Swedish Startup Space

Our Guide To Soft Funding and Why You Might Want To Avoid It, Part 2

Written by on January 21, 2014

Since the last post we got some additions to our list, thanks to @jgauffin, check out part 1 for the updated version.

Why you should think twice before applying for “soft funding”

So you finally got your grant. Feels pretty good huh? You now have the time to work on your product in peace and quiet. But, hold on a minute. Is peace and quiet really what you need right now?

What you should be doing early on is of course to focus on validation. That means talking with customers. The obvious risk here is that you might end up talking less with customers, focusing more on development, strategy and other internal issues. Because you can. And when you do get out of the building once in a while, you spend the time with your financier who you want to make sure is happy.

Is peace and quiet really what you need right now?

While this risk is present in all types of financing, it might be more real when dealing with public grants compared to say, angel funding. That is because the needs of the company tend to be more aligned with the needs of the angel investor. A grant financier on the other hand might not give a damn about traction and how the business is actually doing.

And after two months, you suddenly realize that you have to make a major pivot. What then?

You see, you have these deliverables in your project plan. By now you of course know that the project plan was flawed from the beginning. It usually is. You might want to throw it all out of the building and go in another direction. But you can’t. You are stuck.

While trying to solve this dilemma, your co-founder lets you know that the grant is about to run out. Your pocket is empty and you still got no customers. You have been so busy building your product, discussing visionary strategies and managing your granted project.

So what do you do?

“Well, if I only could get a few months more of peace and quiet…”

You see where I’m going?

Well, you of course find yourself another grant. Maybe it’s not a perfect match, but you feel confident that you can convince them.

This circus can actually go on for quite a while. These startups are doing nothing but draining money and energy, where time is mainly spent on administration and vanity activities in order to sustain a non-existent business model. You might think that “I’d never be this stupid” and maybe you are right. You are one of the experienced ones, or simply too smart to ever get into this situation. But then this post is not for you.

Soft funding can introduce misaligned focus, make it harder to pivot, and become an addiction for your company.

On the other hand

In many cases these funding sources work out very well. For some, it’s a necessity. This can especially be true for high tech companies, where time to market is much longer than that of an average internet startup.

Many founders might not afford to scoff at public grants. When managed well it can be a great addition to your early days, that enables the founders to hold on to their equity while building value. As I mentioned in my last post, these grants can also be leveraged for further benefits. You’ll get PR and contacts, which might be valuable for your business.

If you apply, keep in mind

Be selective

Never ever try to get into a funding program in which you don’t fit. If you feel that your application starts having a life of its own, diverting from your core business idea, back off. Stop it. Now.

Avoid high profile administrative projects. Have a clear picture of what is the expected administration both prior to and throughout the project. Be crystal clear about what their interest are and why they give you their money.

Accelerate or validate

Use the grant for accelerating validation and keep the Lean Startup principles in mind. Understand the dynamics and the evolution of your idea. In order for you to be able to successfully validate your current hypothesis, you must be allowed to be wrong. Is this reflected in the project plan?

In order for you to be able to successfully validate your current hypothesis, you must be allowed to be wrong. Is this reflected in the project plan?

Or, if you already are on good way with validating your business, accelerate it. But do not use these grants to explore new business opportunities before you’ve realized your first. You don’t need more spread in your daily routine, quite the opposite. Consider putting all the wood behind fewer arrows.

Do not go twice as long. Go twice as fast.

Don’t get stuck

I don’t think I have to explain this one.

Good luck!

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