by Regan Stevenson, Alex Kier and Shannon Taylor

As the economy looks to recover from a once in a century pandemic, small business grant funding has become a hot topic of interest for politicians, the media, and society at large. Even before the pandemic, more than $30 billion in public funding was allocated each year to small organizations for commercialization and applied research. This number has ballooned over the last year as grants quickly became considered essential to keep many small businesses, ranging from restaurants to tech firms, afloat.

But how much do we actually know about what happens after a small business receives a grant? Do grants spur on small business growth and survival? Are grants simply a short-term solution or do they help small businesses perform better over the long run? Do grants function as a verifiable signal to help small businesses acquire follow on private investment capital?

Even before the pandemic, more than $30 billion in public funding was allocated each year to small organizations for commercialization and applied research.

Our research set out to investigate these questions using a sample of 129 small business within 8 U.S. incubator sites. Collectively, the incubator sites we studied had assisted nearly 400 ventures, ushering in close to 7,000 jobs and generating economic output (GDP) in excess of $2.5 billion since inception. Incubators are an ideal context to explore the effects of grants on business performance because they tend to attract innovative companies and because grant issuers have a history of working with incubators. Below, we discuss the main findings of our paper published in Strategic Entrepreneurship Journal.

First, our study challenges conventional wisdom that the more resources a firm has, the better it will perform. Instead, we find that in general stretching firms in incubators (i.e., those utilizing the resources at hand) compared to chasing firms (i.e., those seeking to acquire and expand current resources) performed better in the long term. We propose a possible explanation in that stretching firms adopt a resourceful mindset to increase their odds of survival. In contrast, chasing firms may seek to develop grant writing competency, deterring them from focusing on their core business.

Second, grants are not a one size fits all enabler for venture growth. We found that grants were more critical for the survival and growth of small firms relative to larger firms in incubators. Paradoxically however, we note that granting agencies may prefer to fund larger, more established firms in incubators because they have verifiable track records and more perceived legitimacy. Our results show such an approach may be shortsighted. In our sample the revenue trajectory for smaller firms in our study grew more than 1,000% over 2 years after receiving an initial grant, while the revenue trajectory did not change for larger incubated firms that received grants. These results indicate that spreading out available funds in smaller amounts to more early-stage companies may be more effective than providing grants to more established incubated firms.

Finally, while grants did not provide larger firms with an increase in revenue trajectory, receiving a grant did increase the likelihood that a firm (large or small) would receive subsequent private investment. While this could be perceived as positive from the point of view of the business or the incubator, these results should be assessed cautiously. That is receiving a grant could function as a “false signal” for external investors, in that it induces subsequent private capital funding while at the same time not being a good indicator of subsequent venture growth. Based on our theoretical model, we argue that grants may reduce “stretching” behaviors and result in ventures relying on grants as free cash flow, reducing the venture’s need to be innovative and resourceful.

Although our research offers novel insights on the effects of grants on small business performance, it by no means provides a fully generalizable view on the topic. Several limitations of our study provide opportunities for future research. For example, future research could explore the underlying motivation for entrepreneurs that seek grants and how this motivation affects grant attainment, subsequent investments, and performance. Future research could also investigate why entrepreneurs choose to pursue one funding source over another (i.e., angel money vs. grants) and explore the attributable differences to each funding source.

In the years that follow the great pandemic ensuring small businesses have adequate capital is likely to be an ongoing focus for policy-makers. Thus, we urge scholars to conduct more research focused on how grant funding affects firm growth and how granting agencies can most efficiently allocate funds to ensure the survival of a vibrant entrepreneurial economy.

About the authors

Regan Stevenson is the John and Donna Shoemaker Faculty Fellow in Entrepreneurship and Assistant Professor of Management and Entrepreneurship at the Kelley School of Business (Indiana University) – www.reganstevenson.com

Alex Kier is an Assistant Professor of Entrepreneurship and Management at the Carson College of Business at Washington State University –https://directory.business.wsu.edu/Directory/Profile/alex.kier/

Shannon Taylor is an Associate Professor of Management at the University of Central Florida. – https://business.ucf.edu/person/shannon-taylor/

Read the full article here: https://onlinelibrary.wiley.com/doi/abs/10.1002/sej.1376

Please cite as: Stevenson, R, Kier, AS, Taylor, SG. Do policy makers take grants for granted? The efficacy of public sponsorship for innovative entrepreneurship. Strategic Entrepreneurship Journal. 2020; 1– 23. https://doi.org/10.1002/sej.1376