The Money That Doesn't Demand Equity

A Note from PocketVC Founder, Dan 💡 Welcome back to our mini-series! We've covered the basics of VC and whether your company is structurally suited for it. If the answer to "Do I need VC?" was "Yes, but not yet," or "No, but I still need capital," then this guide is for you. You need growth capital, but every equity cheque costs you ownership and control. This week, we analyse alternative funding options government grants, venture debt, and CVCs. I. The Non-Dilutive Engine: Grants and R&D Funding The most effective way to fund the riskiest, earliest phases of R&D is with grants. This money funds the scientific risk that is often too early for VC's to invest in. A. Strategic Use of Grants (EU & UK) Grants and research partnerships are perfect for supporting the high-risk, early R&D phases (TRL 1-6). They provide resources without equity dilution but must be used strategically. Innovate UK: The UK's primary innovation agency provides non-repayable grants to UK-registered businesses. Schemes like Smart Grants offer between £100k and £2m to support disruptive innovations. They also run competitions through the Defence and Security Accelerator (DASA) for dual-use tech. The EIC Accelerator: The European Innovation Council (EIC) offers grants up to €2.5 million for innovative Deep Tech solutions, covering 70% of project costs. Successfully securing an EIC grant is seen by private investors as a significant mark of technical validation. Defence and Resilience: Strategic grant funding is critical for defence tech. This includes the pan-European European Defence Fund (EDF) and EU Defence Innovation Scheme (EUDIS). B. UK R&D Tax Credits Beyond direct grants, tax credits allow companies to reclaim costs associated with innovation. The Principle: The scheme supports companies that attempt to solve a scientific or technological uncertainty. R&D Intensive Support: For accounting periods beginning on or after April 1, 2024, the tax schemes merged into an RDEC. However, loss-making, R&D intensive SMEs (those with 30% or more of their expenditure on R&D) receive enhanced relief (27% tax credit). C. US Government Programmes (America's Seed Fund) US government grants are a massive source of non-dilutive capital, often requiring no repayment or IP ownership. SBIR/STTR: The Small Business Innovation Research/Technology Transfer programs award $4bn annually. They are funded by 11 major agencies, including DoD, NSF, DOE, NASA, and HHS. Bridging the Gap: Advanced schemes like the Air Force's STRATFI/TACFI provide follow-on funding to scale successful SBIR/STTR Phase II projects. II. Strategic Debt: The Capital Buffer Debt financing is an alternative that allows for strategic growth without diluting equity, provided you have a credible plan for repayment. Venture Debt: A loan for VC-backed, high-growth startups, typically raised after an equity round. It provides a 12-18 month buffer to hit the next valuation milestone. British Business Bank (BBB): While primarily focused on debt/equity funds, the BBB is instrumental in major strategic initiatives like LIFTS (Long-term Investment for Technology and Science) to increase domestic institutional capital for science and tech scale-ups. III. Corporate Capital: The Strategic Moat Corporate Venture Capital (CVC) and corporate partnerships offer the most valuable non-financial asset: market access. The Partnership Moat: CVCs (e.g., Bosch, Siemens) invest to gain a competitive edge for their parent company. Paid Pilots and Partnerships: The critical value is securing paid pilots or commercial contracts. A Paid Pilot with a major corporate is the ultimate validation, proving your technology is not just feasible, but commercially valuable and ready for deployment. This is a massive green flag for future VC rounds. IV. PocketVC's Opinion: Build a Hybrid Capital Strategy Deep Tech and high-growth companies thrive when they embrace a hybrid capital strategy. Use Grants/Tax Credits to fund early scientific risk and preserve equity. Use Debt to bridge between successful equity rounds or finance CapEx, minimizing dilution. Use CVCs/Partnerships to secure early market validation and first customers. Reserve VC Equity only for the moments when you need hyper-scale growth capital to accelerate your competitive advantage. The goal isn't to avoid VC entirely; it's to ensure that when you do take equity, you are doing so from a position where it will be most effective.