How the Government Funds Startups
One thing I have learned from being involved in a start-up is that getting investors is the chokepoint for innovation. My CEO and I have met scores of founders with interesting and disruptive ideas who cannot move forward due to lack of outside investment. These founders have a strong work ethic, a good plan, and enough passion about their start-up to work without compensation. Essentially, it means that nearly all start-ups are second jobs. Founders usually have a day job which pays their bills. They use sweat equity and personal savings to get their company up and running.
In our GRO incubator, we spoke to a start-up founder who lives in Northern Europe. This founder spent time in the U.S. because our country is considered to be the Holy Grail for innovation and start-ups. He confirmed that the “start-up culture” (yes, that is a phrase) in Europe is decades behind the U.S. and trying to catch up. One of the problems with U.S. venture capital is that we are a “mature” start-up culture which focuses on identifying start-ups who have the best chance to become a “unicorn” and reward the venture capital company with profits that exceed the Standard and Poor index. If I become an investor in a venture capital company, I would want the same. Sadly, for start-ups that are not unicorns, the journey ends sooner with no benefit to the founder or the investors.
What the U.S. is missing is the incentive to fund start-ups with better tax incentives. Start-ups who can pay their employees wages in the Angel Investor stage would be a source of tax revenue for the U.S. and a source of tax deductions for the investors, even if the companies fail (which they do 80-90% of the time). The failure rate for family-owned businesses (usually service businesses) in the U.S. is estimated to be 50%. Yet, the government allows these small businesses robust tax deductions and capital write-offs. Banks who work with the U.S. Small Business Authority (SBA) receive loan guarantees to offset loan losses from small businesses that fail. Most start-ups are software or non-service businesses (like manufacturing). The tax code has largely ignored this area and left it to private equity. There are limited options for investors to recover their losses in Angel Investment stages through tax write-offs or capital losses.
One bright spot in the U.S. is the availability of SBIR and STTR grants. These are competitive grants designed to incentivize start-ups or small businesses with government grants. The competitive process assures that the best business ideas receive funding. The government agencies who sponsor these programs like the National Institutes of Health (NIH) and National Science Foundation (NSF) do not receive equity or stock in exchange for their grant investment. Most of the successful founders in biotech that I have interviewed cite SBIR or STTR grant money as a crucial funding mechanism that helped them through their Angel Investor stage. The only problem with SBIR and STTR grants is the long upramp to funding (12-18 months from application).
In January, EMF Disturbance Monitors will apply for our first SBIR grant. If successful, this funding will accelerate our trajectory to FDA approval and device manufacturing. Follow along on our Web page as we continue the journey from an idea to a successful medical device manufacturer.
