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How to get the first capital for the development of your business: Mykhailo Popchuk shares his own experience

Mykhailo Popchuk — CEO at Saldo Apps, USF grant recipient, IT Arena 2020 bronze prize-winner shares his own experience about how to get the first capital for the development of your own business

ORTY team receives a cash prize during IT Arena 2020 (Mykhailo Popchuk stands on the right)

Money for your own business is perhaps the most cherished dream of a novice entrepreneur, isn’t it?

Receiving a grant can bring it to life. And while small business owners are striving to fund their startups, the process of obtaining a grant does not seem as easy and cloudless as it seems at first.

However, if you know where to find the appropriate fund and how to apply there, the path to raising capital for business development can be significantly reduced.

The difference between a grant, investment, and loan

Grants are funds provided to a startup to cover expenses such as training a team, purchasing equipment or entering new markets. The grant recipient undertakes to report the use of funds received from the fund. The main advantage of such financing is that the recipient does not give a part of the company (equity) to the fund.

In addition, by their nature, funds do not compete with each other, because they do not receive anything from startups in return, but rather help each other. That is, after receiving the first grant in one fund, the probability of receiving a larger amount in another is quite high.

When attracting investment financing, the owner of the company sells its part (equity) and receives funds for its further development. The advantage: investors often take startups “under their wing” and help in obtaining the next rounds of investment.

The riskiest way to get financing is to take a bank loan. In this case, the bank requires a pledge, and practice shows that small businesses do not have the assets to meet this requirement. And even if the startup can find the amount or the pledge, the risks are still very high. In case of failure, you will have a long and tedious refinancing or losing pledge. In addition, startups are often not given loans at the pre-seed or seed stages.

Where to look for funds and what to look for when choosing?

Currently, there are almost no ready-made resources with a list of funds. Information has to be collected in crumbs or asked from those who have already received a grant from the fund. This is the best way. It is important to find out if there is a serious bureaucracy, and on what principle the reporting of expenses is made.

It will also help to get acquainted with the mission and strategy of the fund. This information can always be found on the official website. Missions often differ. Some aim to develop healthcare, others – AI (artificial intelligence). In order not to waste time and effort on registration, it is important to know that the fund from which you want to receive a grant finances your field of activity.

In Ukraine, for example, I strongly recommend contacting the Ukrainian Startup Fund. This is the best solution. We received a seed stage grant from them. The fund is state-owned, but there is an innovative and progressive team and almost no bureaucracy.

The purpose of the USF is to promote the creation and growth of technology startups at an early stage of development in Ukraine in order to increase their global competitiveness. Therefore, for example, startups that can not make essential changes using grants, or those that do not contribute to the startup ecosystem of Ukraine, are much less likely to receive money. This list also includes startups registered abroad or those planning to spend a grant outside Ukraine. These are the points to pay attention to and take into account when choosing a fund.

How much can you get?

In Ukraine, this amount varies from several hundred to several hundred thousand dollars at one time. It is also possible to re-receive a grant from the same fund. USF, for example, offers up to $ 75,000 (25 + 50,000) for development and ongoing operations, as well as up to $ 10,000 for an acceleration program in international and Ukrainian accelerators. After winning the IT Arena, we also received $ 5,000 from CRDF.

I should add that startups at the early stages need not only financial help. Sigma Software Labs, for example, helped a lot when they gave us the opportunity to work with the team for free in their office for 6 months.

The work there gave much more than a cozy location: networking with representatives of venture funds and serial entrepreneurs, technical and business consulting, the opportunity to hold our own events for free, and participate in events from other organizers. It helped us to be at the center of industry events.

There is also a State Innovative Financial and Credit Institution in Ukraine, which helps startups to prepare and submit grant applications, independently searches for potential investors for the implementation of innovation and investment projects, and selects grant programs in the required direction of the project.

How to increase the chances of your startup receiving a grant?

  • Think a few steps ahead

There is a certain time between the moment of registration and the actual receipt of funds. Therefore, it is worth thinking carefully about the costs that grant funds will cover. It happens that during the period of approval of the application, the purchase of equipment, which you budgeted at registration, is no longer relevant, and from the grant, you absolutely need to pay salaries to the team. Once your registration has been approved, it is no longer possible to make changes to the application. Be careful!

  • Review fund policies

Be sure, you can find many unexpected issues. For example, tax policy. When registering for a grant with the USF, for example, it should be noticed that the amount of taxes on the amount of the grant payable directly depends on the business entity form of registration chosen by the startup:

LLC pays taxes according to its chosen system of taxation (general or simplified) – corporate income tax or single tax.

Fund deducts from the total grant amount when paying to the Individual entrepreneur personal income tax (18%) + military tax (1.5%).

This was our mistake. When applying for a grant, we ignored this item and had to pay 19.5% of the $ 50,000 in taxes.

  • Understand who you are pitching your startup to

In form, your pitch within the fund will be almost no different from the pitch for investors. Venture capital specialists are usually members of the commission. However, it may differ in content. Take time, study the purpose, goals, and values ​​of the fund, and answer the questions:

– How will your startup contribute to their achievement?

– How exactly will it help a specific industry/society?

Find the intersection between the foundation’s mission and the solution you propose and talk about it.

Grants for startups – like a favorite birthday cake. It often makes sense to entrust its preparation to professionals. Even after your own research, when you find available funds and decide to apply, it may turn out that the registration process is like a black hole and has no end. If this process frightens you, consider delegating it. Trust someone from your team or hire a specialist. Grant preparation, often conducted by the foundations themselves, will help.

And with grants, as well as with sweets, you should not overdo it. They are like fast carbohydrates – they give a charge of energy, but not for long. Funds do not require you to achieve goals or KPIs, and this is often not in favor of the startup. It takes a lot of time to prepare, after receiving a grant, business owners relax a bit, and at this time the focus shifts from the main goals.

So I advise you to use grants as a cool booster and raise rounds of investment with new speed.

No matter which way you go, you will win your reward and victory. Not always financially, but who has ever had an extra good experience?