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.