Although traditional fundraising might be the most familiar path to founders, there are multiple different options available. While many consider bootstrapping, there is another source of non-dilutive capital that founders could consider: government grants.

This article breaks down everything you need to know about grants, from qualification criteria to developing a compelling application. Want to hear more? Watch our recent webinar now.

There are many grants available to science and tech businesses, most of which are distributed through government-backed vehicles.

To Luke Jahn, a former auditor and fractional CFO to businesses in the life sciences, "Innovate UK is still the primary source of grant funding for UK companies."

Innovate UK runs many different granting streams, from Investor Partnerships grants - designed to stimulate growth and leverage private investments - through to Knowledge Transfer Partnerships that aim to foster collaboration between the private and academic sectors.

Luke says, "Although many UK companies are still eligible for Horizon grants through the EU, and there are some private foundations that offer certain niche grants, Innovate UK is where the bulk of new technology-focused grants are issued."

In a recent webinar, Susanne Coles, Deputy Director of Innovation Finance at Innovate UK, pointed out that businesses backed by Innovate UK raise an average of 30% more money from the private sector.

This success is partly due to the sheer scale of the programme. "We have a network of more than 150 institutional investors through whom companies can apply for investor partnership grants. Grants can range from £50,000 feasibility studies through to sums of up to £2m to fund the development of experimental projects for later-stage businesses," says Susanne.

It's a programme designed to unlock growth by helping fast-moving companies to execute grant-funded R&D projects and raise equity for growth at the same time.

Through this programme, Innovate UK provides non-dilutive grant funding on aligned equity investment. The grant funding amount must leverage at least equal or higher levels of equity investment from a pool of investor partners chosen by Innovate UK.

These Investor Partnerships are a strong option for startups between seed and Series A that have gained traction from VCs, but are working with investors who may not be able to support the innovation risk without the Innovate UK grant.

The ability to de-risk concurrent private fundraising and R&D can be crucial for unlocking the equity investment. Although the Investor Partnership competition is for single applicants, the grant may open up new areas of collaboration with future customers, supply chain partners, or indeed licensors of the developed technology.

Susanne describes Innovate UK’s sweet spot for Investor Partnerships: "The best cases are where there is strong investor interest, but the grant is genuinely material to the funding round’s chance of closing. We want the grant to actually unlock new capital, not simply to function as a useful bit of extra cash for the successful applicants."

First, think carefully about the structure of the grant you’re applying for, which can increase your chances of a grant award.

In Luke’s view, "Grants are allocated from a pre-determined pot of money. If you opt to apply for, say, 40% of a particular pot, you’ll face a higher burden to show your proposition is worth a really significant outlay for the granting organisation. Tactically, applying for a smaller amount of larger pots might increase your chances of success," he says.

Timing is also crucial.

Innovate UK’s Investor Partnership Programme focuses on companies that have already secured verifiable investor interest – so much so, that Innovate UK asks investors to submit an Expression of Interest (EOI) on behalf of the applicant company.

These grants are only awarded to companies who apply when they’re approaching the end of a fundraising process. Already closed the funding round? Your company is no longer eligible.

"Typically, investment rounds should close between three and six months if a grant is awarded," says Susanne.

Dr Jonathan Memel, Senior Manager for grants at innovation consultancy Ayming, believes that seeking external expertise can lead to better results in Investor Partnerships applications during what is "inevitably a stressful time for founders".

He points out that "An advisor can streamline your workload and reduce the time it takes to create a high-quality application, leaving you to do the hardest part, which is pitching investors and finalising your equity fundraising."

What do startups and scaleups tend to miss during a grant application? For Jonathan, zooming out from the tech itself can often be the biggest hurdle. "Founders always know a great deal about the technological advantages of their innovation. The product and technical detail is rarely a problem. But the best grant applications take the time to focus on the bigger picture – how their industry, and customers, will benefit from the innovation the grant will enable. Show, don’t tell: think about outcomes, evidence and how to substantiate your claims."

What’s the upside of these grants for investors?

Alex Leigh, Investment Director at Future Planet Capital, believes Investor Partnership grants carry multiple benefits. "As VCs, there will always be funding rounds we want to lead but which suffer from a lack of co-investors. An Investor Partnerships grant is a compelling way to derisk a funding round and grow the available pool of capital for a successful company."

While Investor Partnership grants are highly valued by all parties in a funding round, it’s worth remembering that the success or failure of a grant can have a ripple effect on the funding round itself.

For example, an investor might significantly adjust a valuation multiple if a grant is unsuccessful, creating new complications in a round that’s nearly closed.

Not every company needs grant funding, and grant funding isn’t right for every company.

Innovate UK’s Investor Partnerships grants are designed for companies actively fundraising, that can show real, tangible investor interest: by design, this doesn’t apply to every startup.

Building a project to fit a grant, rather than applying for a grant which happens to be a good match for your business model, is unlikely to result in success, as Susanne confirms: "We can identify when companies are retrofitting their solution around a potential grant award. The process works best, and is designed for, companies that are already building in the area we’re looking to fund, where they can back up their application with real evidence."

Luke agrees: "An unavoidable problem with grant funding processes is that they risk diverting your focus from your core business. If you spend lots of time on what is perhaps a speculative grant application, think about the opportunity cost of all the other projects you’re choosing to deprioritise."

Most grant organisations agree some form of ongoing monitoring and relationship management with their grant recipients, and both Jonathan and Susanne are at pains to state that grant funding is "far from free money".

To Jonathan, "the concept of additionality that underpins Innovate UK’s Investor Partnerships grant is very important."

Additionality is the amount of new private investment and R&D made possible by the grant – initiatives that would not have occurred without this funding. Granting organisations are understandably keen to understand and track the new innovations, employment and investment resulting from the grant, as well as the grant’s positive effect on industry and, eventually, the public purse.

In Luke’s view, it’s important for startups and scaleups to understand how funding might be released, "as you’ll invariably receive grant funding in tranches rather than the whole lump sum up front."

Most grants will involve quarterly claims in arrears, with companies claiming based on the business case originally made in their application.

It’s also important to consider how the new grant could affect relationships with investors and other stakeholders? Alex suggests that "you should always celebrate the grant award – send an update to your employees, investors and other relevant parties, because grants do lend companies additional credibility as well as the direct financial benefit it affords."

In some instances, a successful grant application could actually help VCs build investment theses. As Alex points out, "If we know there are regular grants made in a particular sector – such as high-value manufacturing, life sciences, clean energy, or deep tech – and that a founding team has experience successfully applying for and winning grants, then that certainly acts as a positive signal for us as investors."

When equity fundraising is getting harder, and when runway is so crucial to early-stage companies, the prospect of non-dilutive funding like grants is enticing.

But grants are not free money. They are designed by bodies like Innovate UK to deliver real benefits to industry and to the public, and they’ll likely come with reporting and monitoring requirements for which founders should be prepared.

Identifying an appropriate grant, and designing a solid application that makes the value-add of the grant clear, can deliver additional capital to businesses investing in new technological innovations – a win-win for the UK’s science and technology ecosystem.

As Alex says, "We all want UK startups to succeed, creating jobs and drawing in more investment. Grants are a wonderful way to make that happen."