Funding Gap: Meaning, Examples and Implications

What Is a Funding Gap?

A funding gap is the amount of money needed to fund the ongoing operations or future development of a business or project that is not currently funded with cash, equity, or debt. Funding gaps can be covered by investment from venture capital or angel investors, equity sales, or through debt offerings and bank loans.

The term is most often used during the initial stages of research, product development, and marketing of early-stage companies. Funding gaps are commonly realized in companies within the pharmaceutical and technology industries, which rely heavily on research and development.

Key Takeaways

  • A funding gap occurs when there are not enough funds to finance operations or future development projects.
  • Funding gaps are common for early-stage companies as it is difficult to accurately estimate future operating expenses and profit margins are narrow.
  • Funding gaps can be addressed by seeking investors and/or securing additional capital through equity or debt financing.

Understanding Funding Gaps

The ease with which a very young company receives funding depends on many factors, including the viability of the business model, barriers to entry for that particular industry, and overall economic and market conditions. When the stock markets are strong, venture capital investors are much more likely to fund startup companies and may even become less stringent in their eligibility criteria.

Funding gaps are also more likely at these early stages because a company won't know what its full operating expenses will be until it reaches a more mature stage and when, at first, there aren't likely to be any meaningful revenues coming in.

In education, funding gaps are sometimes realized by schools serving poor and minority students.

Examples of Funding Gaps

Organizations can face funding gaps for a variety of reasons. The shortfall in capital may be a result of expenditures in research and development on initial products. For instance, bringing a prototype to full production or taking an experimental drug through clinical trials and regulatory approvals may incur costs that the company cannot immediately cover.

When businesses face funding gaps, they may seek additional investors or financial vehicles to secure the capital needed to continue moving forward. The expectation is that once standard operations have resumed, incoming revenue will provide sufficient capital to sustain the business.

Government entities and agencies may face funding gaps if the allotted budget for a fiscal period does not include sufficient money to pay for the regular operations and duties of the agency. If schools face funding gaps, they may be forced to eliminate classes, extracurricular activities, instructors, or administrators to continue operating.

When government agencies are confronted with funding gaps, programs and initiatives may be forced to cease operation until they secure sufficient resources. When these funding gaps affect many federal entities, it is referred to as a government shutdown. Sometimes, it's not a matter of not having enough funds. A funding gap may occur when a federal agency lacks the authority to allocate or spend funds.

The closure of national parks during government shutdowns is a typical result of such funding gaps. The rollout of new military equipment often depends on defense budgets earmarking resources to pay for their development and procurement. When there are shortfalls in federal resources, programs to create new vehicles and hardware may be canceled or suspended until the funding gap can be closed.