Innovation Statement implications for startups

So, what are the key takeouts from yesterday’s innovation statement? What will directly affect startups and entrepreneurs in the early stages? Most of the announcements are about science and its commercialisation which is important, or about very long term building of skills, again very important but not going to shift the startup dial right now.

Angel Investor tax breaks

This is the big one for startups. Hopefully a 20% tax offset and a 10 year exemption from capital gains tax will bring new money into early stage investing. More money can make it easier to raise and it will be interesting to see if it also lifts valuations. But there are a few things to be aware of:

  • Doesn’t start until (probably) 1 July 2016 so this may make capital hard to find in the next six months. It may be that short term debt funding from investors could be negotiated to bridge this gap, and some investors will stay active for quality deals, but this will still be a tricky period. Note that you should start on the raise well before the target completion date so I expect to see pitches restarting in Feb and March.
  • Only applies if the company was created less than 3 years before the investment. So don’t form a company until you need it (against this remember you really should formalise ownership with cofounders, own IP and limit liability as soon as you sell stuff or employ people). If you’re approaching the 3 year point its time to think about your capital strategy – should you do a round before the cutoff or hold until you hit more goals?
  • The 3 year end point means that if you grow slowly or have a couple of false starts you’ll be pitching to Angel investors who will miss out on tax breaks. So plan ahead.
  • The cutoff at $200k revenue (not profit) will hit faster-growing startups. The solution is to plan ahead. Also, note this requirement is for the prior year so if you hit $200k you’ve got a year to go.

There are also breaks for certain registered venture funds (ESVCLP) which may put more money into the game for later investment rounds. But things may still be sticky at the ‘series A’ or 4-10M valuation stage which are often funded by a mix of Angels and Funds but now the angels will have a tax incentive to put money into earlier deals.

Overall message on capital raising – plan ahead to avoid putting early investors in the position of choosing to invest without tax breaks. Remember they will be looking at alternative startup investments which may give them the tax break. While tax should be only a small part of the calculation by a smart investor, their post-tax return will be roughly 25% better if they don’t pay capital gains tax.

Crowd source equity funding changes could be a bright point, although it will be a year from now, enabling startups to raise up to $5M. Crowd funding will suit some startups very well, but just like product crowdfunding, its not for everyone so think carefully before depending too much on this in your capital strategy. The maximum an individual can invest under these rules is $10k per company per year, so it really will need to be a ‘crowd’ to raise substantial amounts.

Incubator and Accelerator Support

Incubators and accelerators are a great option to help startups get through the tough early stages and the government has announced some support for new and existing programs at $8M over 4 years. Hopefully this will result in new high quality programs, and expansion of the limited number currently in operation. Meanwhile apply for GRIFFIN Launchpad and keep your eye out for openings with other top programs including startmate, ATP Innovations, Muru-D, Angel Cube, blue chili, poleniser and more.

Landing pads

There will be five new landing pads in Silicon Valley, Tel Aviv (Israel) and 3 other locations to help you get into those markets with some Austrade assistance. These should connect strongly to the communities of expat entrepreneurs.

Other tax and policy improvements

Companies will be able to keep tax losses even if the business changes – this will help in situations where there is a big pivot. Depending on the details, it may also mean in some situations its smart to use the existing company for a new venture rather than creating a fresh company. However, don’t forget you’ll keep the shareholders, any liabilities or risks, etc as well as the tax loss so don’t do this without careful thought and advice.

The improved rules on depreciation of intangible assets may give some additional tax help in some cases, but probably more relevant for more established businesses.

The Employee Share Scheme setup will be simplified and reporting requirements reduced – this will be very helpful when you are ready to set up a scheme.

Insolvency reform is a great idea, but remember you don’t have any additional protection until the legislation comes into affect. Experts will be needed to clarify the meaning of the legislation once its finalised, but any shift away from the current situation which enforces very risk-averse behaviour on directors is a great thing.

Final Thought – get on with your startup!

As with any new policy, know about it to plan ahead, embrace it where it can help you but do not wait for it or use it as an excuse to slow down growing your startup. Solving real problems for customers by delivering products and solutions that they love is the best recipe for success.

Full details of the innovation statement are at: