Grant funding is different to equity funding on one, key basis: grant funding involves giving non-repayable money to businesses, whereas equity funding is giving money to businesses in exchange for shares in the business.
In a recent study by Beauhurst, they analysed a huge range of trends in Innovate UK grant giving between 2011 and 2016, in order to assess the effect grant funding has on young businesses.
Facts and Figures – Innovate UK
In the study, it was revealed that London based businesses took 45% of all equity funding in the UK, between 2011 and 2016.
However, the government is aware of this advantage that the capital has, and tries to create more public-sector backed grants.
This has been largely successful, with the results showing 8% of London equity rounds had some level of public sector backing, compared to a whopping 73% in the North East of England.
Companies such as Innovate UK – the government’s innovation agency – have also tried to support non-London businesses, with 8 out of their 10 grant-winning universities being based outside London.
However, only 3 of the businesses were non-Russell group, showing a bias towards higher ranking universities.
Innovate UK described their ideal partners as understanding business and having exceptional research – and stressed that anyone can be awarded these grants if they meet these criteria to the highest possible standards.
Innovate UK noted that many companies are just not aware of grant funding, and thus miss out.
What does this mean?
So, what are the implications of grant and equity funding for businesses?
It’s been revealed that businesses which secure both grants AND equity outperform those that secure only grants OR equity. They raise higher valuations, and raise more money. Why is this?
It’s common knowledge that applying for grants is time consuming, and is costly in terms of man-hours. In addition to this, equity crowdfunding is not without risks, and can hinder returns.
Not all companies are eligible for grants – they are often awarded to businesses who are disruptive or innovative. On the contrary, equity funding is given to businesses that investors think will make a lot of money.
So, if a business is so unique that it is being given grants, and people think it’s so lucrative that they’re willing to invest money into it, then it has already proved it has 2 key factors for success: a product and a market.
In terms of HR, a team which has the commitment level to consistently source, apply for and win grants – but also has the sales ability to successfully pitch their idea to investors – is likely to be varied and well-structured.
Having a strong team with a varied skill set is crucial for the growth of any business. So, it’s not just coincidence that those businesses who get grant and equity funding tend to go further – it’s the quality of their business model.
The Bigger Picture
What is the effect of grant funding in the UK? As previously mentioned, London generally receives the majority of grant and equity funding. The capital receives 45.2% of the UK’s equity funding, and 18.7% of the grant funding.
The lowest scoring areas of Britain for funding were Wales, the North East, the East Midlands and Northern Ireland – with NI receiving just 0.1% of the UK’s equity funding and 0.3% of the grant funding.
Martin Hughes (Hunter Centre for Entrepreneurship) noted that London gets “much richer networks, making it more effective and competitive”, and suggested that “each region needs to build an ecosystem that will absorb more churn, so they will create more businesses that will replace those that are leaving the ecosystem”.
What Hughes is suggesting is that rather than migrating towards London, businesses should work towards making a stronger network in other areas.
Obviously, businesses alone cannot do this. It is therefore essential that more grant companies copy Innovate UK and try to give money to businesses outside of London, in order to ensure that each area of the UK is able to build their own thriving business network.
More could also be done by the government, council and investors, to try and distribute the wealth and opportunities more equally.