14. June 2016–
When people in the startup scene talk about fundraising, they usually mean Venture Capital (VC). Seed-VC and Business Angels dominate the conversation from the very beginning. But especially in the early stages of a new company, founders should not only focus on one financing option, but rather build a portfolio of different capital resources. Because VC-investors want to see growth. And it takes a lot of work in product development and market-validation to be ready for growth.
For research and development (R&D)-heavy startups it is particularly difficult, because a longer time-to-market increases both capital demand and risk – both factors that don’t make VC fundraising easier. Especially for these innovation & tech projects, but also in many other areas, there is a multitude of public funding programs.
With regard to cost-benefit relation, considering application complexity, funding amount, chances of success and startup eligibility, we selected these top programs for Berlin-based tech startups.
Pro FIT - Project Financing
The Pro FIT-Project Financing program is a flagship program of the Investitionsbank Berlin (IBB). The IBB supports innovative startups with up to 1.4 million € – including a maximum of 400,000 € for a non-repayable grant and a maximum of 1.0 million € for a low-interest loan. The exact allocation depends on the depth of R&D within the innovation project: The more research the higher the grant; the more development the higher the subsidized loan. The conceptual separation of the innovation project from the rest of the company and other projects is very important (see graphic below). Only project-specific expenditures, such as personnel, asset investments or materials will be subsidized. These expenditures can range from research and development up to market launch though. The Pro FIT Project Financing program is only interesting for startups that are able to finance their own infrastructure and at least 20% of the innovation project through other sources, e.g. own funds or investors. Consequently, it is an excellent program for leveraging existing seed funding, e.g. by Business Angels.
Pro FIT- Early-stage Financing
The Pro-FIT Early-stage Financing program is a rather new program by the IBB and complements the above described Project Financing program. Startups can apply for both subsequently, but also either one stand-alone. With this program, startups can fund the infrastructure and overhead costs of a company that will facilitate a future or parallel R&D innovation project. Funding is available for personnel, asset investments and ongoing operating expenditures, which are not directly linked to the R&D innovation project (see graphic). With the combination of non-repayable grants and interest-free loans (total: maximum 200,000 €) during phase ONE and low-interest loans in phase TWO (total: maximum 300,000 €), total financing for both phases can amount up to a maximum of 500,000 €.
One of the most popular programs in the Berlin startup scene is the Innovation Assistant of the IBB. Startups can hire up to two recent graduates (max 2 years after graduation) per year and have their salaries subsidized with 50 % (max 20,000 € per person). These positions have to be newly created and within an innovative or technological area. The Innovation Assistant is a great program to strengthen the Engineering or IT teams within startups.
Additional research and development programs
Two other programs worth mentioning in the field of research and development are: KMU innovative and ZIM. Both focus on ‘excellence in research’ and on already established companies. Nonetheless, if certain criteria are fulfilled, startups may apply as well. On an European level, top-level research startups should have a look at the program Horizon 2020. Furthermore, the program “EXIST” is a great program / stipend for founders who are planning an university spin-off.
GRW Funding / Common Task
The GRW program (common task program) of the IBB subsidizes asset investments. The subsidies are available for asset investments, starting at 10,000 €, for the establishment or expansion of a business’ infrastructure, diversification of production or fundamental changes in the production process: this includes investments in production machines, warehouses, IT servers, and even office hardware equipment. If these investments result in the creation of new jobs, and the company conducts supra-regional business activities, up to 30% of the investment costs can be subsidized.
Too often, loans are given too little importance. However, in certain cases they can be an appealing alternative to equity investment. While traditional bank loans are difficult to obtain for startups, publicly subsidized loans are a much more realistic and economically attractive alternative. There are startup loan programs for filling or bridging various types of liquidity gaps at both the IBB as well as the KfW Bank. They range from micro-loans of 25,000 € to setup a new company up to several million € for innovation projects.
As a consequence of the professionalization of the startup scene, an increasing number of experts in both technological as well as business areas have risen. There are programs that connect certified consultants with startups and founders. These programs usually cover the consulting fees to a certain extent. The BAFA (before KFW) and the Coaching Bonus programs are particularly popular with Berlin founders.
Both the IBB as well as the KfW offer (co-)financing for young tech startups through their investment vehicles. Both investors are well established players in the Berlin / German investment market and should be taken into strong consideration by founders.
Looking at the wide range of subsidies on a local, national and European level, one soon realizes the overwhelming quantity of programs and calls. From small ones, focusing for example on patent applications or trade fair participation up to large high-tech niche programs, focusing for example on nano-technology projects.
When looking at these possibilities, you will soon realize that subsidies and grants can be a very attractive part of your financing portfolio strategy and can complement and leverage above-mentioned seed-VC funding. Applications can be very bureaucratic and complex. But for those who want to retain more shares and also need time for research and development the bigger programs can be the solution. First step is to really figure out how much and for what specifically your startup needs capital. When you have an answer for this, the development of a smart public funding strategy can begin.