When Grants Hurt Your Business

This post was written in April 2018 by CASE Executive in Residence Alden Zecha

Regardless of whether they are for-profit or non-profit, small organizations are always looking for more capital to continue their work and sometimes just to survive. Grants can be an excellent source of capital for social enterprises since they don’t require financial payback or equity. However, innovators may underestimate the non-financial costs of grant funding. The reality is they usually require some payback in terms of reporting and often have restrictions on how funds can be used. Those often “hidden” costs can far outweigh a grant’s benefits. Social entrepreneurs should be very thoughtful about when to accept a grant and when to pass on the opportunity.

When I was CFO of Sproxil, a social venture providing product verification services, we won a grant to help us expand into Tanzania.  However, deciding to even apply for it was a major decision even though Tanzania had been part of our expansion plan for a few years. Before we applied, I examined several key criteria to decide if the grant was a good fit for us. I wanted to ensure that if we won, accepting the funds would be worthwhile and would provide sufficient benefits to justify our efforts.

4 Quick Considerations Before Applying for a Grant

There were four criteria that I could address by reading the grant package itself. I had to affirmatively answer that we were ok with each before moving forward to the more complex criteria that required deeper analysis. If any of the answers made the grant untenable, we wouldn’t apply because it would actually hurt us to accept the funds.

1. Where can the funds be used?

In this case, they could only be used in Tanzania and by a Tanzanian company. This meant we would have to bear the costs of opening a new subsidiary. Some grants are more flexible in terms of the entity expending the funds so long as the products or services are delivered to a particular market. Others have no geographic restrictions. That wasn’t the case here.

2. How can funds be used? Are they flexible or tied to specific uses?

For this grant the funds could be used for a variety of purposes related to launching or expanding the business. Often grants limit their use to funding new operations or staff, preparing certain reports or only directly serving beneficiaries. Sometimes they are even restricted to specific new activities or products that may be only tangential to the organization’s current offerings. There also may be additional activities and costs related to the grant requirements that need to be completed during or prior to delivery.

3. When are the funds available and how does that align with our plans?

The grant would help us expand but wouldn’t fund our entire Tanzanian launch. I needed to evaluate if we would be able and willing to meet all the other expansion costs on the same timetable as the grant. That was a big commitment for us to make.

4. What reporting or measurement and evaluation (M&E) requirements were there? Could we meet them and what were the costs of those?

Our grant required both operational and financial reporting. Thankfully those already aligned reasonably well with reports we would prepare for our own management purposes, so the additional burden was small. That’s not always the case.

The Deeper Analysis

Once I had examined the quick four, the deeper analysis began. While I can’t share a simple checklist–since each organization’s circumstances are unique—below are some of the questions I considered:

  • Would accepting the grant create a long-term service expectation in the market such that if we later withdrew we would suffer a notable loss of brand reputation?
  • Would accepting the grant create or eliminate opportunities for further capital, grant or otherwise?
  • Beyond the cash, what was the marketing value of winning the grant?

As you can see, deciding to apply for and hopefully winning a grant isn’t always straightforward. There are many reasons not to apply for a grant. Make sure you understand if a grant is right for you, before you apply. Michael Porter once famously said, “The essence of strategy is what not to do.” When applied to social enterprises and how they approach grant funding, I couldn’t agree more.

Find more information about grants—and determining the best-aligned capital for your business—through CASE’s Smart Impact Capital.  This online toolkit includes primers on 13 different types of capital, and a decision tool to determine which types align best with the characteristics of your business, impact, and growth.

Also see a discussion about flexible capital in CASE’s Scaling Pathways: Financing for Scaled Impact paper, which provides examples of how organizations are accessing flexible capital for scale of impact.

About the author

Alden Zecha is a CASE Executive-in-Residence and Co-Founder of Sproxil. He has over 25 years of experience in more than 35 countries and has founded several companies, including SEAD Innovator Sproxil, Inc., a social venture that provides a consumer SMS and app product verification service to help consumers avoid purchasing counterfeit products.