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Grants May Be Free, But They Do Come at a Price Here are four things entrepreneurs should know about this type of funding, along with some best practices.

By Martin Zwilling

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Every investor in your startup, even friends and family, normally expects a share of your company (equity), which means your return for all your effort goes down quickly. Thus founders seeking funding for a good cause or a new technology often seize on grants from universities, government agencies and philanthropic organizations as free money to solve their problems.

In the U.S. they can visit the directory of government grant alternatives, which is searchable and features more than a thousand federal programs, or more locally the Small Business Innovation Research (SBIR), with opportunities for high technology startups. They can find additional grants from large philanthropic directories, and your favorite alma mater site.

Related: The Feds Have $2.5B Available to Fund Innovative Small Companies

Of course, nothing is really free in the business world. The indirect costs of time and effort to find the right grant, complete the application and manage the process, even if you win, can be substantial. Here is my summary of some major considerations that every entrepreneur needs to evaluate against the cost and effort to attract equity investors:

1. Completing a grant application is real work.

Every organization willing to give you money is looking for specifics on what you will do with it and how it will help the grantor and expects answers to every detailed bureaucratic question. This requires heavy research and lots of time. Your visionary one-page idea description won't work here.

2. Turnaround cycles are excruciatingly slow.

After months of preparation, you should expect another six to nine months for reviews and funding cycles. This is at least double the time required for most equity investments, and may be a delay you can't afford in keeping up with the market and your competitors.

3. Experts are available but expensive.

Just like you can hire investment brokers to find equity investors, you can hire grant writers and expeditors to help you through the process and improve your odds of success. These people will get you on the fast path and lobby your case to executives, but expect a chunk of your money up front.

4. Grant spending and accounting rules may be painful.

Grant providers may not require a seat on your board to help you make decisions, but your spending processes will be carefully monitored and audited. Venturing outside the limits will lead to legal consequences. Don't assume you are free to be your own boss with grant money.

Related: Is Your Business Eligible for a Government Grant?

Here are some best practices that I recommend for inexperienced entrepreneurs to maximize their odds of survival and success in dealing with grants and making the tradeoffs:

Look for assistance, not experts.

Don't try the grant process alone the first time. If you still have any connections at the local university, look for some guidance from related subject-matter professors. Professors get grants for research, but they need you for the current focus on commercialization. Otherwise find an inexpensive class on grant writing.

Seek funding from multiple sources concurrently.

Grants should never be seen as the only alternative to equity investors, or vice versa. Funding is a seemingly never-ending task for startups, so make sure all your research, business plan work and execution plans will work in either environment. Pursue at least two sources in parallel.

Search for special stimulus areas and tax breaks.

Capitalize on current initiatives, such as the recent Obama Administration Green Energy Stimulus, which pumped more than $50 billion into startups. Every organization and agency has special focus areas and related tax incentives. Enhance your business plan and marketing with these in mind.

Highlight an element of social entrepreneurship in every plan.

Every technology advance has the potential to help people in the medical, environmental or cultural sense. Think outside the technology for social applications and value and highlight these in your grant application, and in networking with authorities. Technology is not enough.

In all cases, grants should be seen as primarily an early-stage development assist, and not the last step to commercialization. Some entrepreneurs become stuck in development, fixated on winning just one more grant, rather than moving on to marketing and real customers.

The only real funding that counts in startup success comes from customers. They don't ask for equity either.

Related: U.S. Dealmaking at Record Year-to-Date High

Martin Zwilling

Veteran startup mentor, executive, blogger, author, tech professional, and Angel investor.

Martin Zwilling is the founder and CEO of Startup Professionals, a company that provides products and services to startup founders and small business owners. The author of Do You Have What It Takes to Be an Entrepreneur? and Attracting an Angel, he writes a daily blog for entrepreneurs and dispenses advice on the subject of startups.

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