by • June 17, 2011 • Funding & investmentComments Off127

Match funding incentives

If you ask the winners of business competitions what they did with the prize, you’ll hear, surprisingly often, something along the lines of “chipped away at my student loans” or “went to Ibiza”.

At one end of the spectrum, grant givers shrug and move on. They’re done with their job once they crown the most qualified applicants.

On the other end, the funders start considering draconian measures like awarding the prize as reimbursements rather than cash-in-hand, which leads to crippling cashflow problems for most young founders.

I was listening to Richard talk about UnLtd’s upcoming social entrepreneurship competition and their prize structure resonated.

It’s roughly €15k up front as a grant, followed by another €150k as match funding (paid as soon as you close funding from additional external investors).

The small upfront chunk minimizes their risk while relieving cashflow problems and providing fund-raising runway, while the match funding is available if you give the business a serious shake. Plus, having it there essentially gives future investors more bang for their buck, making that crucial first round a little bit easier to close.

The match funding makes sense in a competition context when you have limited knowledge about the founders and have to deal with lots of competitors who have no plans to actually start the business. The structure minimizes donor risk while preserving founder freedom. And it creates a big incentive to hustle the business forward to the next stage.

I hope more programs (especially university business plan/pitch competitions) follow suit.

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