It still strikes me that most entrepreneurs and startup founders globally are unaware of the funding opportunities available to them other than venture capital. Across the European Union, there are various programs, grants and government-backed loans for small and medium enterprises (SMEs). What is even more important is the fact that these sources of funding are much cheaper than venture capital.
How is this possible?
Those of you having no finance background may have never heard of pecking order theory. Put simply, the pecking order ranks the sources of funding. As external investors by default posses less information than the managers of the company and its owners, they demand a higher return on their investment.
Here are the sources of external funding ranked in accordance with the pecking order theory:
As most entrepreneurs are familiar with loans, mezzanine finance and equity funding, I will put an emphasis on grants and low-interest / fixed interest government-backed loans.
Across the European Union, grants can be divided into two big groups: (i) local grants programs managed by government agencies in the EU states and (ii) EU-wide grants programs. About 76 percent of the EU budget is managed in partnership with national and regional authorities through a system of "shared management". Grants are distributed following a public announcement known as ‘’call for proposals’’. There are programs dedicated to small businesses, non-governmental and civil society organisations, young people, researchers, farmers & rural businesses, etc.
This funding is particularly aimed at people and companies who have ideas that are radically different from existing products or services on the market or under development (not incremental improvements), are highly risky, and require significant investments to get to
market. It is important to note that the SME Instrument is highly competitive and SMEs and startups need to evaluate their chances for success prior to investing time and resources in applying. Knowing their competition and being able to articulate what differentiates their offering from the competition is the first step to be followed by a concise go-to-market and scale-up strategy. Another requirement is for the SMEs and startups to be incorporated in EU member states or associated countries. As many entrepreneurs and startup founders are unaware of the fact that the countries their businesses are incorporated into are actually ‘’associated countries’’, it is worth mentioning those associated countries.
What is the scope of the SME Instrument?
It is anticipated that about 1000 projects in total will be funded via the SME Instrument by the end of 2020. The total available funding is EUR 2.7 billion distributed to projects across various domains, technologies, industry sectors and scientific disciplines.
There are two phases providing funding to businesses at different stages of the development of their projects. In general, under both phases, the funding provided under the SME Instrument is 70% of the total costs. This means that the applicants have to provide the remaining 30 percent.
The funding available is a lump sum of EUR 50 000 and the projects are expected to last about 6 months. The funding received under Phase 1 is intended to be used to validate the idea and prove the ability of the business to scale up and achieve a European and/ or global dimension. Activities can include risk assessment, market research, user involvement, analysis of regulatory constraints or standards regimes, intellectual property management, feasibility assessment and similar. The proposal shall not exceed 10 pages and is expected to be based on an initial business plan.
Project costs from EUR 0.5 million up to EUR 2.5 million can be funded via Phase 2. A higher or lower amount can be requested by the applicant, but it needs to be duly justified. The funding is to be utilized to achieve market readiness and a concise growth strategy is south after. Activities could, for example, include trials, prototyping, validation, user acceptance testing, demonstration and testing in real-world conditions, and market replication. Entrepreneurs are expected to provide a proposal of up to 30 pages based on a strategic business plan. Providing letters of interest from prospective clients and partners or signed agreements is an advantage. SMEs and startups can apply directly for PHASE 2.
Intellectual property rights and the freedom to operate are part of the evaluation criteria and the applicants are expected to address these points in their proposals. The ability to scale the applicant’s business and achieve European and/or global dimension is also to be demonstrated. What are the marketing and dissemination activities? How the applicant’s company can acquire market share? What differentiates its offering from the offering of the competitors? What are the competitive advantages? Is the team capable of managing a fast -growing business? These are just part of the points that must be addressed in order to demonstrate the viability of the project receive funding.
Although proposals can be submitted year-round, there are submission cut off dates. All proposals submitted between two cut-off dates are evaluated after the second cut off date
In many member states, there are low-interest or fixed interest government-backed loans that are available to SMEs and startups. As these loans are secured by a government guarantee, the entrepreneurs are not required to provide tangible collateral such as a mortgage. Equity funding is often the most expensive funding available to entrepreneurs that comes with a loss of control and dilution. Funding options such as government grants, EU programs and government-backed loans are not to be neglected.
Typically 6 Months from the time of application. It depends upon case by case basis in terms of success of getting funds.
Yes there is retainer fees + success fees to be paid
Funds are sourced from European Union Grants Proposal
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