Early Stage Government Assistance - “How to get it Right!“ - Judy Dean, Robert Judd, Ivan Kaye, Jeremy Levitt and Casey Whitehead, BSI Services.
published in the Venture
"In most areas of endeavour government funding does not require equity in exchange."
The BSI Services team acknowledges that turning ideas into a commercial reality is never easy. Governments have programs and funding that can assist companies in achieving success but many are simply not aware of what is available and how to go about accessing it.
BSI takes us through this world of government assistance for start-ups and growing businesses. They cover Research and Development (R & D) Tax Concessions, Commercial Ready Grants, Commercialising Emerging Technology and Export Market Development Grants.
Grants and entitlements are a fantastic way to extend already stretched resources whilst not diluting your share in the business. What BSI makes abundantly clear in their article is that careful planning should always take place if you want to maximise benefits of government assistance.
Australians have always been innovative, driven perhaps by our sense of isolation from Europe and North America and our innate resourcefulness generated from pioneer beginnings. However, turning ideas into commercial reality is never easy.
Government grants and entitlements may assist a company in achieving success but many businesses are simply not aware of what they may be able to access.
From a business development point of view, it makes sense to access government assistance and incentives at a point in your business cycle where risk is high (the R end of R&D). Once a product or service is developed as a prototype or the first production run has been achieved, it becomes much easier to gain an investor's support. Perhaps more importantly, the value of a business increases once projected sales become a judicious plan or a reality. Again, grants and entitlements that help you with export development and market strategies are great, if you know what is available.
It behoves business owners to utilise government funds to increase the value in their company before seeking venture capital. Remember that in most areas of endeavour, government funding does not require equity in exchange, thus after-tax income gained through entitlement programs such as the R&D Tax Concession and the Export Market Development Grant or via grants such as Commercial Ready and COMET, is value that goes straight into the business. From the government's point of view, a thriving enterprise will one day pay tax and lead to additional employment opportunities, thereby increasing personal income tax payments. Government incentives are really a long-term investment in this context.
When seeking government funding either via entitlements or grant schemes, the basis of a claim or grant application will be determined by the nature of the development project. As with any new venture, planning is paramount. A clearly defined project will often be the successful one because not only will the Government assessor understand what is being attempted but they will also be excited by the story being told. It makes sense to utilise government funding on the highest risk aspects of your business plan so that later on, you won't have to give away as much equity when approaching the venture capital market. But it helps just as much if you can expedite the early commercialisation of your innovation, with the help of Government programs.
So let's look at a number of available government incentives:
Research and Development (R&D) Tax Concession
The R&D Tax Concession is a Federal Government incentive program jointly administered by AusIndustry and the ATO that allows for expenditure on eligible R&D activities to be claimed at an accelerated tax deduction rate of 125%. This includes expenditure on items such as salaries, overheads, subcontracts, plant usage and other specified expenditure.
Within the R&D Tax Concession program, the R&D Tax Offset allows small companies to effectively ‘cashout’ their existing tax losses rather than add further R&D-related tax losses to their balance sheet. This aspect of the Tax Concession is now providing companies who meet the relevant criteria with a significant re-injection of cash from their eligible R&D expenditure. For companies that have been claiming the R&D Tax Concession for more than three years, a 175% Premium Tax Concession is available on incremental increases in R&D expenditure. This means that increased investment in R&D activities can deliver significant additional benefits.
Very recently, the Labor Party has indicated in policy releases that it may ditch existing tax concessions in favour of an expanded system of grants and loans. They have argued for reform based on the relatively low ranking of Australia among OECD countries in terms of the percent of GDP spent on R&D. But is Australia really lagging behind or is it in part a reflection of the fact that many companies do not recognise that what they do may be R&D, do not know about their entitlements, have a company structure that renders them ineligible to claim or choose not to claim because of the complexities of the system?
Many companies simply do not understand the true benefit to their business. They often dismiss the financial benefit to them in claiming such entitlements because they lack the knowledge of the program and the legislative framework in which it operates. There are now in excess of forty tax rulings and interpretive decisions and over a dozen court cases that shape the tax concession. It can be an overwhelming and daunting experience attempting to research various avenues for advice suited to your business, and this is where choosing to use an experienced consultancy is critical to your success. Many companies identify that dealing with an advisor who has a technical background is the only way to go.
Furthermore, in the past two years there has been a genuine shift towards a greater compliance regime for the R&D Tax Concession. Again, with good advice and preparation, audits are not an issue but companies are often unaware of the legislative requirements and documentation needed to substantiate their claim.
Commercial Ready Grants
Commercial Ready is the Federal Government’s largest and most broad-based R&D grant incentive, and is designed to stimulate technical advancements and the commercialisation of innovations in Australian small and medium sized businesses. It is merit-based, competitive and designed to provide approximately $200 million per annum in grant funding up to 2011.
The program provides grants from $50,000 up to a limit of $5 million for projects of up to three years in duration. Companies can apply for funding to meet up to half the costs of eligible expenditure incurred in developing a new product, process or service involving any one or more of research and development, proof-of-concept, and early-stage commercialisation activities. Commercial Ready grant receipts are treated as taxable as income to the recipient.
While there is great financial reward for successful Commercial Ready Grant applicants, there is a corresponding large cost and effort to compile a competitive application. Furthermore, because the grant is awarded on a competitive basis, success can never be guaranteed. The Commercial Ready Grant program is also not a ‘last resort’ source of capital and applicants need to expend at least the same effort as would be required when approaching private providers of capital.
What can applicants do to improve their chances of success? Applying for a Commercial Ready Grant should always be tackled as a strategic process.
Companies should elect and empower one person to champion the entire process, and should involve personnel from each relevant functional area to prepare the application and supporting documentation.The preparation process should be punctuated with reality checks, and should address any issues that are identified.
Successful Commercial Ready applicants demonstrate a well-balanced project team, a sound business case, a thorough understanding of the market dynamics, demonstrated market demand, access to marketing channels, an understanding of the technical risks involved, and a technical development strategy that is designed to contend with and minimise technical development risks. Successful applications must also show consistent and balanced cash flow budgets, incorporating existing company operations, clearly constructed budgeted project expenditures and reasonable and supportable budgeted commercial returns. These budgets show the sensitivity between the company’s capacity to fund its portion of the project and the need for external Grant funding.
Consistency and independent verification of all aspects of the application is paramount for success.Employing the services of an external consultant who is skilled in, and has had prior experience with Commercial Ready Grants, is a great cost-saver, as a suitable consultant will provide the necessary guidance and outcome-based focus. There is also the problem that companies often go to the funding bodies ill prepared. First impressions do count and input from your R&D advisor as early as possible can make or break your Grant application. BSI has a proven track record in this area, and can provide you with a structured, project-managed approach to applying for a Grant.
At BSI we have senior consultants doing all the work. That and the fact that we have technical backgrounds across a vast range of disciplines such as biochemistry, geology and geophysics, engineering, IT and accounting, and have staff who have worked in the big four accounting firms as well as the Government’s own program delivery bodies (AusIndustry and the ATO), makes us the best equipped and most experienced R&D practice to assist you in Australia.
Commercialising Emerging Technology (COMET)
COMET is a competitive grants program, providing funding and support to early-growth stage and spin-off companies, as well as individuals, to commercialise their innovation. Typically, these businesses are seeking funds through raising capital, securing debt funding or sourcing working capital by forming alliances, joint ventures or securing anchor clients. Key benefits of COMET are the assignment of a Business Advisor from the program to guide and mentor the business, and the official endorsement of the Government, which can be especially helpful in accessing local and export markets, particularly in the Asian region.
A company’s suitability for COMET is measured both against the eligibility criteria, all of which must be met, and certain merit criteria. The eligibility criteria states that the company must be a registered entity before receiving funding, and that a majority of the company’s activities and assets are based in Australia. Any Intellectual Property (IP) must be assigned to the business or, at the very least, the company must have the beneficial use of the relevant IP. The business must be under five years of age or have been actively trading for less than five years. Lastly, you must have had a turnover of less than $8 million in the last two years or less than $5m in the last year to apply.
Eligible applicants are then assessed against the merit criteria. The most significant of all is the market validation that the company has been achieving. As part of an application process, a company must supply several strong references detailing the commercial viability and market approval of the offering.
Early revenues and sales are golden, endowing the company with serious commercial credibility. Also of great importance is the ability of the management team to successfully commercialise their offering - in effect, how deep is their market knowledge, how commercially savvy are they and is the size of the market opportunity significant? A great invention is not suitable for COMET if the available market is insufficient for genuine commercial returns. Protectable IP is always viewed favourably, as it serves as a possible longterm competitive advantage for the business. Lastly is the question of whether or not the company actually requires funding. If a company secures several million dollars of funding from an investor, it proves very difficult to justify Governmental assistance!
What is the level of benefit? COMET provides up to $64,000 under a first round agreement, at an 80/20 matched funding level, giving a total spend of $80,000. A second round of funding is available to COMET companies who have displayed significant progression and advancement in their business since the initial grant. This is valued at $56,000 which must be matched 50/50 by the business. For both rounds, it is a requirement that the funds are spent on third parties. In effect this facilitates access to expert advice for early stage companies who, because of the scarcity of capital at their level of development, would otherwise be unable to afford it. Assistance is available in the following areas:
- Business planning
- Capital raising
- Export strategies
- Market research
- Intellectual Property strategy
- Proving technology (including finalising working prototypes)
- Management skills
BSI offers services under the first four categories. In our experience, there are three key reasons that companies are deemed unsuitable for COMET. Firstly, they simply don’t meet the eligibility criteria having been operational for more than five years or having no credible argument for needing the funds. This may be symptomatic of poor market awareness of the scheme, with companies only learning about available assistance available after the fact. This seems unfortunately a consistent trait with many Government assistance programs.
Secondly, a company’s technology may not be innovative enough. COMET has a mandate to support innovation, and whilst there are many companies that have great ideas and business models, without the core technology component, they will not rate highly in the assessment process. Lastly, some companies are simply too early stage to access the funding at that moment in time, requiring more progress in the development of the product or greater market traction to be deemed eligible. This is not the end of the world, as within 6-12 months, these companies usually become ideal candidates for the program.
BSI has helped a plethora of companies access the COMET grant. Importantly, BSI has assisted many of these businesses to leverage this funding to become investor ready, achieve additional capital investment and to enter into overseas markets. COMET has proven itself to be a more than useful tool for the entrepreneur as they embark along the commercialisation path, providing the impetus to move into rapid growth and ultimate success.
Export Market Development Grant
The Exporting Marketing Development Grant (EMDG) is a key scheme to develop sustainable export markets by reimbursing companies up to half of their eligible promotional costs above a threshold amount. Irrespective of the level of export sales achieved each year, approved EMDG applicants will receive an export grant equivalent to 50% of their eligible marketing costs above an initial $15,000 threshold.
To be eligible the exporter must meet the certain criteria. The applicant must be an Australian entity with a turnover of less than $30 million per year and export earnings of less than $15 million. Eligible products are generally goods and services (including tourism), but the program will also support promotional activities involving intellectual property rights and know how and events. There is a minimum marketing spend of $15,000 per year but a company may combine two years of eligible and approved expenditure into one.
BSI can assist exporters in structuring and lodging, and importantly maximising, an EMDG claim. The key issue is to plan ahead. Exporters must make sure they have the right agreements and meet Austrade’s eligibility requirement. A company may only make seven claims in total so knowing when to apply is a paramount consideration.
Recently, the Government announced a number of key changes to the scheme to make it more accessible to small businesses. For applicants lodged from 1st July 2007 onwards, the allowance for overseas visits will increase from $200 to $300 a day. More nebulous export sectors (such as those dealing in intellectual property), which may not currently meet the status requirements of the grant, will be given more flexibility. Export performance testing will be removed, making the scheme simpler to understand and more accessible for SMEs. Rules that currently deal with changes in business ownership will be revised and amended.
BSI strongly recommends that you plan your export activities a year in advance to take full advantage of the program. These few hours of strategic planning and thinking can add hundreds of thousands of dollars to your bottom line. For example, it is important that agreements with overseas agents are correctly structured. Do not be scared to use professional export planners, they are generally worth their weight in gold. Since export planning and market research are regarded as eligible expenditure up to a value of $50k per annum, you should take advantage of these services.
What are the main complexities in the program? As every claim is fully audited there is a lot of paperwork. Travel expenses are claimable but you must keep accurate and full records of your trip and the activities that you undertook. Another minefield for EMDG applicants is in acquittal of expenses. It really is well worth using a consultant such as BSI to lodge your EMDG claims. We believe that your return on investment will be substantial.
It is advisable to get in touch with Austrade or State Government offices in the countries to which you are planning to export. They will invariably introduce you to a number of contacts that have the potential to assist you to increase your export sales. The cost of marketing overseas is expensive, but you may be entitled to claim up to 50% of this back under the EMDG scheme to a value of $150k per annum. Research over many years has indicated that every marketing dollar spent through the Austrade programme has resulted in a $12 return in sales.
So what can be surmised from all of this? Grants and entitlements are a fantastic way to extend already stretched resources. They offer an alternative to debt and equity funding whilst not diluting your share in the business or requiring security for funds, which lets face it, at the early stage is sometimes the founder’s house!
What is abundantly clear is that careful planning should always take place if you want to maximise the benefits of the available assistance at the right time for the business. As accessing these grants and entitlements can prove difficult, time consuming and confusing all at the same time, third party expertise, such as that provided by BSI can be invaluable in helping your business to achieve the greatest level of support.
By Judy Dean, Robert Judd, Ivan Kaye, Jeremy Levitt and Casey Whitehead