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How to fund an MVP-stage startup? An ultimate guide to initial funding

Start-up development Finance in IT
Tutorial

Free money to fund your own business is probably the most cherished dream of every budding entrepreneur.

And getting a grant is what can bring it to life. While small business owners dream of a grant to fund their startup, the process of its obtaining is not as easy and cloudless as it may seem.

However, if you know where to look for the right fund and how to apply, one can significantly nick in the path to getting seed money.

Difference between a grant, attracted investment, and loan

Grant is money provided to startups to cover some of their expenditures, such as team training, equipment procurement, or entering new markets. The recipient of the grant undertakes to report on the use of money received from the fund. The main advantage of such financing is that the recipient does not give a part of the company (equity) to the fund.

In addition, by their very nature, funds do not compete with each other, since they do not receive anything in return from startups. And it means that they help each other. It also means that after receiving the first grant from one fund, the possibility of getting a bigger amount from another one is quite high.

When attracting investment, the business owner sells its part (equity) and receives money to develop its company. Advantage: Investors often take startups under their wing and help in getting the next rounds of investments.

The riskiest way to get financing is to take out a bank loan. In this case, the bank requires collateral. And if the experience is any guide, small businesses do not have the assets to satisfy such a requirement. And even if startups manage to find an amount or an object needed for collateral, the risks are still very high. In case of failure, you will have to deal with time-consuming and tedious refinancing or lose the collateral. In addition, loans are often not issued to startups at the preseed or seed stages.

Where to look for funds and what to consider while choosing?

As of now, there are almost no ready-to-use resources with a list of funds. You have to glean information or ask those who have already received grants. It is the best way. It is vital to find out the level of bureaucracy and expense reporting scheme.

It won’t hurt to familiarize yourself with the mission and strategy of the fund. One may easily find them on the official website. Missions often differ. Some have the goal of developing healthcare, others - AI (artificial intelligence). It is essential to know that the fund you're applying for a grant from finances your particular field of activity. This may save time and effort.

In Ukraine, for example, there is almost no alternative to Ukrainian Startup Fund. The fund is state-owned, but its team is innovative and progressive, there is almost no bureaucracy.

USF's goal is to foster the creation and growth of early-stage tech startups in Ukraine to enhance their global competitiveness. Therefore, startups that won’t help the fund make global changes, or those that will not contribute to the startup ecosystem in Ukraine, are much less likely to receive money. This list also includes startups registered abroad or those that plan to spend a grant outside of Ukraine. That is what you should pay attention to and take into account when choosing a fund.

The analog of USF in Russia is RFDIT (Russian Fund for the Development of Information Technologies). The fund offers 2 types of grants to the winners:

  • for the digital transformation of companies

  • for software development

How much can you get?

In Ukraine, this amount varies from several hundred to several hundred thousand dollars at a time. It is also possible to receive a grant from the same foundation for the second time. USF offers $ 75,000 (25 + 50,000) for development and ongoing activities, as well as $ 10,000 for an acceleration program in international and Ukrainian accelerators.

RFDIT offers from 20 to 300 million rubles with a project implementation period from 1 to 36 months.

Early-stage startups need more than just financial help. It can include providing an office, networking with venture investors and serial entrepreneurs, technical and business consulting.

The great contributors are organizations that help startups prepare and submit grant applications, look for potential investors, choose grant programs in the relevant direction of the project. Mostly they do this work for a small fee.

How to improve your chances of getting a grant?

  1. Think it over a few steps ahead.

It usually takes quite a lot of time to receive the grant after applying. Therefore, it’s worth thinking carefully about the expenditures that are supposed to be covered by the grant. It often happens that while the application is being approved, the equipment procurement you budget while applying is no longer relevant, and you need to pay salaries from the grant. After your application is accepted, it is no longer possible to change it. Be smart!

1. Review the fund policies.

Here you may find many unexpected pitfalls that you don't want to trip over. For example, tax issues. When applying for a grant from USF keep in mind that the amount of taxes you pay after receiving the grant depends on the form of registration of the business entity chosen by the startup:

LLC pays taxes according to the taxation system (general or simplified) - corporate income tax or single tax.

Individual entrepreneurs pay individual income tax (18%) + military tax (1.5%).

2. Understand who you are pitching your startup to.

In terms of form, your pitch to the fund will hardly differ from the pitch to investors. Usually, the jury consists of venture investors. However, it may differ in content. Take the time, study the goal and values ​​of the fund, and answer the questions:

  • How will your startup contribute to achieving them?

  • How will it help a specific industry/community/society?

Find a point of intersection between the mission of the fund and the solution you offer, and talk about it.

Startup grants are like your favorite birthday cake. It often makes sense to entrust its preparation to professionals. Even when you find the right funds and decide to apply, it may turn out that the application process is dragging on like a black hole, and there is no end to it. If it scares you, consider delegating it. Entrust it to someone from the team, or hire a specialist. Grant preparation classes, which are often conducted by the funds, will come in handy.

And with grants, as well as with sweets, one should not overdose. They are like fast carbohydrates that give you a boost of energy, but not for long. Funds do not require you to achieve your goals or KPIs, which is often doing no good to startups. The preparation is timely, and after receiving a grant, business owners slacken a little. This is when the focus shifts from the main goals.

Therefore, I advise you to use grants as a booster and scamper to raise investment rounds.

It doesn't matter which way you go - you will receive your reward. Not always financial, but has good experience ever hurt?

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