It's wasted money if they don't change their level of bureaucracy
The EU grants are ridiculously red tapey. Companies have entire departments dedicated to the red tape that European grants require, from the initial participation / auction with hundreds or thousands of pages of documentation, through various stages of thorough checkbox ticking, to the final reception of the project.
Only the usual players with well established "EU Funds" departments can realistically get them, such as Accenture, IBM, Cognizant, Microsoft etc.
I suppose the amount of red tape depends on the type of grant. In my case, I once helped with national level grants to enhance the border protection systems, deployment throughout an entire country. The amount of time and effort to simply participate in such an auction was absolutely ridiculous.
In any case, none of the auctions or checkbox ticking exercises would have been manageable by startups, companies definitely need entire departments dedicated to these funds, and I'm not referring to project management, but strictly red tape.
Generally startups should not be in government supply chain unless it is explicitly permitted / requested. They are by definition too risky for public to rely on their services, so it's ok that they cannot pass the checkbox ticking exercise. In rare cases where their presence is desirable (e.g. to boost innovation or find radically new solutions), government can always step in and offer them sherpa service (as it usually happens) to go through the paperwork.
Whether the whole regulation is necessary, is another question. I think it does, but the process must be more cost-efficient. It can be. I have seen in some places how the government has put focus on bureaucratic efficiency and it worked, but that often means a strategic horizon of a few decades, which is not within the reach of most democracies today: you need a stable government and public consensus.
Most of the red tape comes from excesses or abuses from the past. Government agencies tend to slap an extra layer of rules every time the grant money is being misused.
Those kind of rules also reveal what is being interpreted as misuse or abuse. For instance, you cannot expense a meal that includes an alcoholic beverage on an US federal budget.
This is not true, you just have to do a bit more effort to have all your paperwork in order.
Or there'll be a common European subgenre of "startups" that exclusively draw funding from EU/govs because they're great at filling out forms and telling paper pushers what they want to hear. Then they ship some hypercompliant product nobody wants to use.
But then you have bad regulations, such as NIS, salary "transparency," nuclear energy restrictions, the Digital Markets Act, the AI Act, and Farm to Fork, among others.
On top of that, there’s the massive cost to taxpayers just to keep those people in Brussels.