NIH grants as alternative to angel funding - smart or not?

Patrina Mack Experts in global commercialization

October 18th, 2015

What are the pros and cons of grant money as an alternative to angel funding? What has made you successful in using government grant funds to reach venture stage?

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

October 18th, 2015

I can't speak to all Government Agencies however let me address your question as if you were applying for a Health Care Grant from NIH or NCI. There are grant thresholds wherein you must submit a statement of financial viability for the venture seeking a grant and in some cases (grants of $5 million or >) undergo at least a superficial financial audit by a firm selected by the Grant agency or one of the recognized auditors (typically the Big 5). There is also the reality of the ventures' financial requirement versus the Agencies timing which are not necessarily in correlation. Lastly, large Grants (aforementioned) are typically awarded in phases hence if Phase I does not have the outcome the Granting Agency is seeking although you have been awarded the full grant you will only see the portion that funds the Phase and nothing further. As you would suspect, except for capital equipment costs the bulk of funds are granted longitudinally hence there are no guarantees that the venture will ever see the full amount of the Grant.

Having said all that a Grant gives your venture a great deal of third party validation making it in some cases a far more enticing investment. It also gives a threshold for equity ownership by a party other than those to whom the Grant was awarded in some cases and in others defines the type of equity holders.

Hopefully this helps and if you have further and more specific questions my LinkedIn profile has my email address.

Leo PhD Product development executive, serial entrepreneur and Angel Investor

October 19th, 2015

Patrina,

This is a great question. But first, I disagree with a comment above saying that government money is a "cancer". There is no qualifier for such a statement. Many ventures and companies started with the help of government funding.

You should, however, understand that grants and Angel money are not mutually exclusive. One does not replace the other and they serve different purpose. The idea is to use each source strategicallyto maximize both business and financial outcomes. For many healthcare related ventures (since you mentioned NIH), having grants is pretty common.

There are many pros to getting grants (assuming that it is strategic):

It's non-dilution funding - you don't lose equity but you get funding.
Credibility - as Thomas said above, it is a 3rd party validation.
Phased funding injection - a good mechanism for fail-fast, if the business/method/innovation actually doesn't work, you have less to lose.
Because of 1 and 2, your company can be even more attractive to private investors because they can maximize their return on investment.
Helps you prepare - with all the auditing requirements, it actually forces a new venture to put their ducks together in an organized manner. This would also help you in your private fundraising later.

As for cons, you can always mitigate them by strategically applying and receiving only the right kind of grants.

Time-consuming - application takes time, and can be a lengthy process. Only apply for the grants (or specify it in your application) that are strategically aligned with what you are trying to build.
Reporting requirement - this can also be time-consuming, but for me, it serves also as an accountability mechanism.
Phased injection - you may not get the full grant in one go. Make sure the milestones are reasonable, timely and match your strategic plan.

In short, if you can get free money that matches your go-to-market strategy, get as much of it as you can. It will make your company a more attractive investment target for private investors (with other validations also assumed, that is).

Hope this is helpful.

Todd Kovalsky

October 18th, 2015

If you could get a grant, for a for profit venture go for it. Grants are free money and don't need to be repaid. Sent from my iPhone

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

October 18th, 2015

Sorry, just saw that you had specified NIH. So the above applies.

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