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When startups cannot operate without grants
Many startups are stuck in the habit of seeking to access funding, which makes them apply for one grant after another. Photo/ Edgar R Batte
What you need to know:
- Many startups fail to shade off reliance on grants, which in the end impacts their operations.
- A number of startup have instead of developing sustainable ways of growing their businesses, become comfortable in seeking one grant after another to sustain their operations.
The cry about lack of access to cheap capital has rung for far too long, but there seems to have developed multiple grant opportunities for startups.
Matthias Mobius of StartHub Africa, says at the very early stage of the venture cycle, there were several risks investors were not willing to carry.
“If the grant is well used, it can help a startup or an early-stage business to get off the ground or put certain things in place, such as infrastructure that will make them either investable or ready to run on their own,” he says.
However, it is becoming increasingly evident that some startups that make it into one accelerator door often find themselves sailing to another - so much that if you ask any business support provider or accelerator for a list of 20 businesses, chances are you might see the same names pop up across the board.
Why then, therefore, do start-ups get stuck in the grants cycle?
Joseph Ocailap, a financial analyst and investment specialist, says while the first accelerator the business interacts with probably does a good job at preparing it to unlock their first grant, one cannot rule out the fact that the initial taste of funding can be frustrating.
“That stems from the misconception that grants are ‘free money, which in reality is not the case,” he says and notes that the highly competitive business landscape encourages businesses to pursue the next ‘free investment’ for capital rather than focus on growing their revenues and cash flows,” he says.
However, unlike a baby being weaned off breast milk that has little control over what it is fed, Ocailap says startups tend to continue to look for whatever grant they can get, especially once they master the winning formula.
That is not to say that grants are bad. The drawback is when accelerators do not help businesses understand that grants cannot be banked on as a sustainable source of income, especially for a for-profit startup looking to scaleup.
When grants fail
Business founders have their own lives and financial needs that winning accelerator capital might be a jubilation to meet personal needs.
“If the founders have a long-term perspective about their business and hence structures, this capital comes in handy to set the ball rolling. Otherwise, it is misused hence the search for more accelerator grants,” Mobius says.
He adds that grants are often a problem when it is more than what the startup needs. For instance, while one may only need $500, most accelerator grants may be more than that.
“A start-up can receive, say $2,000 but will not know how to use it to spur growth, [perhaps due to] lack of planning,” Mobius says.
Weaning from accelerator grants
While weaning a baby usually starts at six months, Ocailap says startups must prepare to wean themselves off grants as soon as they are selected .
“This is because mind set change is at the core of this process and it is typically a lot harder to change the mind set of a startup that has already discovered the ‘winning formula’ for accessing grant funding,” he says.
To put it into perspective, imagine a startup founder who has toiled for years to get the business up and running, relying on goodwill, hard-earned savings, and even loans from friends, family, and other donors.
Sometimes, the loans press on yet the business has barely broken even.
Thus, when accelerator capital comes, with no form of repayment and no need for equity, save to achieve a few milestones, startups often grab it with both hands.
However, Ocailap says the challenge is that they may spend several months trying to figure out how to meet these requirements, because sometimes they “get into accelerators whose demands do not align with their operations and strategic growth plans”.
“Before long, the capital is gone without meeting the business needs. Nevertheless, with the winning formula at hand, they can easily return to unlock another grant,” he says.
Unfortunately, this cycle has put many in an unsustainable cycle to sustain their operations instead of focusing on what helps to achieve long-run growth.
That is why Mobius says they always scrutinise startups they give grants and capital “to find out if they have a story or are just there for the money”.
Solution
For startups not to become grant-addicted, Mobius says, in their infancy, the founder should invest money instead of seeking grants all the time.
“This creates a sense of responsibility that is translated into business-minded use of grant accelerator money,” he says.
Beyond this, the bulk of money obtained from grants should not be allocated to funding day-to-day business operations.
“This follows the assumption that the business should cover the bulk of these from its revenues with or without the grant,” Ocailap says.
Startup founders must think holistically about the ripple effects of supplementary capital as it may not cover all the business needs.
For example, while the grant may help in purchasing new machinery it may be insufficient to upgrade existing facilities to house the new machinery.
“In such cases, startups need to be guided on how to consider each change holistically, understand costs involved, and how each contributes to sustainable revenue growth,” Ocailap says.
It is also wise for startups that access accelerator grants to take time to study the business model as well as establish future partnerships that offer different models of funding.
Better still, startups need to understand that once the grant is done, there is no guarantee of more money.
Therefore, they should consider accelerator grants as a single-shot silver bullet that has to hit the right target at the right time to achieve sustainable growth.
“While applying and pitching for the grant, the start-up needs to be reminded that sustainability stems from growing revenues and turning a loss into profit through organic business operations and not external funding,” Ocailap says.
Growing concern
Sustainable growth
There is a growing concern about the so-called grant startups or grant-preneurs.
That is particularly from the lens that these startups do not have a sustainable growth mindset. As such, Ocailap says these businesses are becoming increasingly unpopular among different accelerators and financiers, especially because their overreliance on grants raises questions about whether they are making enough revenue to sustain their businesses.
“To redeem itself, a startup [that relies on grants] must conduct a dependency analysis to understand just how it can keep business moving. Then it should return to the drawing board to see how best it can transform to a sustainable and profitable business,” he says.
