Grants for FOAK

During my time scaling up climate tech, I wouldn’t touch government grants. Even when they could clearly reduce my capital costs, help to avoid dilution and generally help to speed up a project. In Russia, dealing with government money means that sooner or later, you’ll have a budget controller knocking at your door, whose sole purpose is to find out how you misused public funds, so that he can ransom money from you or throw you into jail. The jail could actually be the first step, so that you are more pliant to buying your way out of it. The fact that you are squeaky clean and used all public funds as promised to the last kopek doesn’t matter. The creative part of the budget controller’s job is to find an excuse, any excuse, to threaten you with jail. That’s just part of doing business with government money in Russia. And that’s in addition to all the paperwork you’d need to submit.

Government grants are often cited as one of the best ways to finance a climate tech FOAK, or any FOAK for that matter. The main reason, apart from grants being essentially free money, is that grants do not dilute founders' shares and allow startups to take the next step. While the benefits of grants are evident, there are costs, and not all of them are clear at the outset. If you deal with grants outside of Russia, or any other state where it is normal for government officials to receive kickbacks from the grants they issue, you are likely at least to avoid an embezzlement case. Still, the “free money” is not really free, and does come at some cost.

The cost of free money

First of all, getting the grants is not easy. The competition can be fierce, and competitors are many. For example, C1, a German startup developing a new process for manufacturing green ethanol, applied for the EIC Accelerator Grand and failed. It was one of the 1100 applicants, of which only 300 made it to Brussels for selection, and only 45 were awarded the grant.

Second, compliance and reporting requirements are usually complicated and require devotion of a significant amount of time by your team, especially if you are unfamiliar with using grants. There is a reason why the grant industry in Europe has its own dedicated consulting industry. Governments are bureaucratic organizations, and any money from the government will come with requirements of extensive reporting. For example, Traceless, a circular bioeconomy startup, secured €5,1M grant for its production site. They used a consultancy service to get it, but it still took six weeks of full-time commitment from the founders.

Third, getting a grant usually means you have to adapt and lock in your project schedule to accommodate the grant selection procedure, its payment schedule, and deliver results when bureaucrats need to report back. For example, Metafuels, a SAF startup, started preparing for getting a grant a year in advance and submitted its bid 6 months in advance. Then, a typical grant would have a term of one to three years, sometimes more, during which you must deliver on key performance indicators.

Are grants for FOAK realistic?

Now, let’s say that you are not in Russia and you are unfazed by all these challenges. How realistic would it be to fund your FOAK with grants? Well, not very. FOAK is rarely funded by grants. According to Deloitte, climate tech firms raised $840M in grants in 2021 and $4B in 2023. But most of these go to pre-seed, seed, and early-stage startups. Only 13% by deal count go to later-stage companies. Most grants are awarded to small businesses, with fewer than 50 employees and revenue or balance sheet asset value of less than $10M, and 86% of these are under 10 years old.

While it is statistically rare that you’ll get a grant for your full-scale FOAK plant, note that when you get to build your pilot facility, you are most likely to fit the description of a typical grant receiver - less than 50 employees, asset value under $10M and being around less than 10 years. Thus, from a statistical viewpoint, considering grants for your pilot stage is much more reasonable than considering them at later stages. There are, of course, examples of large-scale FOAK plants getting hundreds of millions of public money, like Tesla factory or Northvolt. But these are outliers and require deft political maneuvering and connections, which most cleantech startups lack.

So, how do you decide whether you should go for a grant or not, and if you do, what should be your steps to getting one? Here is a framework that you can apply.

The 6-step framework to decide if you need a grant or not

1. Check with your suppliers for the possibility of equipment loan or deferred payment.

2. Check with your customers (if you have them at this stage) for advance payment

3. Look for “patient capital”, like impact funds or corporate VCs, who might be willing to provide you with cheaper capital than VCs.

4. Look for non-government grants from foundations or universities.

5. Check that you still have at least a year of burn available before launching your pilot/demo/FOAK

6. If all of the above turn out not to be enough, and you still have a year to go, congratulations, you need a grant and have enough time to get it! Otherwise, focus on getting less cumbersome non-dilutive funding.

The 5-step framework of getting and managing a grant

Now that you’ve decided you need a grant, apply the five-step grant framework below to maximize your success in securing and successfully implementing the best possible grant:

1. Get a grant manager. Treat grant management as a full-time job. Is there anyone on your team who has experience in applying, securing, and completing a grant? Is he or she able to devote at least a third of their time to grant management? If yes, good, you now have a grant manager; if not, seek outside help. Hire a consultant with a proven record of securing grants. You’ll probably need only one person, not a full Deloitte team, unless your project is exceptionally big, and you can afford to blow €100-200K on a grant application and management. Hire a consultant not only for selecting and applying, but also for reporting, after the grant is secured. This will free up your team to focus on running your project, rather than filling out papers. If your business is closely government-related, like the government is your main investor or customer, or you are heavily dependent on particular government regulations, it makes sense to hire a full-time government relations (GR) manager. He will take care not only of your grant but all other cabinet shoulder-rubbing as well. And boy, government officials love long meetings! You wouldn’t want your CTO running off to a ministry in the midst of commissioning your plant!

2. Determine which program you should apply for. This should be done by your GR officer or a consultant. Feed them your FOAK plan, just make sure that you have at least a year of runway during which you will be applying for the grant. Don’t skimp on it, and read the fine print of the grant documentation. Make sure your project goals 100% align with the grant's purpose. You don’t want to explain to a government budget committee why you’ve spent taxpayers' money on something that doesn’t match the grant’s description.

3. Devote necessary resources to the preparation of the application. Your GR officer or consultant is not an expert in your business or technology. They are experts in getting shit done in the corridors of power. They will need your and your team's help in preparing documents and in conversations with government officials. Recall the example of Traceless above, where the founders had to devote a full one and a half month of their time to the preparation of the application, despite having a consultant. Talk to your team, explain to them that their contribution is critical to grant financing. They must see talking to your GR or consultant as a priority; otherwise, in a frantic startup environment, they’re likely to push grant applications down the list as it is not “real work”.

4. Plan your project with grant limitations in mind. Include grant application time, grant term, and reporting cycles in the planning. Include time buffers for critical deliverables to manage the risk of slipping past grant reporting or tranche release milestones. Make sure you know how fast you can get the grant money, so that you plan your cash flows accordingly. And just to be on the safe side, add another two months to the planned date of funds release. There is always some additional document to be filed, of which you’ll never know until it is time to get your money.

5. After securing the grant, include your consultant or GR officer in the project reporting flow, so that they get project updates as regularly as you do. They must not fight to get the necessary data from your team and must not be excluded from project discussions. Treat them like a representative of your main shareholder.

Takeaways

As the Deloitte research shows, grants are most commonly used in FOAK for financing pilot plants. By the time your project gets to building a pilot, you’ve likely already become familiar with grant funding. But getting grants for pilot or demo, or even FOAK, takes the grant game to a whole new level. Now it's not only about research and development, it is about implementation and real assets. The stakes are higher.

When planning for grants as a non-dilutive funding, remember that getting grants takes a long time, with no guarantee of success. Plan accordingly, and ensure you have enough burn to see you through the grant application process.

Finally, get someone with experience in grant applications and reporting. Usually, that would be a consultant. Occasionally, if your business is dependent on government decisions one way or another, you’ll have a full-time GR manager. In any case, grant application and management require a certain skill set, which startups normally lack.

The examples and figures are taken from Deloitte and Climate First report "Driving Climate Tech Growth: A Startup's Handbook for Non-Dilutive Funding", which can be downloaded here: https://www.deloitte.com/il/en/services/consulting/perspectives/ndf-climate-tech-report.html