Unless you’ve been completed sheltered from the larger financial and information ecosystems, you’ll know that interest rates have gone from “zero or near zero” during 2009 – 2021 to “much higher than that” (at the time of this writing, even the federal discount window rate is 4.75%). Consequently, the value of tech companies has been falling, the value of bank stocks has been falling (the market value of those banks’ bonds have dropped dangerously), and accessing capital has gotten dearer for almost everyone—including venture capitalists (VCs) and the limited partners (LPs) they raise money from.* That may seem like a point distant from the world of grants, but it’s not: since at least 2009, various parts of the federal government, most notably the Department of Energy and USDA, have vastly expanded the number of grants available not only for technology research and development (classic R&D), but for companies that are scaling and for manufacturing infrastructure.
Those grants, however, were less attractive than VC money for much of the 2010s, because VC money was so available: zero or near-zero interest rates meant anyone seeking real investment returns couldn’t get them from bank deposits, Treasury Bills (“t-bills”), or similar sources, so VC investing seemed like the best alternative to the stock market, as returns weren’t impressive from most other sectors. VCs took all that money and reinvested it in a huge range of startups—including ones related to solar, batteries, wind power, and more. Federal grants could still be attractive in the low-interest-rate 2010s environment—the linked post is from 2016—since those grants were non-dilutive and could fund some projects much earlier than VCs typically would. So grants had their place, but, at the same time, VCs also move a lot faster than the feds—I’ve seen claims that VCs sometimes make a fund / no-fund decision for early-stage startups within one to two weeks of first contact—and so a lot of companies preferred the VC route over the grant route. For much of the 2010s, too, it was obvious that solar, wind, and batteries were becoming and were going to be a big deal, which has by now become conventional wisdom.**
Things have changed in the funding environment: VCs are now having problems raising new funds, and some of their LPs are said to be balking at existing fund commitments. Tech stock values have dropped, and with them a lot of the angel investor funding that seeded the startup and scaling ecosystems. So the startups that two or three years ago would’ve gone for VC funding are now likely to be looking closer at grant funding. The total amount of grant funding available in some sectors has increased too, thanks to the recently passed Bipartisan Infrastructure Law (BIL) and Inflation Reduction Act (IRA).
Many of us—including me—have forgotten how much interest rates affect the macroeconomic environment, and few of us expected a global pandemic to allow an economic boom to continue, with only a few months of interruption. Supply chain problems persisted throughout the pandemic and arguably to this day, but the overall picture has been surprisingly rosy. We’ll see what happens if interest rates keep rising, we end up in a genuine bank crisis, and/or a recession.
Nonprofits aren’t immune to variations on the phenomena above: they’re probably seeing donations fall, along with the stock market and the larger set of economic jitters in most areas (except, interestingly, housing, which remains expensive: for decades, we’ve not been building enough, which means that there are substantial-real world shortages, and those legally mandated shortages affect everyone). But smart nonprofits have always cultivated both grants and donations; for R & D startups of the sort that might pursue Small Business Innovation and Research (SBIR) or similar grants, the calculations about grants versus VC money have always been different.
* “LPs” tend to be pension funds, university endowments, ultra-wealthy family offices, etc. These organizations have been reaping a disproportionate share of tech startup gains over the last fifteen years, and tech companies have been going public later than ever due to regulatory restrictions like Sarbanes-Oxley (“SarBox”), thus restricting the ability of average investors to make money in tech funds. A lot of well-intentioned rules and laws have perverse incentives built into them!
** Today, the biggest problem isn’t the raw cost of solar panels, batteries, or wind turbines—the biggest problem has instead become grid interconnect projects. That’s the bottleneck. “Environmental” laws like the National Environmental Protection Act (NEPA) are holding up projects that are good for the environment! NEPA is a law that really protects the status quo, at the expense of doing things better than the status quo, and that is bad. As is so often the case, the law does the opposite of its name.