Government Funding: A Shockingly Rational Approach

Government Funding: A Shockingly Rational Approach

There is nothing the media loves better than making juice out of a government-funded lemon. FOX News managed to recycle the Solyndra flameout as lead story for months. But not everything touched by government turns to dust. When considering the risk-reward profile of materials and cleantech start-ups, in many cases government funding is REQUIRED along the path to success. While the shenanigans in DC over the last week have shown that rationality and government don’t always go hand in hand, for a materials focused start-up, a logical government funding progression might follow something like this…

Proving the Concept: Government plays an instrumental role in funding basic research for the benefit of society as a whole. However many important innovations are developed by entrepreneurs outside of university walls. Usually in the earliest days they are beyond the risk profile of private capital, but fortunately government funding can step in to fill the gap. As an example, Phase I SBIR funding in the United States typically provides $150K to fund proof of concept development. Our portfolio company Boulder Ionics developed an alpha version of its micro channel reactor technology with funding from the National Science Foundation and this proof of concept formed the foundation of our investment. Government funding is also helpful for risky projects at a more established start-up. Having already established itself as a leader in lithium ion cathode and cell technology, Envia Systems was awarded ARPA-E funding to develop a high energy density anode. This higher risk, longer-term project would not have been possible with private capital, however it has successfully formed the basis for the company’s next generation high energy density battery technology.

Reducing the Burn: While project based funding typically involves a detailed technical and commercial project review, some jurisdictions provide more broad blanket financial support. For example in Canada, the Scientific Research & Experimental Development program can offset development costs by up to 40%. Over the years, Pangaea’s Canadian portfolio companies have taken full advantage, significantly increasing the progress that has been made. Similar programs exist in numerous Asian and European countries as well.

Demonstrating your Wares: Nothing is more important along the sales cycle than having full-scale product demonstrations generating real-life field data, while providing the touch and feel experience for potential customers. One of the most prominent programs of this sort is Sustainable Development Technologies Canada (SDTC), which focuses on funding pre-commercial demonstration projects for new clean technologies. Pangaea portfolio-company Switch Materials received funding from SDTC for demonstration of its smart window technology in an architectural setting. As you can imagine, showing off the technology in a real building has had considerably more impact than briefcase samples in a boardroom.

Concrete and Steel: When the demos are done and commercial reality becomes more near term, this is when the real dollars can start to add up. Fortunately, politicians continue to be magnetically drawn to ribbon cutting ceremonies even in a post-Solyndra world. There is nothing like hard hats and shovel ready rhetoric for scoring political points. Nowhere in the world is this support greater than in China where it is common for land, buildings and equipment to be entirely state funded. Our portfolio company Cnano has rapidly grown into the largest carbon nanotube business in the world, facilitated in part by state funding support. But China is not alone. Countries such as Germany and states like Mississippi and Oregon provide tremendous support when the plan calls for Greenfield CAPEX.

The land of plenty it might seem and to a certain extent, we agree. Nevertheless, the Pangaea Ventures team has worked with companies that have experienced the tremendous benefits and pitfalls of such support. With this experience behind us, we suggest keeping the following in mind:

  1. Maintain Focus: The strategy of many organizations is to chase after the next grant. However if a company’s vision involves creating a valuable and important business, the cardinal rule is that government funding should be targeted at activities that fit along the logical path.
  2. Get help: No shocker here but paperwork and detailed cost accounting requirements increase dramatically, presenting a skills and patience gap for the typical entrepreneur.
  3. Strings attached: Flexibility usually decreases proportionally with increased government funding. If you are getting into capacity expansion type project funding, expect employment guarantees, combined with the necessity to fund an often dramatic increase in ongoing OPEX.
  4. Politics matter: Especially for larger scale funding, you will need to pull together a network of supporters and consortium of organizations that can be shown to benefit from the support.
  5. Under the Microscope: The media is always looking for the next scandal or boondoggle. Under a more public eye, you had better be on your best behavior or you might find the 6’oclock news van rolling up.
  6. Plan to make payroll: Never RELY on government funding. You never know when they might just decide to shut down!!!

Partner, Pangaea Ventures Ltd. Andrew has over 12 years of energy and industrial experience, recently leading several of Pangaea’s investments in the energy generation, energy storage and energy efficiency domains. Andrew holds a Bachelor of Applied Science (Mechanical Engineering) and a Masters in Business Administration degree.View Andrew Haughian's profile on LinkedIn


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Guest Monday, 09 December 2019