Government Grants: Get Smart

Although many UK IT firms benefit from government grant schemes, there are still gaps in the Smart system. So, Pete Morris asks, will new Labour mean new funding?

The Department of Trade & Industry (DTI) recently announced a massive shake-up to its high-tech grants scheme, which it says is intended to bring closer together the bewildering array of grants that IT startup companies can apply for. Although there has since been a change in government, it is unlikely to change the stated aim of encouraging the UK IT industry to develop indigenous products, particularly software, rather than just to be a nation of resellers of US and Japanese products.

To that end, a mass of grants ? large in number, if not necessarily in financial terms ? have evolved (see box). The main grants an IT startup company with a good idea but no cash could apply for were spread under the headings of Smart, Spur and Spur Plus, all of which were available from the DTI.

Smart is an annual competition open to individuals or businesses in the UK with up to 50 employees and a turnover of less than #7 million. Smart fund-ing provides grants of up to #45,000 for a firm or individual to undertake a commercial and technical feasibility study into a technology product.

The product developer has to provide its own funding of #15,000 to get the award, and recipients cannot be receiving other funding. But successful Smart applicants can be considered for the more lucrative Spur grant (which will no longer exist separately).

Spur has enabled larger UK companies (up to 250 employees with a turnover of less than #40 million) to develop new products that involve significant technical advances, by providing a total grant of up to 200,000 euros (about #160,000). For the lucky few companies a further grant, Spur Plus, is available for exceptional products offering cash of up to #450,000. The grants do not have to be repaid, even if the technology is not developed into a fully formed product. By the end of 1996, the DTI had funded 1,600 Smart projects and 800 Spur projects through a network of regional offices.

Now, subject to approval from the EU, the government is merging the three separate grants schemes into one, called simply Smart. The new scheme will also include the innovation element of the regional enterprise grants that were previously handed out by the Department of the Environment (and which closed in their current form last September).

If that were not confusing enough, the changes will only come into effect in England. Wales, Scotland and Northern Ireland will keep a slightly expanded version of the existing Smart/Spur system. The DTI says that the changes are to streamline bureaucracy rather than save cash, but not everyone is convinced.

?Real Smart funding has disappeared in England,? says Hugh Davies, founder and chairman of specialist security software developer Visage, which was a recipient of Smart funding. ?It will have a bad effect on small companies that want to develop their own products.?

Companies in Wales and Scotland, though, will not be affected. DTI representative Veronica Freebairn says that the new Smart scheme will be more flexible than the previous one, with a programme to provide support for small-scale feasibility studies into the viability of products.

There is also a second strand to Smart, covering the development of technologically innovative products up to a pre- production stage. There is a two-stage process for companies that want to apply for either standard of the Smart grant, with the first part a registering of interest and then ? after approval from the local government office ? the submission of a formal application.

Although Smart grants are aimed at all technologically innovative companies, a number have gone to IT startups. Announcing the winners of the 1997 Smart and Spur achievement awards at the Science Engineering & Technology (SET) 97 conference in March, the then science and technology minister Ian Taylor singled out two IT companies that had received awards in the early 90s. Integrated Optical Components used high-level Spur funding to develop lithium niobate-based optical components used for data transmission along optical fibre cables.

A more down-to-earth product came from M4 Data Products, which received both Smart and Spur funding to develop high-speed, high-density data storage devices. But ? in terms of the wider IT industry ? part of the problem with the DTI grants is they will not necessarily lead to commercial IT products. They are often used to develop processes that, if UK business does not take up, will be integrated into products from abroad.

The reason for this, according to one recipient of Smart funding, is because of the lack of venture capital funding in the UK to take a product through to the next stage.

Hugh Davies got Smart funding for his company (Visage Development) to develop an innovative access control system for the PC based on photographic images rather than on passwords. The funding allowed Visage to get the product to launch stage, but Davies says help can then still be needed.

?Sales have been slow because it is a new category of product and large customers take a long time to evaluate it,? he says.

According to Davies there is a big gap in the UK IT industry for innovative developers, with funding available to get the product to development stage but not to take it further. ?There are virtually no venture capital people in the UK who are interested in small IT companies,? he says.

?If a small developer does not get bought up by a larger one after it gets Smart funding them it has virtually no chance of success.?

This is part of the reason why Britain lacks a strong indigenous software base, and has had to rely on large hardware factories being set up by overseas companies that benefit from large regional grants (see below). There is also much criticism from the IT innovations sector ? as there is from dealers ? about the role of the banks in providing funding. But according to the head of Nat West?s innovations and growth unit, Duncan Matthews, small technology driven companies should do more to close the ?empathy gap? between themselves and financiers.

Matthews says that high-technology firms would greatly improve their chances of getting funding from banks if they began talking to their bank managers earlier. ?They need to form a trusting relationship with them and to use banks as partners and not just as fund providers,? he says.

Matthews adds that banks are more likely to lend to high-tech companies that have already shown their credentials by obtaining technology grants like Smart funding.

Although this doubtless makes sense from the banks? point of view, and takes some of the risk out of investing in unproven technology, it does highlight the paradox that small high-tech companies face in the struggle to get investment into their idea.

Once you have obtained funding from one source, it is much easier to get others to invest in your company, but it is the people with a good idea and no Smart funding (which may well become harder to obtain as the scheme is streamlined) that need the support of the banks most. The future of high-tech funding looks distinctly uncertain.

But there is some good news when it comes to grants for the UK IT industry, with some companies proving that they can get funding. In January, the DTI announced a regional selective assistance (RSA) grant of #240,000 to Barking-based direct PC seller Hi-Grade Computers. Hi-Grade, which employs 55 staff, applied for the cash after it outgrew its existing premises, and wanted to move to a new 4,000 sq metre site. The cash, which will be used for new plant and machinery, could create up to 150 new jobs.

When he awarded the grant, the then industry minister Greg Knight said that the Hi-Grade award demonstrated the valuable contribution which RSA grants can make to support industries which benefit the local and national economy. Hi-Grade works with the East London Training & Enterprise Council and the University of East London in running computer courses for local people. Sales director Ori Yasiumus says that since moving to the new premises, Hi-Grade has secured a number of new contracts, including ones with Argos and Great Universal Stores, to supply home PCs.

According to the DTI, there are currently 91 RSA projects in the pipeline and, as Hi-Grade shows, it is not just large multinationals such as LG Electronics that win the awards. The DTI says that the total investment from overseas and domestic companies in the RSA projects is #100 million. Although a number of the schemes involve domestic companies, the largest ones involve overseas companies setting up in the UK.

Regional selective assistance grants, which are also called regional assistance grants, pay from 10 to 30 per cent of the cost of fixed assets in development areas (which are in parts of England as well as Scotland, Wales and Northern Ireland), and up to 15 per cent in intermediate areas (see box). Grants are taxed, and have to be approved before work begins on the capital project.

Although RSA grants can go to companies of any size, and can be used to safeguard existing jobs as well as create new ones, many working in the grants sector feel that they are being skewed disproportionately towards large overseas ?prestige? companies.

?There is supposed to be a level playing field when it comes to grants,? says Russell Dodge of Truro-based Business Location Services. ?But the cash always goes to the largest companies.?

The south west of England ? parts of which qualify for full development funding ? has become the poor relation when it comes to grants. Since the high-profile collapse of Falmouth reseller Rom Data, sources in Cornwall have claimed that the grant-making body there, the Government Office for the South West, has become even more cautious. Rom Data collapsed after getting nearly #1 million in grants.

What is needed, say those working in the sector, is a combination of grants that reflect the diversity of firms working in the IT sector. Large capital projects, like the #600 million investment by Samsung to bring its European monitor product to Wynard Park in Cleveland, creating up to 3,000 jobs are vital ? but so are smaller-scale seed-funding projects if the UK is to sustain any kind of indigenous software business.

Large capital grants need to go to firms that can guarantee job creation, but there is also room for taking an intelligent gamble on UK innovators.

Those technology grants in full

Smart ? for budding inventors: Since the recently announced changes, Smart is an amalgam of the old Smart/Spur and Spur Plus schemes and the Department of Environment?s regional enterprise (innovations) grant. Smart is an annual competition run by the DTI, covering feasibility studies and pre-production of new technology products and techniques. Grants are up to #200,000. The two-tier, Smart/Spur system continues in Scotland, Wales and Northern Ireland.

Regional selective assistance: RSA grants from the DTI are available to firms of all sizes in government-defined assisted areas. Grants are intended to provide support for investment projects in manufacturing and also in some service sectors. Projects must be economically viable, create or safeguard employment, demonstrate a need for assistance and offer benefits for regional or national economy.

Other grants: There is a range of other grants that companies can apply for, although recipients of Smart funding cannot receive other grants. Grants that are often attached to RSA funding include:

• Rent-free periods: these often come as part of a wider package of grants available to large companies;
• Loan finance: fixed intersect loans for job creation in development or intermediate areas are available from the European Investment Bank;
• Employment and training grants: these are available to firms employing disabled or long-term unemployed staff; and
• Enterprise zones: areas with a 10-year tax holiday and 100 per cent capital allowance for commercial buildings.

Contacts

DTI 0171 215 5000

Visage 01442 230471

Business Location Services 01872 222777

Hi-Grade 0181 532 6100