The Dilution Problem
Every equity round costs founders ownership. For deep-tech companies with long development cycles, this can be particularly painful. By the time a product reaches market, founders may hold single-digit percentages of their companies.
Non-dilutive funding offers an alternative. Grants, loans, and other instruments can fund significant R&D while preserving equity for truly critical moments.
Types of Non-Dilutive Funding
R&D Grants
Government programs that fund research and development:
- No equity required
- Often 30-70% of eligible costs
- Typically require R&D activity in specific jurisdictions
- May have repayment obligations on success
Examples: Israel Innovation Authority, Horizon Europe, Innovate UK, SBIR/STTR.
Loans and Convertible Instruments
Debt-based funding that can fund growth:
- Innovation loans (often government-backed)
- Revenue-based financing
- Convertible notes (dilutive only on conversion)
- Working capital facilities
Awards and Competitions
Prize-based funding:
- Business plan competitions
- Innovation challenges
- Corporate sponsored awards
Typically smaller amounts but can provide early validation.
Customer and Partner Funding
Commercial arrangements that fund development:
- Development partnerships
- Advance payments
- Joint ventures
- Strategic investments (with limited dilution)
Building a Comprehensive Strategy
Effective non-dilutive funding requires strategic thinking:
Step 1: Map the Landscape
Identify all potentially applicable programs:
- National innovation agencies
- Regional development funds
- EU and international programs
- Industry-specific initiatives
- Foundation grants
The landscape is larger than most founders realize. Systematic mapping is valuable.
Step 2: Assess Fit
Not all programs are equally suitable. Evaluate each against:
- Eligibility requirements
- Strategic alignment
- Success probability
- Time investment required
- Total potential value
Focus on programs where fit is strong.
Step 3: Create a Timeline
Different funding sources have different timelines:
- Application preparation time
- Evaluation period
- Funding disbursement schedule
- Reporting requirements
Coordinate these with your overall business plan and cash needs.
Step 4: Integrate with Equity Strategy
Non-dilutive funding should complement, not replace, equity strategy:
- Use grants to extend runway before critical raises
- Build value before equity rounds to improve terms
- Leverage grant success as validation signal
- Time applications to support overall funding plan
Common Strategic Patterns
Pattern 1: Pre-Seed Extension
Situation: Company has initial funding but needs more runway to reach Series A milestones.
Strategy: Apply for early-stage grants to fund continued R&D while preserving equity for the larger raise.
Pattern 2: R&D Acceleration
Situation: Company has proven concept but needs substantial R&D to reach market.
Strategy: Target major R&D grants (IIA, Horizon Europe) to fund development at 50%+ coverage, reducing equity requirements.
Pattern 3: Geographic Expansion
Situation: Company wants to establish presence in new markets.
Strategy: Use local innovation programs to fund expansion activities. Many regions actively recruit technology companies.
Pattern 4: Risk Reduction
Situation: Technically ambitious project with uncertain outcomes.
Strategy: Use grants to fund the highest-risk development phases, then raise equity once risk is substantially reduced.
Program Selection Criteria
When evaluating specific programs, consider:
Practical Factors
- Success probability: How competitive is the program?
- Time investment: How demanding is the application?
- Funding timeline: When would money arrive?
- Reporting burden: What ongoing obligations exist?
Strategic Factors
- IP implications: What happens to IP developed with funding?
- Location requirements: What R&D must happen where?
- Disclosure requirements: What information becomes public?
- Relationship value: Does participation create valuable connections?
Managing Multiple Applications
Active companies often pursue multiple funding sources simultaneously. This requires:
Coordination
- Avoid conflicting commitments
- Manage overlapping scopes
- Track different requirements
Resource Allocation
- Balance application effort with other priorities
- Consider professional support for complex applications
- Maintain quality across all submissions
Timeline Management
- Understand interdependencies
- Plan for different outcome scenarios
- Have contingency approaches
Common Mistakes
Treating Grants as Free Money
Grant funding has real costs: time, restrictions, reporting obligations. Calculate true value, not just face value.
Applying Too Broadly
Pursuing every possible program exhausts resources. Focus on best-fit opportunities.
Neglecting Execution
Winning grants is only the beginning. Proper execution and reporting matter for future applications.
Ignoring Strategic Implications
Some funding programs have IP restrictions, location requirements, or other constraints that affect strategy. Understand these fully.
Building Grant Capability
For companies that want to make non-dilutive funding a sustained capability:
Internal Development
- Assign clear ownership for grant strategy
- Develop application skills over time
- Build relationships with funding agencies
- Track program changes and opportunities
External Support
- Use advisors for complex or high-value applications
- Build network of experienced mentors
- Join industry associations with grant expertise
Conclusion
Non-dilutive funding should be part of every deep-tech company's funding strategy. The opportunity is significant, and the benefits—preserved equity, extended runway, validation—compound over time.
The key is strategic thinking. Not all grants are worth pursuing. Those that fit, approached with quality applications, can meaningfully accelerate company building while protecting founder ownership.
Want help developing your non-dilutive funding strategy? Contact us to discuss your situation.