Perhaps the most significant advantage of launching your start-up in Australia, as opposed to in the US, is access to some hefty government grants and financial assistance programs.
The two most noteworthy schemes are the R&D Tax Incentive, and the Commercialisation Australia program. Both can be utilized to roughly double your runway, but each has its own pros and cons. I promised to write a blog post explaining both options last year.
Now that we have successfully obtained a Commercialisation Australia grant and begun to apply for the R&D Tax Incentive, I can comment at least with some authority.
R&D Tax Incentive
As part of the Australian tax system, the government provides a tax concession of 45 cents for every $1 spent on research and development. A company needs to spend a minimum of $20,000 on R&D in a financial year to access the entitlement.
The tax concession is a credit against tax you pay. For example, if a business is subject to $15,000 income tax one year and spends $20,000 on R&D, it will receive a $9,000 tax credit, which reduces tax owed to $6,000.
However importantly – especially for start-ups that are not yet cash flow positive – the credit can be cashed out when in losses. In other words, if your business is not yet profitable and burning through raised capital, the Australian Tax Office will send you a cheque. Money in the bank representing your tax credit.
For example, imagine you are a start-up that has raised capital and spent $60,000 in FY12 on R&D related activities, plus another $20,000 on travel and fundraising expenses, and received $10,000 in income. So your business is $70,000 in losses. You will receive a $27,000 refund ($60,000 x 0.45) at tax time.
The main downfall of the program is the drawn out time frame. You typically receive the credit 2 – 4 months after filing your end of year tax return. This means that R&D expenses incurred in July will not result in a credit until around September the following year, at the earliest. For start-ups this can result in a serious cash-flow problem. However, the government plans to help rectify this by switching to quarterly credits in 2014. Great news for Aussie start-ups.
So what expenses are considered R&D? This has expanded over the last few years to also including supporting R&D activities, and the scope is now pretty broad. Salaries related to product development are generally included, as well as expenses such as server costs. Travel and legals are generally excluded, as well as anything related to fundraising.
Accessing the program involves first registering your R&D project with AusIndustry. This first step must be completed within 10 months from the end of the tax year (April) and involves outlining your R&D experiment. The key is to describe what you have been developing and what you are measuring. For example, Rome2rio’s project may be developing multi-modal transport search technology, and measuring the amount of traffic to our consumer site.
Once approved by AusIndustry, the next step involves submitting a breakdown of R&D expenses as an accompaniment to your tax return.
Some start-up have employed the services of external consultants to help them access the R&D Tax Incentive, whilst others have navigated the program themselves.
The R&D Tax Incentive has been hugely popular among Australian start-ups. It’s reasonably easy to access and a fantastic mechanism to make your capital go further.
Pros: Non-competitive. Less paperwork than a grant application. Applicable for many start-ups and projects.
Cons: Rebate rather than matching funds. Lengthy annual cycle. Only covers R&D related expenses.
Commercialisation Australia is a government program that assists businesses with the commercialisation of innovative intellectual property. The program provides grant funds of up to $2 million. Grants are awarded to projects selected by the Commercialisation Australia board, and unlike the R&D Tax Incentive this is a competitive application process.
The grant provides 1:1 matching funds for your project. For example, if you raise $400,000 in funds from investors you can receive up to another $400,000 through the program. You cannot match with in-kind contribution, nor with income from the project itself.
The program provides four grant categories:
- Proof of Concept: Between $50,000 and $250,000 in matching funds over 12 months.
- Early Stage Commercialisation: Between $50,000 and $2,000,000 in matching funds over 24 months.
- Experience Executive: Up to $350,000 in matching funds over 24 months.
- Skills and Knowledge: Up to $50,000 in matching funds over 12 months (matching at 80:20 basis).
The Proof of Concept (POC) and Early Stage Commercialisation (ESC) are the two major grants, which I’ll talk about here.
The Proof Of Concept grant is designed to assist you to build a first version of your product. The Early Stage Commercialisation grant is designed to assist you to then take your product to market, and achieve first sales. Many Australian start-ups have probably already launched a version of their product by the time they raise funds and apply for a Commercialisation Australia grant, so the ESC grant is often applicable. The ESC grant offers a higher funding limit, and longer time-frame, which is why we selected the ESC grant for Rome2rio’s application.
The grant application process is well run, but it requires a fair amount of work. I’d estimate we spent around 6 man weeks in total from start to end. Once awarded a grant, there is also some administrative overhead. Whether the benefits of the grant outweigh the effort depends on how much you’ll be applying for, how much you value your time, and how likely your application will be successful. You may decide it is not worthwhile if matching less than $100,000 – $200,000. In our case, the additional $385,000 in funding was well worth the effort.
The application process involves 2 stages. The first stage is reasonably easy to complete, taking perhaps a couple of days of your time. Once submitted you’ll be assigned a case manager, who will meet with you and give you feedback. If you’re unsure if a Commercialisation Australia grant makes sense for your business, it’s probably worth at least progressing to this point to get an assessment of your business’s suitability by a case manager. The second stage is much more involved, and requires a detailed application with letters of support from potential customers, financial projections, and more.
Your chance of success depends on two major factors.
The first is whether your start-up ticks the right boxes.
Some of the important ones, from our experience, are:
- Is your start-up ”Australian”? If you’ve registered a US entity, or some of your team is overseas, this may reduce your chances.
- Are you a B2C or B2B start-up? It seems that B2B businesses fit better into the Commercialisation Australia model.
- Are you already receiving revenue from customers? This is OK if the revenue is from a different project (in Rome2rio’s case our B2C site was generating revenue, but our B2B project was not yet).
- Do you have potential customers lined up?
- Does your start-up employ a technical innovation that you can present as tangible intellectual property to be commercialised?
The second major factor is your case manager. He or she will work with you to refine your application for submissions to the board. They can make a big difference, and we were fortune enough to be assigned a case manager who understood our business well, and was prepared to put the time and effort into helping us put together a strong submission.
Also worth mentioning; something called clawback provisions means that you cannot apply the R&D Tax Incentive to funds also matched by Commercialisation Australia. Alas, you can’t double your money twice!
Several hundred businesses have participated in the generous program. However, it is less popular than the R&D Tax Incentives, likely due to stricter admission requirements.
Pros: Provides upfront matching funds. Covers most expenses related to commercializing your product or service.
Cons: Lengthy application process. Competitive program with approval subject to board review. Limited to one or two year time-frame. Not all start-ups are suitable.