Key points at a glance
- PwC R&D Specialist Noel Verma's ideas to make your business more appealing to potential investor including;
- Sound financial management and have a plan for the future
- Obtain ESIC status - become an Early Stage Investment Company
- If you're developing new products or services, investigate your eligibility to claim the R&D Tax Incentive
- If you're exporting product or service overseas - consider if you can take advantage of the Export Market Development Grant
Creating funding appeal
Obtaining funding is imperative to the growth of a startup. Whether you are seeking debt or equity, there are several things PwC R&D Specialist, Noel Verma would suggest thinking about to make your business more attractive to potential investors.
Noel suggests the following ideas to boost your funding appeal:
1. Good business hygiene
Something I have personally seen one too many times is poor business hygiene. This is a major detractor to making you an attractive investment. Business hygiene encompasses everything from the financial management of the company to the level of service you offer your customers, including after they’ve exited your sales cycle.
Ask yourself, would you be impressed by you? How attractive are you to your customers? How do you manage the finances of the business?
The thing is, long before you ask for someone else’s money you should be demonstrating you can manage your own. This means being able to show you have utilised all your existing resources (both cash and non-cash) to maximum effect. There are a number of government incentives and programs, like the R&D Tax Incentive or the Export Market Development Grant that can help make every dollar go further.
It also means getting on top (and staying on top) of outstanding debtors and managing cash flow effectively. We all know cash is king, and having poor cash flow can be the death of your business. Therefore actively managing your receivables so you get paid on time is a no brainer.
2. A strategic plan
Whether you’re actively in “fund seeking” mode, or positioning yourself to do so in the near future, you need to turn up your business savvy.
Firstly, set a clear plan for the future of the business. You can choose the timeframe for this to be realised but I’d suggest picking both long and short term objectives. What is important here is that you have a clear vision for the future and a roadmap to show how you will reach destination “Success”.
Secondly, you need be able to clearly show how any funding you receive will fit into this plan. Irrespective of whether these funds come from investors, banks, corporates or government, they are all going to want to know how their money is going to help realise the vision.
You may want to consider a staged approach to funding, by seeking smaller amounts to help validate short term milestones. Depending on your circumstances, this may be more attractive for a couple of reasons.
For one, you’re more likely to receive smaller amounts for clearly defined milestones, as this helps quarantine the risk, rather than larger sums which cover multiple objectives over a longer timeframe. Secondly, success in early milestones will help to de-risk future funding rounds as you will have validated part of your business model and demonstrated your ability to deliver successful outcomes. Finally, having succeeded on a small scale, you will be more confident when it comes to asking for larger amounts as you will be further down the path to success.
3. Engaging in R&D
Conducting Research and Development (R&D) is a great way to prove you are in a differentiated business that is seeking to challenge the status quo. The Australian Government incentivises businesses to innovate by offering generous tax incentives of up to 45% for eligible activities.
As an R&D specialist, I recommend seeking out an appropriate expert to ensure you maximise your claim whilst meeting the various compliance obligations. If you spend less than $500,000 in an income year on R&D activities, Nifty Forms is a brilliant option. An online platform, built and backed by PwC, Nifty Forms enables startups and early stage companies to easily, and affordably, access PwC expertise when completing their R&D claim.
If you’re unsure whether your activities qualify for the R&D Tax Incentive have look here, or alternatively please feel free to reach out to me if you have any questions.
4. Early Stage Innovation Company (ESIC) status
Finally, consider whether you qualify as an Early Stage Innovation Company (ESIC) as this may have a significant impact for investors.
There are a number of requirements startups need to meet in order to qualify as an ESIC. These include being a non-listed entity, incorporated in the last three years. Startups must also have expenses less than $1,000,000 and assessable income of less than $200,000 in the prior income year. Companies must also meet either a ‘principles-based innovation test’ or meet a 100 point innovation test (note: up to 75 points can be obtained through claiming the R&D Tax Incentive).
The ESIC legislation provides investors with a non-refundable tax offset equal to 20% of their investment and capital gains tax exemptions for shares held between 1 and 10 years. This applies to both sophisticated investors (with a maximum tax offset cap of $200,000 for $1m invested) and non-sophisticated investors (who can only invest up to a maximum of $50,000).
If you want to create funding appeal consider whether you are able to meet the requirements for becoming an ESIC as the potential benefits to both you and your investors could can be significant.
Last things to note
To sum up, if you can tick off each of these as ‘done’ you’ll not only boost your funding appeal, but also get your business humming along nicely down the road to destination “Success”!
If you have any tips to enhance ‘funding appeal’ please feel free to share them below.