Four hard-to-swallow truths about government grants

Twenty years ago, my fellow co-founder received $26m in funding from the Canadian Government because he could not get it here. Fifteen thousand kilometres away from home, we brought our product to market, made new hires, opened new factories and put that $26m back into the Canadian local economy 10 times over. Canada reaped the rewards of Australian entrepreneurship because they could see the potential that the Australian Government had overlooked.

Unfortunately, many of the issues with government funding that existed then still remain.

In my experience of applying for government grants in the US, Canada and Australia, there are some stark flaws in how government money is spent here, who it is given to, and why.

There are four hard-to-swallow truths about how government grants are awarded in this country:

1. Government grants need to de-prioritise low-risk digital companies and instead focus on the big picture infrastructure, hardware and utility challengers that are too risky for financially motivated investors.
2. Australia urgently needs more reliable grant options and clear routes to funding, which enable companies to plan ahead and for money to flow reliably.
3. Grants need to change their eligibility criteria in favour of small startups that sorely need the money, rather than more established players that want the money.
4. The government must look beyond trends and headlines, which sometimes means awarding grants to boring but essential businesses instead of zeitgeist tech trends like AI.

A bigger appetite for risk

Government can be guilty of misunderstanding its role in the startup ecosystem and how it differs from other forms of investment. Government is not a venture capital (VC) investor, so it shouldn’t act like one.

A huge proportion of VC money goes to low risk, high reward businesses because they offer a faster rate of profitability. Governments should look for the exact opposite criteria. They should assign a greater proportion of funding to businesses that are immediately less attractive to VCs because they require more upfront capital, are further away from profitability, or are attempting to solve seemingly impossible challenges. Of course, this isn’t to say that the government should spend its money on bad bets, but it needs to back businesses that offer a greater value to society, not shareholders.

To solve the really big challenges facing humanity, we need big solutions. We need new infrastructure and new physical deployments of tech — whether that’s solar farms, EV charging, rail networks or medical facilities.

Businesses developing software and digital services can only create a mild benefit to society by comparison, and should not be the main focus of government funding. Let them be supported by VC money.

Removing uncertainty

For most Australian startups, the Research & Development Tax Incentive is the only form of government funding that can truly be relied upon. It is consistent year after year and is a boon for businesses as they plan ahead financially, make new hires and bring their product to market.

Meanwhile, most other forms of government money can be erratic. Many grants force startups into making and continually updating complex contingency plans over a long period of time. They need plan A for getting the grant, plan B for getting some of the grant, and plan C for missing out entirely. This can negatively impact and severely delay progress.

It’s also commonplace for a company to tick all the boxes required for a government grant, only to be denied because another, preferred candidate has a slightly stronger entry that year. They will spend considerable time, effort and resources during the application process, only to be denied through sheer bad luck. Maybe this is a neat encapsulation of being a startup, but it needlessly makes financial planning more difficult. It should be the role of government to remove barriers, not throw up more.

To mitigate these uncertainties, more grants need to be made available, or current grants need to be awarded to more companies. Initial entry filters could be established to enable only a reasonable amount of work to be done on an initial application. Only if it succeeds would founders then be required to put the time and effort into a more detailed application, with a much higher proportional chance of success. It would also help to shorten the application/award process so that companies are not left in limbo for extended periods of time.

Look beyond trends

Every so often, government becomes fixated on topical trends, and funding can flow more easily to companies in that space. Renewable energy, AI, robotics and quantum computing are recent examples. They hoover up government money, and the party in power gets to be seen as a trailblazer in the media and enjoy photo-ops in front of a shiny new solar farm or robotics factory.

Government cash should not follow the shifting currents of topical trends, nor alter direction when the winds change. Funding needs to be steadfast and reliable. Sometimes that means backing a less showy but no less vital issue, rather than the zeitgeist.

Bring an end to unreasonable requirements

One of the biggest challenges facing startups is that most grants have minimum thresholds for applicants that inherently favour more established companies. For example, they are typically only available to businesses that have more than three years of operations, and more than $1m in annual turnover. In short, the kinds of companies that don’t really need financial support are the ones best positioned to get support. Indeed, the companies that most need the grants are precluded from getting them. It’s both problematic and counterintuitive.

It is clear that risk aversion drives these decisions. These thresholds may be logical when viewed solely as an attempt to reduce fraudulent applications, or prevent phoenix companies — startups that secure funding, go up in flames, then rise again under a different name. However, we must put more faith in other mechanisms to counter this, such as the newly established Director IDs.

We need to move away from a grant system that penalises smaller emerging businesses and rewards already successful businesses and startups that are merely sister companies of established brands. There needs to be an increase in the appetite for risk if we are really going to see groundbreaking solutions developed locally.

Moving forward

Ultimately, we returned to Australia after our time in Canada and the US, but we were in a fortunate position to do so. I am certain there are other Australian founders at the start of their careers who are seeking funding here, but increasingly looking elsewhere. We can’t allow them to leave as we left. We can’t allow other countries to reap the economic rewards that should be Australia’s. We must reward and support businesses that demonstrate real novelty and innovation, above those that will quickly turn a minor profit.

These are hard truths to swallow, but the alternative is far worse. If we don’t adequately support businesses with talent and ambition, we will never see it turn into opportunity and success. We need to turn Australia’s brain drain into a ‘brain retain’, and even a ‘brain regain’. Let’s get founders growing here, staying here and returning here.

Image credit: iStock.com/Andrii Yalanskyi