Financing Options: Government Grants

Governments will provide capital for startups and I've seen many entrepreneurs over the years take advantage of this form of financing. The grants are usually "free money" in the sense that they do not need to be paid back and they don't cost any equity.

But nothing in life is free. You do pay for this money in ways that may not be in your interest. The application process is usually long, involved, and distracting. And sometimes the grants come with strings attached; you can't move, you have to use it for a specific purpose, you have to hire a certain number of people with it, etc, etc.

I've seen states provide grants to do "economic development." I've seen all sorts of US Federal Government grants. The most common are Small Business Innovation Research (SBIR) Grants. But there are also grants available from various departments related to energy, health, defense, and many more. Internationally, I've seen Canada, Israel, and Slovenia provide "free capital" to startups.

In Canada, startups can get a portion of their headcount funded by the government. In Israel, the government provides grants to startups but they need to keep their IP in country. I am sure that many countries around the world provide funding of this sort. And I suspect we will see more of this sort of thing as technology based economic development becomes more important.

I'm not a fan of this form of financing. First, in principle I think that government ought to stay out of the business of picking winners and let the market do that. But more practically, I've never seen an entrepreneur change the outcome of their startup with government money. It is never enough to really move the needle and the strings that are attached usually make it uninteresting to me.

But if you would like to look into this sort of thing, contact your state and national government and ask about grants for high technology, research, and startups. I suspect you'll find some programs out there that you can tap into.

#MBA Mondays

Comments (Archived):

  1. ErikSchwartz

    My previous company was awarded a $500K state grant. The single biggest problem I’ve had with grants (and I’ve had all the ones you’ve mentioned, moronic application process, paperwork, geographic limitations, and so on) is the people running the programs are not of the caliber you want as partners. Most of them are classic “government employees”. There’s no passion for starting companies. There’s no domain expertise. They get paid the same if you succeed or fail. The goal of the program is to continue the program so they keep their jobs.The program I worked with puts out about $5M a year in awards total. The admin staff for that program is 10 FTEs. This does not count the folks who actually decide who gets awards (they are volunteers and outside consultants). The expense ratio of the program is like 20%.

    1. fredwilson

      great point Erik. you want your partners to be as into what you are doing asyou are. i know that’s impossible. but it’s a goal for sure.

      1. paulmg

        Actually, I would want my partners to be as into what I am doing or stay out of the way.  Particularly non-equity partners.

        1. fredwilson

          That’s a good framework

    2. CliffElam

      Interesting.  My wife’s company has an SBIR and, except for some very specific reporting requirements post-award, they are not involved in day-to-day stuff.One thing that did impress me is that the overhead stuff in her company can’t really come out of the grant – it has to be used for science at, I think, the 92% level.-XC

      1. ErikSchwartz

        They’re not involved in day to day at all. But they have very specific reporting requirements that are not really the kind of expense tracking that start ups are set up to do. Hours that I am CEO doing dev work are fine, hours that I am CEO doing non-dev need to be paid out of another pool. Is product strategy overhead? I spent the better part of a week discussing that.That 92% number has to be tracked by someone and since money is a fungible resource making the books look right becomes an actual job.

        1. CliffElam

          In the SBIR that GalaxyDX has, you can pay a book-keeper to keep the books for the grant reporting requirements.  People can even claim pay for the time they spend keeping timecards, which is recursively amusing.It does hit my wife to a certain degree post-award (she is the president/CEO/janitor) to deal with the requirements at a high level, and she certainly can’t collect from the award.  OTOH, it made her life as the VP/Marketing easier, and it’s made it easier to have productive meetings with VC/Angels. Things without price.As a somewhat neutral observer (except for the fact that my wife’s talent and drive amazes and humbles me) it seems like an all-good thing so far.They are looking forward to going after the $M SBIR next year.-XCPS – Using the SBIR and some early sales, they’re going live with their testing protocol, I hope, next month. Woot!

          1. Guest

            Wish I had more time today to engage with this post. @CliffElam:disqus  and @ErikSchwartz:disqus I enjoyed the discussion you two are having in the brief time I could spend here today.  Thanks

          2. Guest

            Wish I had more time today to engage with this post. @CliffElam:disqus  and @ErikSchwartz:disqus I enjoyed the discussion you two are having in the brief time I could spend here today.  Thanks

  2. William Mougayar

    Canada is the land of government grants, with an alphabet soup of programs: SR&ED (pronounced ‘shred’), NSERC USRA, FedDev, etc…Although I agree they don’t move the needle in the same way that VC funding does, they can be helpful to companies while funding is being pursued. For e.g., we took advantage of a recent government program where they refunded 50% of an engineer’s salary. That was significant for us.If all things were perfect and private/VC money was in abundance (US is closest to that), then the government programs would be a drop in the bucket or unnecessary. But not every country is like the US.

    1. leigh

      The Federal money in Canada is a nice way to extend/amplify the money you already have further but it’s not a funding solution.  The Province monies vary from place to place but I found the Ontario tax credits were simply put, not worth the time and effort for how little the reward.  Would have been better off focused on other things including the product speed to market.  🙂

  3. gabacus

    @fredwilson Wrong! Wrong! Wrong! Fred, please come to ATDC and VentureLab to see how NSF/SBIR grants are used successfully. #ATDC

    1. fredwilson

      where is ATDC?

      1. andrewwatson

        I started writing up what ATDC is but I couldn’t do better than their website :”The Advanced Technology Development Center (ATDC) is a start-up accelerator that helps Georgia technology entrepreneurs launch and build successful companies. Founded in 1980, ATDC has helped create millions of dollars in tax revenues by graduating more than 120 companies, which together have raised more than a billion dollars in outside financing. ATDC has provided business incubation and acceleration services to hundreds of Georgia startups—most of which are not based on Georgia Tech research, but which benefit from the close proximity to the university.”My startup OtherNumber was an ATDC company and I valued their mentorship and guidance greatly.

        1. fredwilson

          Sounds great. I will let you know when I get to Atlanta next

          1. Jon Birdsong

            Fred, a Georgia Tech (ATDC) educational startup — OpenStudy — is meeting with Albert this afternoon at 5:00 p.m. in your office. Also, our Co-Founder and CEO are speaking at the RWW conference tomorrow too. Hope all three of you can connect. 

          2. Glenn McG

            Venture Atlanta Conference 2011 is October 25 & 26th and is a great time to see the best of our early stage technology community.

    2. Ed

      I just went through the SBIR application process for my startup Modkit. Overall it was a good exercise. The SBIR requires (well strongly suggests) that you provide letters from potential funders, partners, and customers. This was the best part as it allowed us to spend time flirting with potential customers and partners with no commitment.Since I just left the Media Lab to focus on Modkit, I think the process was the perfect transition from academia back to the real world. And we won’t complain if the money comes through. It’s like a free seed round.

  4. pfreet

    As part of a group that commercializes University research, we use SBIR/STTR program grants as a core part of our strategy. It provides a funding for translational research, converting core research into shovel-ready technology. It has worked over and over again, enabling University research-based innovations to be extracted into a startup. The US Government spends tens of billions on core research. The tiny amount of SBIR/STTR funding allows this research to escape the labs and impact the real world. I would encourage anyone who wants to know more about how this is done at Georgia Tech to visit us:

    1. fredwilson

      i am sure they work well for academic research, but i don’t see muchacademic research based startups in the sectors we invest in

      1. Dave W Baldwin

        Maybe worth a second glance Fred.  I write this without going thru the ATDC website, but having seen what Ron Arkin has done/doing and the straight up Lab for Interactive AI… Georgia Tech does represent something greater than someone doing song and dance gaining a ton of gov money with concepts that are laughable (and of course wasteful).Georgia T represents a good middle ground vs. the winner take all DARPA, for you have younger minds directly involved just like the Fed Ex Institute in Memphis.The ingredient that needs to be encouraged in order to evolve is the collaborative between arts/computation/sales savvy to truly flip game board.

    2. Andrew Ice

      GTech is the model for how to do University Tech Transfer.

    3. Richard Stump

      In reality all Universities claim that these grants are great for their University and forms successful companies but again reality says that many university “startups” are nothing more than a vehicle for a professor to supplement his income and provide employment for post-docs.  While their are always exceptions, name any startup in any of the heavily granted area that is a large success?  In all cases it takes the private capital to build a successful business.  Additionally, the strings attached with grants do make you do things that you wouldn’t otherwise do.  Grants are like heroin, once you are on them it is hard to get off.  I have direct experience with both federal and state grants and can tell you that they are not necessarily a net positive.  Also, as others have pointed out they distort the market.  In the case of federal grants, often the funding is going to pet companies projects because the peer review system can be gamed.

  5. Peter Sullivan

    We utilized Sweden’s ALMI innovation loan found here… (in Swedish sorry) to help get our prototype started. What it did was enable us to get the project started and gain some small traction before approaching angels, which eventually ended in a round of financing. I know when living in California, they had a strong program under their SBA department as well that processed these “risk free” loans. Like Fred mentions there was a lot of paperwork and bureaucracy but it did enable us to take the first steps of many in creating a company.We are now on the hurdle of managing a team after hiring great talent. Its a challenge in itself but then again just another small stepping stone until the top of the mountain.

  6. Fernando Gutierrez

    I’m somehow glad that it’s the same (slow, distracted…) everywere. A few years ago I was working in a project with a partner and we applied to a 200k euros government grant. We were still in a very early phase and didn’t really need it, but we met the requierements, so we tried. Almost two years after that, when we both had moved to new things, we received a phone call to congratulate us for getting the grant.We had killed the project because we realized that the market wasn’t what we expected and for us the grant was nice but not necessary. But had we needed the money we would have gone bankrupt much before getting it.

  7. Sebastian Wain

    This government programs are interesting mainly in countries/cities with less developed venture capital. In that cases fewer VCs implies that they ask for more equity so the government alternative is one of the best.Also, there are some areas that are interesting to develop but difficult to monetize at the required level of a VC. One example I see is the grant to the graph visualization company Tom Sawyer when it was not clear that graphs usage will explode.

  8. CliffElam

    My wife’s company, Galaxy Diagnostics ( got an SBIR grant, and it was everything you describe.  And my opinion about “free” government money is the same as yours.  (Although, I did like the idea of my wife’s company getting back some of my tax dollars.)The benefit was huge, though.  First, it’s a social stamp of approval for all the scientists, companies, and doc’s doing business with her company.  Secondly, it’s a foot in the door with any VC or angel who might be interested in investing.Finally, wow, they REALLY needed some money at that point.-XC

  9. Jason Kelly

    Usually love the blog, but I think this advice is way off-base once you get outside the web startup world.  Cleantech and biotech startups leverage grants all the time.  We’ve made great use of grants (~$5M in less than 2 years) at Ginkgo ( and have found the administrators to be top shelf at many of the agencies.  Also, the market has a harder time picking winners in these sectors since most investors lack the appetite for the upfront R&D risk.

    1. fredwilson

      I don’t know much about biotech and cleantech. I am sure you are right aboutthe value of grants in those markets

      1. paulmg

        I would add to that medical, (NIH) and obvoiusly military/defense/space.  The government including NSF and military funding was all over the creation of the internet (besides paying Al Gore’s salary…)

    2. Rayhan Rafiq Omar

      You make an interesting point, because I would like to pose the notion of how much MORE money would be available in your field if there weren’t government agencies costing x amounts in administration and communication costs? Would the money not find its way to you from the private sector in the form on more capital/lower taxes?

    3. Chris Fortier

      Jason – how have you tapped these grants?  Did you hire an experienced grant writer?  Any other tips?

  10. Greg Neichin

    “I’ve never seen an entrepreneur change the outcome of their startup with government money”…if you look at startups in the energy/cleantech sector you’ll find plenty where the outcome has been fundamentally altered… recovery act funds filtering to smart grid startups like Silver Spring Networks, loan guarantees for large solar developers like BrightSource… the trajectory of these companies has definitely been majorly impacted (for better or worse, though I’d argue mostly for better).  It’s a very different sector, but without government support (or regulation to push markets), the U.S. is going to continue to fall behind in technology leadership in this domain. 

    1. fredwilson

      Yup. I am sure you are right

    2. ShanaC

      such a pity if we do, we need this stuff

  11. RJ Johnston

    There are situations and branches (DISA/State level technology investment tax credits) where it makes sense to apply for government funding.  But as a whole, I absolutely agree.

  12. David Smuts

    I have no objection to Government providing grant funding, and in markets where there are a shortage of seed stage funders this is often critical. Europe has these grants in place because there is a recognized gap in early stage funding. What I do object to however is Governments topping up VC funds. The UK Government provides billions to VC funds which historically have not delivered any significant returns. A sheer waste. 

  13. Gorilla44

    If you really like feeding at the govt trough, get an earmark. Traditional earmarks have been banned, but they still find their way into the budget.1) Identify your local congressman or senator2)  Lobby said politician (usually by hiring an ex-staffer) and convince them that you will create jobs with this project.3) Help the politician’s office figure out where in the budget your project should go.4) Wait 18 months and collect the money over a 2-year period. The plus is that it is usually millions of dollars.5) Don’t forget to donate to the politicans’ campaign.

    1. fredwilson


  14. Gorilla44

    Fred – what do you think about state capco programs for VC funds and state-funded VC fund of fund programs like Ohio’s and Utah’s?

    1. fredwilson

      I don’t like them

  15. jpwoodland

    Anyone ever manage or take money from an SBIC (…  Is this a better way to get government money into startups than grants?  Seems the administrative burden of getting this funding is transferred to the investment company.  I just don’t know if SBIC’s run themselves more like an extension of a government office rather than a true VC firm.

    1. fredwilson

      An SBIC is a VC firm that supplements its capital with leverage (ie debt)provided by the government

  16. Tom Labus

    On a larger scale, the Defense Dept funded the Internet and everyone’s glad they did.I think we’ve entered an era of state capitalism and don’t see it being derailed.  

  17. paulmg

    Fred, the key to remember about SBIR is that it is carved out of existing extramural research that would happen anyways.  The government said if you’re an agency like Dept. of Defense and you’re gonna spend a lot of money on research anyways then a small percentage of that must go to small companies, hence SBIRs.  It’s seed funding in its purest form.As far as picking winners, at least at NIH, it’s not done by government grant administrators but by 3rd party reviewers from industry/academia.  It would be interesting to compare the results with a business plan competition.  There are companies that have received >$20 million from SBIR grants, especially in the defense and health areas.

    1. fredwilson

      Great points

  18. Fraser Harris

    Fred – Like investors, not all government programs are created equal.  (Canadian perspective) I’m sure Ted at Kik will save a lot of your money through SR&ED, which returns in cash a portion of your R&D costs.  Another program matches up to 50% of an investment round.On the flip side, I recently wrote 38 page grant application.  It took 10 emails to teach government employees the difference between stocks and options.  I’ve given up and have decided to call up more interested angel investors.

    1. fredwilson

      Ted will but I had no idea they could do that when we invested. It isirrelevant to me

    2. Derek Ting

      SR&ED doesn’t really help consumer-web startups all that much. Most of our R&D expenses are ineligible for SR&ED.We’ve looked into government money as well, but at the end of the day, it isn’t worth the mental bandwidth to go after government money. Your focus is better spent on developing the product and acquiring customers/users.

  19. Morgan Warstler

    “I’m not a fan of this form of financing. First, in principle I think that government ought to stay out of the business of picking winners and let the market do that.”Unless it comes to broadband policy! 🙂

    1. Anthony Ortenzi

      The policy he advocates doesn’t pick winners, it keeps the market open.

      1. Morgan Warstler

        Noise.  The current policy keeps the market open.  If someone wants spectrum they buy it.  If someone wants to run cable they hire pullers.You’ll find the Reason crowd agrees with me.

        1. fredwilson

          What is the “Reason” crowd? That’s a new term for me

          1. fredwilson

            “free minds and free markets”i can get behind that slogan

          2. Morgan Warstler

            Fred, it dawns on me you should subscribe to Reason – at least put it in your RSS, give it some space to grow – see if it moves you. Nothing ventured….

    2. fredwilson

      On broadband policy I want the government to stop protecting the winnersthey picked decades ago

      1. Morgan Warstler

        Ah see, that’s too bad.  Contract law grants rights to the guys who got there first.  We’re not giving the land back to the Indians either.Supporting property rights NOW means choosing to end government interference rather than using past bad actions to justify more bad actions.But, I’m very interested in your opinion now, after a couple years of real Obama regulatory efforts…. its a lot uglier than your imagined right?  At least more than “a little uglier” right?

        1. fredwilson

          i’m a huge fan of the President. i plan to support his re-election.

          1. Morgan Warstler

            “free minds and free markets” has nothing to do with Obama.  That’s quite a bit of cognitive dissonance you got going on there.

          2. fredwilson

            I’m all about cognitive dissonance.I’m a VC who has been called a socialist and a communist many times by AVCcommunity membersI’m not into labels, dogma, orthodoxy, and categorizationA free mind is an open mind

          3. Morgan Warstler

            You aren’t a socialist or a communist, you are an investment class new yorker who doesn’t concern himself with SMB job concerns…. so you support Obama.  The technical title is “corporatist” – a VC version of Jeffry Immelt.But, anyone worried about job creation in the SMB market, or toppling the teachers unions – has recognized their last vote for Obama was a luxury we cannot afford another order of.  I know, I know – you want to hack education, but not really – voting against Obama is the quickest possible way of ending teacher unions as we know them, and letting start ups take big bites out of those union wage dollars.I assume deep down somewhere in there your pro-Obama position is about stuff that over-rides your desire for jobs and education, he means enough to you on other things to give a bit up on the stuff you claim to deeply care about.

          4. Guest

            “But, anyone worried about…toppling the teachers unions – has recognized their last vote for Obama was a luxury we cannot afford another order of.”Man, where did you learn grammar, a *public* school? 

          5. fredwilson

            call me names, classify me, do what you wanti know what i am and what i care about

        2. PL

          Wait, do you think it’s because of contract law that we own and/or are not giving land back to Indians?And also, does supporting property rights NOW — love the gratuitous use of all caps, btw  — really man choosing to end government interference.  After all, isn’t it “government interference” that creates and then enforces property rights?

          1. Morgan Warstler

            lol, let me put it this way, the function of federal government is entirely meant to be negative rights.  what states do is up to them.but, the cute idea you have that private wealth needs government to maintain its ownership is much like saying government helps business because it builds roads – the reality is government exists because it serves the interest of the wealthy that pays for the things the wealthy want – truly, if there was no gov, there would still be roads – the the non wealthy would still get to use them.almost anything can be privatized, my point is always that government is fine as long as it is forced to compete to provide said services… which is why we want things like monetary union without fiscal union  (see the EU), it is why we want to devolve as much federal power back to the states.States’ rights is the free market version of Democracy.

          2. PL

            “the function of federal government is entirely meant to be negative rights.  what states do is up to them.”Oh, god. That’s your opinion and unfortunately it is an opinion not supported by little things like, um, the federal Constitution, which explicitly grants the federal government plenty of affirmative powers (not to mention implied powers) while also explicitly limiting state powers.But keep blathering on if it makes you feel good.

  20. Chris Kurdziel

    Fred,Love these MBA mondays posts. One question – what do you think of venture firms that are backed by government grants?  I’ve seen a few different models ranging from firms that are organized as non-profits such as JumpStart (… ) and some other firms that raise a portion of their fund through federal SBIC/SBIR grants (Brook Ventures in Boston might be a good example).I’m curious as to how you perceive these fitting between the more traditional LP backed venture community and the direct government SBIR loans.

    1. fredwilson

      I wish the capital markets would fund these firms instead

  21. Steve

    It’s interesting that you have raised this issue in the wake of Board of Trustees of Stanford University v. Roche Molecular Systems. Actually, that SCOTUS case is interesting if only because it is probably irrelevant given the common dysfunctionalities of university tech transfer departments across the U.S. There are exceptions (like at Stanford and MIT) but the bottom line is that there are most certainly many wasted monetization opportunties for the marketplace because the “university culture” is not the culture of business. As someone else said in this thread, they all get paid whether they succeed or fail. Having said that, there are tremendous opportunities with universities, particularly if one can find champions among the researchers within a university, and a pathway into a network of commercial interests aligned with that university. There’s nothing fast about taking this route. It takes a tremendous amount of patience dealing with people who generally work for a university so that they don’t have to take risks. But when one’s venture is in a “fly over” state here in the U.S., it is a viable means of funding and gaining traction in the marketplace. Sometimes it is the only path.

    1. fredwilson

      tech transfer at Universities is almost as painful as government grants

  22. J. Andrew Rogers

    I agree that the overhead offsets the benefit in most cases but I would qualify it more carefully. The grants that arguably make sense are technology R&D grants but very few startups are doing innovative technology development at the level where these programs are beneficial. In the US, there are good methods for avoiding much of the government process. In defense technology, for example, they badly want technology startups to participate and are keenly aware that the overhead makes it impractical. In-Q-Tel has become a bit of a defense grant vehicle dressed up as a VC so that companies can avoid grant overhead.One of the best methods is to partner with an existing big contractor that adds the startup as a subcontractor to a contract vehicle owned by the big contractor. This effectively outsources the contract administration to a company that has process in place. Many grant issuing agencies would prefer to work with startups directly (and it very significantly increases the cost of the grant to work through a big contractor) but it is seen as a viable way to allow small technology companies to participate.But again, outside of a subset of real technology startups the process often produces no net benefit to the startup as far as I can see.

    1. Scott Edwards

      Glad you mentioned In-Q-Tel. I searched comments to make sure someone brought that up.

  23. Dave W Baldwin

    Interesting debate, but how about a game plan?  Too much power in too few hands applies to both sides.  The true power is attainable by the Devs if the Devs will look longward. First, @fredwilson:disqus – great inverview re Education.  Some of us get into the battlefield to see what is truly lacking and the best way to disrupt results.  What you said about politics is on money and why I’ve become independent in order to develop what will be benficial no matter which side is running the show.Second, though I was defending @pfreet:disqus earlier regarding Georgia Tech, it comes down to three phases: 1) Gov R&D (in all areas) followed by 2) Private VC/Angel followed by 3) rise of self sufficient Dev. As discussed below, the push of interactive research moving from classroom to marketplace will be beneficial… saying it can only be one or the other is not realistic. Fight for those that want to be proactive in overall and that will limit the other side where a big company takes over smaller Universities transforming its location/population into a servant status to self serving interest of big company.We can argue all day about who invented the internet, yet you guys are all of the place… in the end it was the market (customers for those that can’t see the forest).  That said, you can’t say DARPA is everything because this implies what we have was only made possible thru DARPA.  Sure they did some great things and should continue… just not end all to beat all.As the US matured, you had a rise in Angels and those that entrust VC’s doing things that by any measure are sometimes off the wall.  This, at present, is the best way to go.  If you are an Angel, get involved and start looking forward.At this time looking forward, the needed capital to do something truly disruptive is incredibly low-  AND FOR SMART ASSES, YOU DO NOT NEED TO BOIL OCEANS- compared to relatively recent.  Developers will be able to start doing things in sync to allies enabling protection from an independence stand point.This will force the investors to be more on top of things and go hand in hand with developing in real time.  At this moment, you have soldiers requesting developments related to what’s going on.  How long ’til this applies to the street?Looking long, we have to be realistic of there being gov funds… and a lot of wasted money.  At same time, there are a lot of wasted funds in private (simple truth).  The more successful Devs become, especially those that did the truly lean route, the more we will be able to do with less.

  24. Nick Gavronsky

    Grants can be helpful, but as you say its a long and drawn out process and brings the issue of goverment meddling in business by placing constraings on the use of the funds.

  25. calabs

    I’ve been involved with a couple of SBIR contracts. Some are good, most are corrupt. The SBIR requests are often either impossible (“we want a handheld device that takes stereo gigapixel video at 50fps, encodes in real-time to a lossless codec, and consumes 5 milliwatts”) or already exists (“we want a system that does generic distributed computing over heterogenous machines”).There are a handful of professional SBIR leach companies that use phase 1 and phase 2 money as revenue, with no intention of bringing a real product to market.OTOH when used properly, SBIR gives an independant, small inventor real money to think outside the box. I’d like to figure out a way to make it better.

  26. Rayhan Rafiq Omar

    I think this statement is the key to understanding this topic of government grants: “It is never enough to really move the needle and the strings that are attached usually make it uninteresting” How often do government/private partnerships provide true innovation or an opportunity that would not have otherwise been exploited? Even when a University innovates with what is initially government funding, how many progress later with government funding?

  27. Eunice Apia

    I think I will skip this process too. Sounds like too much work. I’m a product of my generation. The faster and easier, sometimes the better for my peace of mind.  Will wait to see what next week has to offer.P.S. I know nothing good comes easy. You have to work hard for great things, blah blah blah. LOL

    1. fredwilson

      “i’m a product of my generation”nice one eunice

  28. Eunice Apia

    New York Foundation has great Grants but I don’t know if it applies to startups or just Artists and

  29. JLM

    The problem with most govt funding is that it is already your money and it shrinks in the process.You pay your taxes and it costs about 26% to collect them and then 20% to administer the underlying programs.Then 33% of the deals implode immediately leaving only a pittance of money actually reporting for duty!If they just let you keep the money and gave you an incentive to invest in start ups — well that might actually work?There is almost nothing in which the govt delivery system can compete with a well run lemonade stand run by a third grader. That is not a cheap shot. Govt is not intended to run businesses.

    1. Tom Labus

      But it can fund them and pay defense contractors to invent all kinds of new widgets.The problem is that neither political party has any credibility and to expect them to the economically logical thing is really far fetched at this point. These guys posing as Republicans would toss TR out on his ear and maybe even Ike.

  30. matthughes

    I wonder how much more agile the start-up financing market would be if the government wasn’t involved at all?

  31. GovtRD

    DARPA is certainly not everything, but I think we have differingdefinitions of innovation.US Government R&D (not just DARPA) didn’t just fund theinternet, it funded the transistor, space-based communication satellites, thespaceship to launch and deliver said satellite for military and commercialcommunication, the spread spectrum technology that was used for militarycommunication that is now used to communicate with your handheld device, and ofcourse GPS was and is still being funded by the US Government so you canreliably find your way to any destination and check in with all of yourlocation-based software systems.Fred, thanks the blog; this is my first post. I understand your post is related to startup funding, and I agree it is extremely painful to work with the government and it is a tough choice for a startup CEO who has limited time, and lots of demands.  Currently, I’m building a plan to improve this process for the scientists/inventors, government employees, and VCs.  They are disparate groups, but I strongly believe there’s a way to improve the experience and efficiency for all.

    1. Sebastian Wain

      What I understand is that Government grants has a longer term, wider and less competitive vision that is not common with a private, for profit, initiative?Will be good to hear more about your vision.

      1. GovtRD

        On the applied side, the US government (DoD, DoE, etc.) just wants to get a product that solves their problem; they would love to get it cheaper and sooner. Most in government realize the structure they have to work within typically yields the opposite.Once I nail down a couple points, I’ll reach out with the general concept.  I appreciate any thoughts or experiences you can provide.

    2. Peter Beddows

      In quoting developments such as DARPA, transistors, space-based communication satellites, etc., versus what Fred has been discussing here, you are comparing apples and bananas! Two completely different types of situationWhile true that government funding provided for these developments, the funding for them did not originate from entrepreneurs looking to fund innovation as Fred has been discussing here.The funding for such complex (and of course, innovative) technology development originated as a result of certain entities ~ big business like AT&T, IBM et al, ~ responding to RFP’s (Requests For Proposal) originating from Government entities such as the DOD and DOE.For example, the TOKOMAC Fusion Development Project – destined to be built (and discontinued) at Princeton University – and the Mirror Fusion Development Project – destined for (and subsequently cancelled) Lawrence Livermore Labs  was a DOE funded development. Companies involved in these projects included divisions of Gulton Industries, General Atomic and several others all of whom were essentially offering sub-contract development capability to – and paid for by – DOE in contributing to these projects.So notwithstanding the examples you’ve listed, in practice, individuals and/or small business applying for Federal grants as a way to fund development are both the beginning and the end of the proposed innovation intent and therefore, as Fred has stated, this clearly is a very limited and limiting approach to funding a startup.A way around this is to get a grant while in University for some specific development that you can then, with the University agreement, take public and commercialize as the foundation of your new venture: In other words, get the government money to fund the research and then run with the result in a commercial venture.

      1. GovtRD

        I totally agree with you and Fred about why it’s not the right choice of funding for the startups in his sector.  While universities and the large prime contractors were involved in those examples I provided, so were 100s of small businesses that were founded by inventors/entrepreneurs–Qualcomm’s history for example.I guess I don’t fundamentally understand the need to distinguish between an entrepreneur who is making something to satisfy a government need that can also satisfy a civilian need, and an entrepreneur who is making something only for civilians. I don’t want to paraphrase, but I think you and Fred (and probably others) might have touched on an important idea: the idea that once a startup starts taking government money, and gets indoctrinated into their arcane rules (to satisfy the grant demands, etc.), then the startup is less likely to be as “hungry” as it needs to be to compete in the “free” markets.

    3. fredwilson

      government is awesome at funding R&D but terrible at funding entrepreneurshipthere is an important difference

      1. GovtRD

        Interesting distinction and I agree.  I’m trying to figure out why so many amazing ideas, and even fully developed products, never get out of the government space–so I can fix it.Fred, provided it was a great technology that was scalable in your sector, would you be less inclined to invest with a CEO who had already received US government funding?   

        1. fredwilson

          That would not be an issue

      2. Ryan Bradley

        They’re good at funding the national debt.

  32. mickwe

    In Israel, there actually is a way for startups that receive government (Chief Scientist) funding to transfer IP at the time of an acquisition, but the uncertainty and complications around this are a serious concern for everyone involved, and that’s one of the reasons why the better entrepreneurs and their backers tend to avoid govt. money, despite the huge sums in their budget. 

  33. Abenego

    Fred, thanks for posting this, I have considered this in the past but I did not like some of the limitations you state here, plus they were just not a long of the products I want to build.I was wondering, (slightly unrelated) Have you ever written about the process of getting VCs to participate in a round of funding? I wonder how one goes about talking to multiple VCs and have them agree to take part in a round of investment… and how does it get decided who invest how much amongst participants.Anyways, I think many of us will benefit from this if you haven’t yet written about it.

  34. rveloso

    “First, in principle I think that government ought to stay out of the business of picking winners and let the market do that.” why would government be out of the business of picking winners and vcs dont? isnt that an arrogant point of view. besides goverment should fund basic research outside of academia that can be commercialize, specially nowadays where money is being spent in all sorts of crappy web2.0 socio-clould like startups.

    1. fredwilson

      VC is a market economygovernment is notif you are a bad VC, you go out of businessif you are a bad government, you do not

      1. rveloso

        well, governments also get replace during elections so they also “go out of business”. But my point is that the government investment should focus more on basic science and break through tech, rather than web 2.0 photo sharing sites…

  35. Marg Paradiso Bouse

    I have a lot of experience with government grants for clients, and while has made the application process somewhat easier, I can tell you that the voucher/audit/reporting process dwarfs the initial application process.  Best used if you have the majority of the funding you need, but just need to fill a gap.  Anyone should carefully weigh the pros and cons, and a good way to find out both is to talk to prior recipients of the grant (in prior fiscal periods) to find out the relative burden and their experience.  Things that seem too good to be true, like “money for nothing”… usually are…. but I have to tell you that I have had clients who were very successful utilizing grants — usually as technology refreshes or employment grants versus funding R&D. 

  36. Mark Mc Laughlin

    Fred. In Ireland where there are no early stage VCs, a government funded agency, Enterprise Ireland (EI) very much fill that void. They invest in about 80 start ups a year and that investment has to be matched by other investors. The invest in convertible shares which then convert based on the valuation of the next round of investment (if you get there) with a discount depending on how long they have held the shares. Although the process can be time consuming and bureaucratic they do offer post investment supports in terms of contacts, training, grants etc…They also have offices that you can use in most major economies including NYC, SF, China, Canada and every EU countryThere are a lot of terrible government agencies in the country that don’t contribute but the majority of start ups in Ireland avail of some EI support (whether equity, grants, training etc…) and they helped us get our product built when the capital markets were closed in late 2008 / early 2009. 

  37. Roger Ellman

    Government grants can be like paracetamol and headaches…sometimes it works but when the headache is bad enough swallowing that bitter tasting pill has no effect.Government grants are like giving into the financial needs of youth and taking a part in a porn movie even though you hate to be in the spotlight…years later the spotlight is full on, youGovernment grants are like an enormous pot of overcooked spaghetti….impossible to unravel, sticky and indigestible

  38. Samuel Cubac, an Israeli VC

    In Israel, while IP should be kept in country, the company is not precluded from being sold to a US acquirer – it simply reaches an agreement with the Office of the Chief Scientist.

  39. Derek Ting

    “I’m not a fan of this form of financing. First, in principle I think that government ought to stay out of the business of picking winners and let the market do that.”I completely agree with this point.Especially for consumer-web startups, I wouldn’t recommend spending too much time and energy going after government grants. It is much better spent developing the product and acquiring customers and users. Nowadays, it doesn’t require all that much capital to start a consumer-web company if you can pay early employees with equity.