One of the mysteries of TSB funding, for many people, is this idea of “match funding”. “Do I have to raise the rest of the money right away?” is a common follow-up question that we get, which shows that most people don’t understand the match funding process at all.
Here, then, is how it works.
First, let’s ignore the “upfront” payment and focus on the “meat” of the issue.
Quarterly, in arrears
TSB Smart Grants are paid in arrears. Here’s the money quote from the TSB guidance.
Proof of market:
All grants are claimable in arrears and will only be paid once the necessary reporting has been completed and received satisfactorily. Claims are paid directly into a business bank account. It is important that you plan your cash flow requirements to ensure that you can accommodate the cash flow required for the project arising from payment in arrears. You should also ensure that there is sufficient flexibility in your finance arrangements to allow for any delays in claims being paid, should queries arise.
Proof of Concept / Development of Prototype:
All grants are claimable quarterly in arrears and will only be paid once the necessary reporting and independent accountant’s reports have been completed and received, including financial forecast, project plan and exploitation plan. Claims are paid directly into a business bank account. It is important that you plan your cash flow requirements to ensure that you can accommodate the cash flow required for the project arising from payment in arrears.
What “arrears” means, in practice, is that first, you spend the money (and track your expenses) on activities that are authorised by the grant, and then, once a certain period has elapsed (a quarter, in the case of the PoC and DoP grants) you file those expenses with TSB and they refund you a percentage of the money (depending on the percentage that you applied for).
This is very clever for a number of reasons, though I’ll argue that it’s too clever for TSB’s own good.
The good side
First, it means that it’s practically impossible for recipients of grants to spend the money on stuff TSB doesn’t like, or to fail to obtain the other side of the match funding, or to otherwise screw around with TSB, unless they commit outright fraud and lie to TSB’s face about their expenses (which even the most morally flexible entrepreneurs will shirk from).
It also means that TSB gets visibility into what the money is being spent on, and whether the project is indeed being delivered. Unlike a typical angel investment process, where the angels provide the money and then promptly lose visibility over where it’s going, TSB maintains complete clarity and transparency over the process.
Thirdly, this match funding mechanism means that there is no incentive to claim a grant larger than what you can realistically spend. If you have a £100k project that you would want 60% match funding for, getting a grant for £200k is mostly useless, because you’d have to spend £40k more to be able to get that grant.
Finally, because the application includes a spending plan (now quarterly, even at the application stage), TSB can monitor and react to deviations from the plan, and effectively pressure the recipient to stick to the plan, at least in terms of spending.
I happen to think that this is destructive of TSB’s aims, though.
The bad side
TSB purportedly aims to support technologically risky projects that wouldn’t happen, or would happen much slower, without its help. However, one pervasive characteristic of risky projects is that they’re difficult to plan out accurately. Moreover, much of the innovation in this world tends to be carried out by relatively small companies and teams, that don’t have the processes to produce a reliable spending plan. Their main advantage is their speed and flexibility, and TSB grants can take away some of that flexibility by making it difficult to change the spending plan to match reality.
Secondly, while I understand that match funding is required by EU regulation on state aid (states aren’t allowed to just give a load of money to their companies, that would be anti-competitive), the way TSB has implemented it makes it very unfriendly to smaller companies. As the guidance states, you have to be able to fund the cash flow of the project yourself - TSB just comes in as an added boost.
What this means in practice, and which we tell our clients, is that TSB cannot and will not provide the main source of funding for their project. If a project is funded already, TSB can make it cheaper, but if there is no cash to fund the project, TSB grants will not be much help.
The eventual outcome of this is that TSB grants basically don’t make much of a difference. They provide a bit of cash, and that’s always nice to have, but they’re not going to make or break the project. This flies directly in the face of TSB’s vision of itself, which goes so far as to demand, in the application process, that applicants explain why and how TSB’s support will make a difference.
The reality of the matter is that, in part due to the match funding process being used, TSB will very rarely make a significant difference. If your project is fated to do well, TSB funding will make it do slightly better - your hockey stick curve may be a tiny little bit steeper for a period. If your project is fated to do poorly, TSB funding won’t make any difference to that.
You might ask if it’s worth filing TSB grant applications at all, given this situation.
Well, I believe it still is. Money is still money, even with all those hamstringing limitations. Financial success is often made from lots of small differences piling up together, rather than from one big jump upwards (that’s called a lottery win, and is extremely rare), and so getting an extra £100k or £200k to reduce your expenses is hardly unwelcome.
But it’s important for applicants to realise that, and not to ever think that TSB will make any difference, other than a comparatively small bump that makes a successful project even more profitable, at the cost of a time-consuming application process and a significant amount of administrative hassle. And it may perhaps be important for TSB to realise that this is the net effect of their funding mechanism.