Funding Innovation: The link between grant and equity funding for innovative businesses

A new study looks at the link between grant and equity funding in supporting innovative young businesses.

Put together by Beauhurst, who research UK startups and scaleups, the report is the first to examine Innovate UK funding in detail, with analysis of the recipient companies as well as the universities that work with them to win grants.

Author: Ben McLeod, Beauhurst

The regional picture

The business growth process requires many ingredients. Where can you find all of those in one place? London. The capital has education, diverse talent, abundant innovation, and a rich supply of capital. For now, these ingredients don’t have critical mass elsewhere in the UK. 

It makes sense then that the capital took 45% of all equity funding between 2011-2016. Behind this statistic is an even bigger gap between London and everywhere else in the UK: 8% of London equity rounds had some level of public sector backing, compared with 73% in the North East. Fortunately, the Government is aware of the reasons for London’s dominance, and is ecosystem-building elsewhere – particularly by feeding innovators money. Innovate UK exemplifies this push of government cash to other centres of innovation, with eight of the top ten grant-winning universities found outside of London. Over time, private investors will follow. But until then, prospective unicorns need one foot in London.

 

Being a great partner

Of the top 10 grant winners, only three are non-Russell Group universities. The general industry consensus is “no surprise there”. The Innovate UK projects most likely to succeed draw together a talented academic, top research infrastructure, and a business leader to solve a problem. And while the ability to craft good grant applications is essential to securing funding, infrastructure and decades of research certainly help. Our enquiries showed that company leaders care that their university partners both understand business and have exceptional research – but that many companies are not even aware of grant funding as an option. With the right strategy, other universities could exploit this niche in

the market to generate more partnerships. 

 

Grants and equity — the best of both worlds?

Businesses that secure both grants and equity outperform those that secure only grants or equity. They tend to raise more money and achieve higher valuations. Why? Stories abound of companies getting ‘hooked’ on grants. Yet due to the time-intensiveness of applying for them and the limited capital on offer, dependence has a high opportunity cost. And when it comes to equity investment, overly optimistic assessments of technology may hinder returns. 

Clearly, adopting either model in isolation has risks. But the due diligence processes of Innovate UK and an equity fund focus on different aspects of a business, and so help mitigate these risks. The former is designed to pick products that are technologically novel and achievable, while the latter picks businesses that have potential to make money. A business that wins grants and equity has therefore proven it has the two key factors for success - a product and a market. The pedigree of the founding entrepreneurs is also important. A team that has the skill to find, apply for and win two very different, very

competitive investments is more likely to be a team with a strong advisory panel and full start-up skill set. These conclusions have recently been validated by Innovate UK itself, which has just launched an ‘investment accelerator’ competition for entrepreneurs. Winners will receive simultaneous Innovate UK grant funding and venture capital investment from the private sector. We look forward to seeing innovative businesses

take advantage of this powerful combination in the future.

Download the full report here

 

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