Springboard to Funding #9 - The Value of Free Money

Added Tuesday, March 13 2018

Grants are ‘free money’ for companies and Northern Ireland is a great place to get them. This is a widely held perception but actually it’s not always true.

What is true is that Invest NI and others provide a good range of grants which can be very instrumental in helping grow our companies, especially those at an early stage.
And no-one will argue with the idea that grants do not cost you shares in the same way as an equity investment does. However most companies will also say that there’s a sizeable overhead in applying for, winning and indeed claiming these grants. So not quite so free as you might think.

However when it comes to innovation, there is another dynamic at work which has been highlighted by a recent Beauhurst report. This suggests that companies that use a mixture of grants aimed at innovation and equity appear to be more successful. So what’s going on here?

The study looked at companies between 2011 and 2016 who raised equity and/or grants from Innovate UK (IUK). The clue is in the name ‘Innovate’ as this is a major funder across the country that focuses on assisting companies to generate and improve novel technologies.

The report shows that businesses that secure both these grants and equity outperform those that secure only grants or equity. They also tend to raise more money and achieve higher valuations – probably a reasonable proxy for their eventual success.

Taking a look the numbers, the average equity round was £1.79m where the company also won an IUK grant. This compares to just over £1.5m there they didn’t. And average valuations were £6.72 and £6.35m respectively. 

Even comparing the IUK grants raised, companies who also raised equity won £494k compared to £413k where they didn’t win a IUK grant. 

This would appear to be down to two factors.

Firstly, to win both grants and equity, a company is in effect showing two key success factors – product and market. IUK’s processes focus on products that are technologically novel and achievable. However equity funders like Venture Capitalists are designed to seek businesses that have the potential to make money. This means the market and the team to take advantage of it.

So, the argument goes, if a business is well equipped to win both grants and equity it is more likely to be successful.

The second factor is, as so often, the quality of the company’s team. If their skills lead to success in winning, not one but two, very different, very competitive types of funding, then that’s an indication of a strong team. This is more likely to be a successful team.

Turning now to how this plays out in Northern Ireland, there is a problem. Applications for Innovate UK grants are much lower. The same Beauhurst report shows that NI took just 0.3% of the IUK grants. This is 10 times lower than the next lowest area which was Wales at 3.2%.

There are a number of reasons for this. IUK is less well known here, companies often wrongly assume that they don’t operate in NI and of course we are so used to approaching Invest NI for funding. In fairness to IUK, they are trying hard to correct this with a full time member of staff based in Belfast and an aggressive campaign of meetings and events to raise awareness.

We are often criticised here for having a ‘grants culture’, but it appears that in this case we’re lagging way behind in the ‘free money’ stakes. And in missing out here, our companies are less well equipped to win larger equity funding and increased success.

Alan Watts is the Director of Capital Match at Catalyst Inc (formerly the NI Science Park).
For more information about Capital Match or to contact Alan, go to capitalmatch.catalyst-inc.org