How do I get a public grant for my startup?

Learn how to convince the government to support your startup with a  grant and how Sepior got 2 million Euro in support from the EU

Governments provide grants to startups based on the assumption there is a market failure with funding for a specific activity and there are externalities, so it’s good for the government to make grants available even though it’s at a cost. They do get something back. The difference is that they believe these activities wouldn’t have happened without the grant. In other words, the key for success to getting public grants comes down to two things:

  1. The business idea helps the government achieve their goal
  2. The government is convinced you couldn’t have continued otherwise

The first point is that governments do not give money out to all startups, but only to those that can help the government meet a specific societal or socio-economic goal. In order to get a grant, the startup needs to know what they can help the government achieve. They need to find out what kind of support programmes have been created to achieve specific government goals (for example, improving jobs in certain industries, getting university research grants or advancing clean environment projects). Then comes the very important second point which many startups miss when applying for public grants: the government only gives grants to startups when they believe the startup would not be able to continue otherwise! If that isn’t the case, the money could have been better spent elsewhere, since the goal of the government is not to support your company but to achieve its own goals (by having more startups working on them). In other words, you will have to convince the funding body not only that your startup can help them achieve their goals but also that you cannot proceed without the grant!

So how do you ensure your startup gets the public grant out of the many that apply? You can improve your chances by having the following points in mind:

1. If you’re not a grant application expert, hire one!

To be fair to everyone, the government requires you to fill out plenty of paperwork to apply for grants. You need to include information about what you want to achieve and how you can help them achieve their goals.

There is of course huge competition for such public grants. The infographic below shows statistics for one of the largest public grants in Europe, the Horizon 2020 SME Instruments managed by the EU, where Phase 1 is the small grants (up to €50,000) and Phase 2 (the large grants of up to €2.5 million). For Phase 1 applications, eight per cent got funding and for Phase 2, fewer than six per cent were successful. They base their decision on the paperwork you submit. This is unlike approaching a VC fund or business angel where the personal relationship is key and you need an introduction. Wining and dining matters much less to get this type of funding; what you write down matters much more. You can get a conventional venture capitalist to invest in your startup if you’re a fantastic
person with charisma and a strong network and you’ve done it all before. But that’s no use if you apply for a public grant and write a poor application. You won’t get the grant even if your idea is great and you have a strong team to back it.

 

2. You need co-financing!

The time it takes to produce a good quality application, and the bureaucracy involved in evaluating the application, means it normally takes at least three to six months from application to grant. On top of this, most grants are paid as cost-reimbursement. The grant is paid after the cost has been incurred, leading to further need for short-term liquidity even if you get the grant. But you also need co-financing for the grant itself. Normally the grants don’t cover a hundred per cent of the cost. For most public grants, the percentage of cost covered by the grant is between 50 and 75 per cent. In the above-mentioned example, EU SME Instruments, the grant covers up to 70 per cent of the total cost. The startup must then fund the remaining 30 per cent or find other external funding. But if the public really want to achieve its goals, why don’t they pay a hundred per cent of the costs? Saving money is one reason, but another is that they want to ensure incentive on
behalf of the entrepreneur. Imagine if they paid a hundred per cent of the costs for a project. This would lead to a ton of applications from startups just to get their salaries paid. These would most likely be projects with a lower chance of success since the startups’ motivations are flawed. The government is looking to strike a balance with its grants: they want to invest in things that help the public achieve its goals and where there is incentive for doing so, but this can’t be done if the entrepreneur must cover a hundred per cent of the costs. Even with a government grant you need co-financing. It is however much easier to attract private investors (for example business angels) if you can go to them and say 75 per cent of the cost is already covered with a public grant!

Case study: Sepior receives €2 million from EU

Sepior is a Danish cyber security company that was founded in 2013 when it received €500,000 in funding from both a local seed fund and business angels.
In 2015 the initial product (encryption software to protect cloud data from hacking) was finalised and tested by a number of potential customers. Sepior, together with some partners, applied for EU funding of approximately €2,300,000 to be used for further R&D and further market development. The money was provided by the EU support programme SME Instruments Phase 2, which provides public grants up to €2,500,000 to cover up to 70 per cent of project costs. Why was Sepior (of which the author of this blog is co-founder) successful in their grant application?

 

1. Sepior found a public grant topic that fitted them very well.

The specific SME instrument topic was: “The Open and Disruptive Innovation (ODI) scheme aims to foster the development of fast-growing, innovative SMEs with promising, close-to market ideas bearing high disruptive potential in terms of products, services, models, and markets”. Here was a grant allocation clearly aimed at SMEs like Sepior, who were close to market (the core product was already developed) and had disruptive potential. Sepior had developed a ground-breaking technology that had the potential to disrupt the way we protect cloud data; all in all, a very good fit between grant topic and the project.

2. Sepior had a very strong team with external support:
Sepior is lucky to have a world-class technical team and one of its co-founders is one of the most cited researchers in the world within cryptography. This was a very important part of the successful grant application. In addition, Sepior asked outside opinion leaders in IT security to write letters of support which they included in the application. These letters gave even more credibility to the team.
3. Sepior showed credible co-financing:
When a relatively small startup asks for a €2 million grant, that pays up to 70 per cent of the costs, you don’t need a maths degree to figure out they also need significant co-financing. To improve the credibility of our application, and in order to convince the grant body we could secure such co-financing, we asked both existing and potential investors to demonstrate their interest in co-financing via letters of intent we included in the application. Together with extensive calculations on how we would cover the financing needs, that documentation was essential for us getting a positive review of our application.

4. Sepior spent a lot of time and used external experts:
The team behind Sepior was lucky that some of them had extensive experience in writing other EU grant applications while others had extensive experience in writing business plans and investor material. Compared to the average startup, we had the skills needed to write the application, and we literally spent hundreds of hours on it. The first time we submitted the application it didn’t get over the threshold. This highlights both the tough competition and how hard it is to write an application if you haven’t applied for the specific grant before and don’t know exactly what the evaluators are looking for. After the first attempt, we were close to the goal and decided to ask an outside expert to review our application and propose changes. The input from that expert, and the further hundreds of hours spent on revising the application, were essential for getting the grant the second time we applied.

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If you are interesting in knowing more about startup funding, then consider participating in one of Nicolaj Højer’s hands-on master classes. Next is to be held in Copehagen on May 3rd: Sign up here.

Executive summary for startups raising capital

I find the executive summary to be the single most important piece for investor-material for startups.

That’s because most investors  (business angels, VCs etc.) receive several hounded investment-proposals from startups per year, but on average invest in less than 1 % of the startups. The ability to say no  to startups- very fast –  therefore becomes a core competence of early-stage investors.

This no/maybe decision will be taken within a few minutes, and no-one reads an entire business plan or even a 15-page investor-deck. The startup needs to be able to explain why it has potential much faster. This is where the executive summary comes in, since it explains the whole story on a single page.

You can find my notes on how to write an effective Executive Summary in my presentation: Executive summary for startups seeking funding

 

 

Startup funding in Norway: LAVO app

Case Study: LAVO app – Know your customers and get the right people on board.

LAVO is a mobile app in the social media domain. Users set, follow and respond to video ‘challenges’, where they capture exciting moments and add music to bring their footage alive. Founded in 2015, the Norwegian company bootstrapped until the first angel investment round in 2016.

Founder and CEO Tom Roger Sokki explains:

“I had an idea around live streaming for a younger target group, where the consumer behaviour was constantly changing and the content needed to be cool. The product evolved into a challenge app, where publishers and the audience can interact, share, stay up to date and have fun together.

We bootstrapped initially, and the first investors came from the Bergen Angel Network in September 2016. The network consists of 40-50 early investors and five of them wanted to join the team, investing a total of NOK 2 million in that round. Since then things have moved fast.

The second seed round was done with help from a small advisor team in Oslo, Eikeland & Ravnaas, who put us in contact with Tom Erik Kjeseth, an award-winning film producer. He wanted to join the company because he liked the way we were working with floating media, film effects and music. Kjeseth also invested NOK 2 million and is now very involved helping us build our creative strategy.

The last seed round was closed with top-notch investors – big real estate owners in Oslo. Brothers Øystein and Torstein Tvenge are among the most successful investors in Norway, investing mainly on the Oslo Stock Exchange but also investing in startups where they see a huge potential, as they do in Lavo.  They were so bullish in the first meeting, I thought they wanted to buy the whole company! However, we secured the cash needed, NOK 8 million (approximately $1 million).

I think a lot of our success comes down to understanding our customer. I talked with two important organisations who represent LAVO’s target group. We conducted workshops to learn about their behaviour, needs, trends, what´s cool, what topics are important, and other patterns and I learned a lot about the type of product LAVO could be. We also spoke with a Norwegian TV channel who wanted a product that gave their audience more interaction, which gave me more drive and motivation to fine-tune LAVO.

As the product evolved, I questioned just about everyone: producers, content creators, talent, and musicians, until LAVO had a perfect place in the middle of the matrix.  We challenge content producers to interact with their audience and at the same time the audience is more involved than ever before. We are adapting to changes in user behaviour, and the investors see this as the way forward.

I would say that the most important thing we’ve learned is to work with good and smart people who believe in you and what you are doing.  This also means getting the right investors.  Our investors have delivered both hard capital and intellectual capital, as we expected.  As a startup you are often good at the product or service the company provides, but growing the company constantly, raising funds, is beyond your full control. So getting on board investors that know that part of the game, and that can also participate in many rounds of early fundraising, is important.

In Norway, we have few environments that specialise in startup-funding. It’s too early for the investment banks and most of the venture funds so you rely on rich angel investors. Luckily, I managed to get advisors on board who knew many of them, and who liked Lavo. Now they have all been taken on one hell of a ride!”

Startup Funding in Norway: WeClean – Drag investors into your universe

Norwegian startup WeClean provides on-demand home cleaning services via a convenient app. After bootstrapping for two years, WeClean received five rounds of Angel funding in 2016. Founder Kim Haagensen explains:

I have been an entrepreneur my whole life – a high school dropout, a hustler, dreamer and a rebel. So when I found myself driving Uber after a public and ugly divorce, it didn’t take much for my brother Sindre to talk me into starting a new venture, providing home cleaning the ‘Uber way’.

In Norway, there are maybe five to ten thousand people cleaning on the black market. This intrigued me because it shows a group of people who want to work and deliver their services in a legal way, and it also verified a market which we now suspect to be worth €500 million.

We’ve been pretty laid back about funding, so when we won the Angel Challenge in May 2016, we’d already been through absolute hell. It’s not easy to find hippie investors! It was actually an Uber passenger who introduced us to our first investor, Emil Pete, who shared our values and became a good friend.

Emil’s investment gave us our first 300,000 NOK in January 2016 and we received a further 250,000 NOK investment from his father, Frank Pete, the following month. By March 2016, we were pitching on a 15 million NOK pre-money valuation and were at the final stage with many of our bids. We were still bootstrapping but we were confident in the market and watching the business grow every day.

The Angel Challenge was a great achievement. WeClean beat 19 other strong startups to win 1.3 million NOK in the form of a convertible loan. It felt fantastic and also incredibly scary that someone believed enough in us to give us their savings; there was a real feeling we had to prove ourselves. We did, winning 100,000 NOK in the Telenor Digital Challenge the following month.

Throughout all of this, we’ve stuck to our values of Peace, Love and Good Times. We wanted to change the world and shamelessly claim that we’ve already made a start. Our weapon is our service (cleaning) and our altruistic mindset – our cleaners receive a portion of our profits and not one of us is above cleaning ourselves. Our big goal is sustainability which means we avoid huge administration costs. We say if you’re too cool to clean, you’re too cool for us!

We did look for funding from a corporate partner and this didn’t go well. As we entered into discussions with Lilleborg, who had their own range of cleaning products and could train our cleaners, it looked like an exciting collaboration. But after some talks about partnership and possible investment, their parent company Orkla launched a concept very similar to WeClean. According to them, this project had been active for over a year, long before we entered discussions with them!

This kind of behaviour does happen, but Orkla won’t succeed because they don’t know how to live our values, even if they copy our ideas. My advice to entrepreneurs would be that no matter who you are pitching to, you have to drag them into your own universe. Never let anyone drag you into theirs. It’s important to have faith in your product and not accept funding from just anybody.

Our first investors believed in us and our values. Since Orkla, we’ve received a further investment of 500,000 NOK from Frank Pete, who will soon convert the loan on a ten million NOK valuation because of the good faith he showed early on.

Startup Funding in Denmark

Where do I find Danish investors for my startup?

I am often asked by both Danish entrepreneurs and foreigners moving to Denmark about the different options for startup financing locally. Below is therefore a very brief introduction to that subject.

Business angels

Many business angels prefer to invest together in consortia. Denmark is no exception and there are four regional business angels networks with which entrepreneurs can get in contact and in front of which pitch to their members:

Many business angels are for all sorts of reasons not a member of any of the above formal networks, in many cases because they already have large personal networks and therefore do not need the exposure/deals arising from the BA networks. Finding these is a bit trickier, but try:

However there are also many angels who are not even member of the DVCA. This goes for example for a lot of the successful IT entrepreneurs who are now investing part of their fortunes in new startups:

The best way to find these is to look into who funded previous startups within the same segment/industry you are in. This you can find via news articles but also via company databases like www.proff.dk.

Public innovation centres

To bridge the Valley of Death for startup financing the Danish Government has decided to run public innovation centres. These act and think almost like venture funds, but invest much earlier than a regular VC. The normal initial investment round is typically around 3–4 million DKK. Until 2014 there were six centres spread across Denmark who invested mostly regionally, but these were merged this year to just four centres. These are still located around Denmark, but invest across the country:

Venture Funds

Of course Denmark has real venture funds. Below are listed some of the most active:

Accelerators

A startup accelerator typically does not invest huge sums directly, but participation in a startup accelerator has for many startups been pivotal in their future fundraising via access/exposure to business angels and venture funds. There has been an explosion in the number of active accelerators – also in Denmark , but the two leading accelerators in Denmark are:

Debt financing

As any entrepreneur will confirm, banks in general don’t like to lend money to startups with an unproven business model. Vækstfonden (the Danish growth fund) has two options that can help bridge this gap and are therefore relevant for startups:

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I know the above list is brief and therefore not comprehensive, but hopefully a good starting point for entrepreneurs looking for funding in Denmark.

Feel free to e-mail me (nicolaj@startupfundingbook.com) if you think something is missing.

Best regards,

Nicolaj Højer Nielsen