Here is why startups should rethink their strategy on grants

With the growing interest in social impact enterprises and sustainable development goals, government departments, corporations, foundations, and trust funds, are backing startups that are doing business for good in the form of grants.

A grant is non-refundable funds given to individuals, organizations, educational institutions, and businesses to fund a specific project. They are usually competitive and proposals are submitted before one is selected.

While grants may be a perfect way to get funds to kick-start your start-up and gain valuable networks, if you are looking to make your business sustainable, you are advised to avoid total reliance on them.

Villgro Kenya Chief Innovation Officer, Wilfred Njagi gives his perspective on the limitations of grants to social enterprises. If you are a social enterprise that has it's funding strategy reliant on grants, not to worry, he also offers alternative options to help you scale your enterprise sustainably.

What are the risks/limitations of a startup involved in 'grant-preneurship'?

W: There are a number of risks associated with grants. The first one is donor-dependence syndrome. Overdependence removes the necessary pressure required to make a business sustainable. The danger is this approach is that when the donor withdraws the startup is basically dead in the water.

If you are not building a business, then you can go ahead and raise grants but if you start out as a social entrepreneur who wants to apply a market-based approach to address a social problem, then you can’t rely purely on grants. You have to move away from grants as soon as you can.

The other risk is donor fatigue. Normally after deploying so much money in a space or a sector and the impact numbers are not as compelling to warrant continued spending in that sector it reaches a point where the donors just get tired and withdraw from a sector.

Grants can also move your focus and energy from the core business. If you get many grants from different organizations you are obliged to report to them, each with different funding guidelines and reporting metrics, you may find yourself spending more time reporting instead of actually executing your business. This slows down operations during reporting seasons due to the limited bandwidth of time and team members.

If you are an entrepreneur who is serious about building a business, once you have used grants to de-risk, to do market research, R&D to validate a few assumptions, my advice would be to run away from grants as soon as possible. There is space for them but do not get caught up in 'grant-preneurship'.

Villgro Kenya has previously employed grants and is moving more towards Venture Philanthropy can you speak to that

W: There is an emerging thinking around blended finance and in a much bigger context of venture philanthropy. Venture Philanthropy looks at to administer traditional philanthropy with the discipline and rigour of venture capitalists.

We have seen family offices, traditional donors like USAID & GCC move away from a blank writing a blank cheque to milestone-based financing. This phased investing approach ensures that the entrepreneur hits some set their targets before unlocking the next tranche.

Another innovative approach by donors is repayable grants. Once an enterprise has reached financial sustainability they are required to repay the grant which can then be re-deployed to another deserving case.

Venture Philanthropy leads to better leverage for both the startup and the donor. The entrepreneur ends up reaching the milestones faster, scaling up faster and hence a much wider impact as opposed to pure traditional grants where recipients just write reports.

Blended finance, on the other hand, looks at mixed instruments. For example, if you are a family office, incubator or a donor you typically would start off with a milestone-based in a phased manner and as they continue to hit the milestones it reaches a point where they are fully/semi de-risked to be considered for equity and other return-seeking instruments.

Villgro Kenya is going the direction of the broader venture philanthropy and more specifically blended finance. We are likely to blend grants and returnable instruments on a case by case basis. We are moving from traditional grants.

A startup could start off with a $20k-$40k grant and as they meet those milestones and prove their business models Villgro Kenya might consider them for additional funding of up to $50-$200K returnable capital (equity/quasi-equity).