Every few months a founder shows me a pipeline with a grant in it. It sits in the same column as the customer deals, sometimes at the top because it is the largest number, and the founder is understandably pleased.
I always ask the same question. If the grant is revenue, who is the customer, and what did they buy.
The honest answer is that the funder bought a report. The founder’s customers bought the product. Those are two different businesses, and the danger of donor money is not that it is bad money. It is that it lets you run the second business while believing you are running the first.
A grant reprices everything it touches
Take the grant and, for a period, revenue becomes optional. Not in the plan, but in the day. The team is paid whether or not customers buy. The product roadmap starts to bend toward what the funder’s reporting template asks about. The hiring plan grows to the size of the grant rather than the size of the market.
None of this is anybody’s fault. It is what money without a customer attached does to a company, and it does it quietly.
Then the grant ends, on the date it was always going to end, and the founder discovers a business built for a payer who has left. The team is too large for the revenue. The product has features nobody outside the funder ever asked for. And the market, which was never consulted, has not moved to fill the gap.
I have watched this happen to founders far more capable than I am. The grant did not fail. The grant did exactly what it said it would. The founder simply mistook it for a market.
Three tests before you take it
Does it pay for something a customer would have paid for anyway. If the grant funds the product you were already building, for the customers you already serve, it is capital with unusually good terms. Take it. If it funds a new geography, a new segment, or a new feature that exists only because the funder wanted it, you are being paid to build a different company. Ask whether you want that company.
Does it end at a moment you can survive. Draw the month the money stops. Then draw your costs in that month if nothing else has changed. If the gap between them is a number you cannot close from customer revenue, you are not taking a grant. You are taking a loan whose repayment is the collapse of your cost base.
Does it require a shape your business would not otherwise choose. Some funding demands a structure: a non profit vehicle, a beneficiary count, a board with specific seats, a location. Every one of these is a permanent decision made for temporary money. The company you have to become to qualify is the company you will still be when the funding has gone.
The grant shaped company
There is a stage beyond this, and it is worth naming because it is common.
The founder becomes good at applications. Properly good, in a way that takes years to develop. Proposals get funded. The team learns to speak the funders’ language. Every quarter has a deliverable and a report, and the company is, by the funders’ measures, a success.
Meanwhile nobody has sold anything to a customer in eighteen months. Nobody remembers what the product costs, because nobody has had to justify a price. The sector fills with other funded competitors offering the same thing free, so that the one founder still trying to charge for it looks unreasonable.
That company is not a business. It is a professional applicant with a product attached, and the day the funding cycle turns, and it always turns, there is nothing underneath.
How to take it well
Ring fence it. One project, one budget, one team, with a wall between it and the customer business. The customer P&L must remain visible on its own, every month, so you can see whether the real business is growing or whether the grant is hiding the fact that it is not.
Do not hire permanent people on temporary money. Contract for the grant’s duration and be honest with them about why.
Set the end date on day one and treat it as a customer churning. What has to be true about the customer business by that date for the company to survive the loss. Then run toward that, and check it every quarter.
The honest cost
You will turn down money. In this market, where capital is the scarcest input there is, that is a hard thing to do and a harder thing to explain to your team.
Some of your peers will not turn it down. For two or three years they will be larger than you, more visible, better staffed, and asked to speak at the conferences you were not invited to.
Then the cycle turns. It always turns. And the founders still standing are the ones who could name their customer in one word, because they had never stopped being paid by one.
