Using Grant Money as a Stepping Stone

In the entrepreneurial world, many women are pursuing grants as a source of startup and growth capital. We looked into the benefits and drawbacks of this less-frequently used funding route.

Candice Helfand-Rogers By Candice Helfand-Rogers

Entrepreneur Nicole Russell of Last Dragon Pizza. (Credit: Last Dragon Pizza)

Entrepreneur Nicole Russell of Last Dragon Pizza. (Credit: Last Dragon Pizza)

When Nicole Russell wanted to expand her Rockaway Beach, N.Y., business, Last Dragon Pizza, she didn’t pitch investors, pursue a loan or turn to crowdfunding. Instead, she took part in a local grant competition — and won.

In May, Russell received $10,000 from the Queens Economic Development Corporation (QEDC) as the winner of its 2017 StartUP Business Plan Competition — making her one of many female entrepreneurs who are turning to grant competitions as an early source of funding.

The embrace of grant competitions is something we’ve observed in our own reporting over the last few years. Grants powered up-and-comers like Takia Ross of mobile makeup studio Accessmatized, multi-million dollar entrepreneurs like Kari Warberg Block of organic pest-repellent maker EarthKind, and international vendors like Tanya Heath — to name a few.

But while these rumblings may point to an emerging trend, are grants a reliable alternative for women looking to start up or grow ventures? What are the benefits and drawbacks?

Positives and Negatives

Though research on women business owners’ pursuit of grants is scant, one thing is easy to see — there is no shortage of grant competitions for them to enter. Contests are offered by a variety of institutions, from local and national governmental organizations to large companies, with winners snatching up dollars doled out by the thousands — even millions.

Infusions of what some call “free money” can have long-term benefits for ventures. For example, a 2015 study from the World Bank Group showed that the 720 Nigerian entrepreneurs who were awarded grant money were 37 percent more likely to survive 3 years, the course of the study, and nearly 23 percent more likely to grow their ventures to 10 or more employees.

Moreover, grant competitions that cater specifically to women-owned businesses can be a relief in a funding landscape that still overwhelmingly favors men. After all, female founders received just under 5 percent of venture capital funding awarded in 2016, and continue to get fewer, smaller loans with higher interest rates from banks. And while women’s crowdfunding efforts are statistically more successful than men’s, the largest campaigns are overwhelmingly male-run.

Still, grants are hardly what one would call a “popular” option. A study conducted in late 2016 by Ernst & Young and the Women Presidents’ Organization found that 68 percent of female entrepreneurs in the U.S. tap into their personal savings for startup capital, while 27 percent take on bank loans. Grants didn’t even make their list of funding sources.

And of course, while grants by definition don’t have to be paid back, they aren’t really “free money,” since applying for them can involve lots of time-consuming work. For example, the U.S. Small Business Administration’s InnovateHER program gives women the chance to win $70,000, but involves a multi-step process that includes writing a business plan, making pitches and surviving several rounds of competition.

And there can be strings. When it comes to government-backed grants, stringent rules for use of the money apply. Many competitions exist to incentivize participants to take part in related programs sponsored by their hosts, such as business education, or to generate positive press for corporations. Still, there are tangible benefits for those who win these prizes.

Competition Funds, in Practice

Winners of grant competitions can gain crucial stepping stones to success early on in their startup stories. Accessmatized’s Ross won a total of $35,000 by entering numerous area pitch competitions, allowing her to funnel funds into her growing business and take advantage of free publicity to boot. And Warberg Block of EarthKind was able to buy vital supplies to make her pest-preventing herb satchels early on when she was strapped.

Russell’s grant money, meanwhile, will help her get into a commercial kitchen space where she can mass-produce frozen pizzas and ship them throughout the U.S., while continuing to serve up hot pies locally, which also keeps her venture going and growing.

Fashion biz owner Tanya Heath, who also used grant money to grow her business. (Credit: TANYA HEATH Paris)

Fashion biz owner Tanya Heath, who also used grant money to grow her business. (Credit: TANYA HEATH Paris)

But, of course, winning is not guaranteed, and far more women apply than can achieve victory. So how does an entrepreneur set herself apart?

Andrea Ormeño is the director of the Queens Women’s Business Center, a program run by the QEDC that caters to female entrepreneurs. She worked with Russell on her business plan, and says the pizza-preneur typifies what it takes to win: commitment.

“She executed and was able to deliver,” Ormeño says. “If someone isn’t doing the homework the way they’re supposed to, they will not be very successful. She was a serious client, and that really distinguishes between winning and not passing the first round.”

Russell says applying was, indeed, a tough process, especially since she learned about the QEDC opportunity close to the deadline and had little time to take the mandatory business class and write the required business plan. “I didn’t sleep for days at a time. And I hadn’t written a business plan ever in my life.”

However, writing the plan brought benefits beyond the $10,000. For one, it helped her win a third-place prize of $2,500 in a second competition sponsored by New York City. And perhaps more importantly, it gave her valuable new insight into how her own business works. “When I did the plan, it helped me see that hot service is what’s sustaining me, and I can’t move away from it. I didn’t quite see it that way until I did the business plan.”

This was a victory for QEDC, too, which uses its grant competition as a carrot to advance a government-supported mission to strengthen local businesses. “Through the competition, you’re thinking about your business, planning for your business, foreseeing what you’re not thinking about now,” says Ormeño.

Taking Advantage of Granted Opportunities

Across the pond in London, Shoshana Bloom is using $10,000 in grant money she recently won to build LivLuv, a new nonprofit organization that supports members of the Jewish community who have intellectual, cognitive or developmental disabilities.

She says LivLuv is flipping the script on outreach to these individuals by focusing not on fundamentals like housing or food, but on personal and spiritual fulfillment. Bloom is using the grant from Natan, a group of Jewish philanthropists who dole out $40,000 annually, to turn what was a pro bono sideline into a full-time endeavor.

“I wanted to formalize it,” she says, and used the grant application process to outline her vision for LivLuv and draft a business plan to that aim. “Natan was there for people like me who have an idea, who have a plan and needed to kickstart it.”

Bloom says she also intends to use the funds to “develop more accessible resources for people with learning disabilities,” such as leadership and civics programs, that can enhance their independence. And, eventually, she wants to hire help.“There’s a real danger in any organization being too centered around one individual. It’s not sustainable, and not something I’m comfortable with.”

Indeed, these dreams could all come true, as Bloom says winning the grant has attracted other funders to LivLuv. Winning grant competitions can, indeed, be a good signal to future investors, says Alicia Robb, founder and CEO of Next Wave, a Mancos, Colo., early-stage investment firm that promotes diversity in entrepreneurship and angel investing. That third-party vote of confidence can “mitigate some of the risk in the earliest stages of investments.”

It can also provide a leg up. “I’ve seen creative uses of this subsidy,” she says, pointing to cases where businesses have moved into new international markets or launched a new product using grant money.

So though “there’s cost associated with taking the time to apply for those grants,” Robb says, the resulting work on a business road map is crucial. “If there’s no viable business model, no path to sustainability and growth,” that can be a problem and hurt the business’ future.

She also cautioned entrepreneurs to treat the funds as a one-time shot in the arm. “Getting dependent on it to continually subsidize operating expenses is pretty dangerous — and once the money dries up, you won’t stay in business.”

Ormeño of the QEDC agrees that competitions are a great opportunity to put together a longer-term plan for a venture and hone a business pitch. “If you don’t know how to sell it to [the judges], how will you sell to customers?” After all, she adds: “You need to sell in order to have a business. Otherwise, you just have a hobby.”

Posted: August 10, 2017

Candice Helfand-RogersUsing Grant Money as a Stepping Stone