Investing grants are an attractive option for investors looking to fund impactful projects while also earning financial returns. Government agencies, foundations, corporations, and nonprofits offer various grant programs that provide capital to organizations addressing social or environmental issues. Understanding the diverse grant investment landscape enables investors to align investments with their values and objectives. This article explores the key characteristics, strategies, and challenges of investing in grants, with the goal of empowering investors to make informed decisions when evaluating grant investment opportunities. There are plentiful prospects across sectors like clean energy, affordable housing, healthcare, education, and more that can generate compelling financial, social, and environmental returns.
grants provide access to impact investment opportunities
Grant programs are an effective way to channel capital towards underserved geographic regions and causes. Government and philanthropic foundations design grants to address market failures and gaps in access to critical services like healthcare, clean water, renewable energy, etc. Corporations also offer grants to fund research or pilot new technologies and solutions aligned with their business priorities. Investors can diversify their portfolios by investing in government, foundation, or corporate grant recipients delivering needed services and resources. For example, the US Department of Energy’s ARPA-E program provides early stage research grants to breakthrough clean energy companies tackling climate change. Investors could target ARPA-E grant recipients that have commercially scalable innovative technologies.
grants reduce risk for early stage investments
Grant funding helps validate organizations and enables further capital raising from other investors. Unlike equity investments, grants do not dilute ownership. Since grants are non-dilutive forms of financing, entrepreneurs are more open to accepting them. The rigorous selection process and oversight involved in most grant programs provides investors with greater confidence in the viability of grant recipients. High potential but unproven ideas often struggle to attract investors. However, a grant award signals an external validation of the idea and the capabilities of the team, making follow-on investors more comfortable providing capital.
grant investments can take various forms
While grants themselves are non-dilutive, investors can structure accompanying investments in diverse ways. Some grants require matching funds or continued funding after the grant period ends, providing an opportunity to invest through debt or equity alongside the grant. Investors may also choose to fund grant recipients through donations and program related investments (PRIs) that earn below market financial returns. More commercially oriented grant funded companies can receive investments seeking risk-adjusted market rates. There are also investment funds focused specifically on grant recipients in certain sectors like cleantech. Thus grants open up varied types of investment structures suitable for different investor expectations.
due diligence is critical for assessing grant opportunities
Though grants provide validation and financial support, investors should still conduct in-depth due diligence on the recipients. Assessing the team’s capabilities, analyzing financial health, studying the market landscape, and understanding operational metrics is essential for making sound investment decisions. Government agencies and foundations have strict reporting requirements for grantees, so investors should review those reports. Since grant recipients are often early stage, investors need to develop projections for future commercial viability and scale under different assumptions. Understanding risks around technology development, competitor dynamics, and growth capital needs allows investors to structure investments appropriately.
grants enable investment in line with values
The rigorous selection and ongoing oversight required for most grant programs results in recipients aligned with the grantors’ social and environmental goals. Investors targeting grant funded organizations can feel confident their money also supports meaningful impact. For example, investors passionate about expanding renewable energy could identify National Science Foundation SBIR grant recipients commercializing promising new solar technologies to fund. Or, an investor concerned about the education gap could invest in education tech companies backed by nonprofit literacy foundation grants. Grant investments allow investors to have positive community and environmental impacts beyond financial returns.
In summary, investing in grant recipients provides investors access to impact-oriented organizations, validation of business models, and the ability to align capital with values. Investors should thoroughly assess opportunities, risks, and projected returns when considering grant investment prospects.