A Word About Government Grants

I’m writing this post while rehearsing my pitch for Myojo Waraku, Japanese SXSW taking place Sep 8 & 9 in Fukuoka. I’ll be on stage demoing latest product there.

A couple of months ago I asked one of my prospective investors/advisors who live outside Japan whether it’s good or not for early stage startup to participate pitch contest. His answer was basically yes as long as it helps startup gain visibility and attract audiences that it has to talk to: investors and customers.

From time to time we see same kind of contests initiated by government, and in most cases startups are given some sort of grants by government in reward for winning the prize. Only difference is that the former is just one-off event, but the latter is long-lasting event that may span across many months if not years.

This type of government-driven pitch contest or sometimes called ‘collaboration’ can be seen often in countries and cities where they promote themselves as next Israel or next Silicon Valley. People at government believe pouring chunk of public money into startups may foster foundation of whatever next thing they are trying to be.

While it is true that government plays important role as substitute for angels/VCs where there is shortage of venture money (aka risk money) in industry, there is a couple of things you need to be aware when taking money from government.

Among them, one pitfall that is particularly cautious to early stage startup is that everything has to be spec’ed out up front and you need to produce hard evidence at the end of funding period. For those who exercise Lean Startup Methodology it’s obvious that product that’s being spec’ed out prior to hitting market is almost guaranteed to fail.

There is even greater risk for early stage startups taking money from government such that it has to compromise something important, speed. And, speed is sometimes the only advantage over incumbents that startup is trying to compete.

While you are busy talking to other parties participating same pitch contest and preparing whatever materials you need to submit to government, some smart startups may come in and just get market before you actually even start. Not to mention it becomes harder for startup to pivot once you start working with government and it may be too late to pivot if you wait until funding period is over.

At the end of the day, government is not a customer and startups facing customers on a daily basis always win. Facebook, Instagram, AirBnB weren’t born out of government grants (as far as I know.) They might not be successful today if they scarified one of the most important assets at the time, speed.

I’m not completely against a whole idea of government grants helping startup kick-off business. It does help startup up to certain point. But you need to be 100% sure about what you are receiving from it and what you are giving away to it before committing great amount of your time to work with government and other parties associated with it.