Available Funding vs the Pace of Innovation
In recent years, the acceleration of new innovation in Western Australia has been quite extraordinary. Co-working spaces such as Spacecubed, Studio Startup (we’ve worked out of both and they are fantastic) and many others provide the environment for innovation to flourish.
Accelerator programs such as Startup Weekend, Curtin Ignition, (I have facilitated at both and they are fantastic) and others help to upskill our entrepreneurs. Networking events and connectors like The LiNK (Emergination is a sponsor) help facilitate connections. Startup News publicises it all – and there so many great people throughout are keen to help. Corporates and government are now embracing innovation and hackathon events to generate great solutions to curly problems (see Albany Self Sufficiency Hackathon article).
Yet the greatest challenge for innovation (as it always has been) is obtaining the funding to accelerate innovation, particularly in a resource rich state where the job and wealth creation opportunities appear so much bigger in mining, and oil and gas.
As markets become so much more global, all businesses and their leaders must innovate to compete.
Show Me the Money
On the 21st of June 2018 the State of Innovation Summit event – “Show Me the Money” was held at the Rise in Maylands. Chaired by Charlie Gunningham, the session was hosted by Innovateaustralia.org who are creating innovation network groups to spur innovation in a range of industry sectors including mining, oil and gas, biotech, agricultural, and space.
The session focussed on opportunities for capital to grow innovative companies in the Western Australian and Perth market.
For those in a hurry, here are some of the highlights. If you want more detail, please read on.
- For more established businesses, R&D tax is stil the best opportunity for business as it is an entitlement. EMDG grants are also vital for export market development. There is a wide range of other government grants (with less available in Western Australia than other states). Accelerating Commercialisation funding is a focus, with a competitive application process.
- For those considering crowdfunding there are opportunities, however there are challenges with regulatory risk in Australia.
- There have been some serious tech success stories out of Western Australia including Canva, Health Engine, and Seqta with growing successes such as Kanopy and Icetana.
- The first step with any business seeking investment is to get investment ready.
The following are my notes from the presentations which is meant to be a quick overview rather than a definitive guide.
Matthew McFarlane : Angel and Venture Capital
- Angel fund raising size $100-500k
- Angel investors offer capital, expertise and connections with the investment
- Stake is higher than later stage investment due to the risk involved
- In Perth most angel investors tend to invest in mining and engineering as they have made money in those spaces, and they feel comfortable in investing. In software, there are so many as not many wealthy people who have made their money there, therefore there is a much lower level of comfort in investing.
- Convertible debt is a good investment approach. This allows the investor to put money into the company and defer the difficult discussion on valuations to more success based on achieving milestones. For example, a deal may be struck that if certain milestones are met, the debt is converted at a $5m valuation. If not, the debt is converted at $2m valuation.
- Perth angel scene – Perth angels, innovation bay (only be a software startup. Angel dinners), tank stream labs (angel dinners)
- Matt has raised money by just working the network. Perth’s 2 degrees of separation means that most potential investors are a step away from the person you are talking to
- To protect investors, they may seek preference shares with some additional control / restrictions compared to ordinary investors.
Venture Capital in Perth
A typical venture capital fund has general partners that manage the fund, with limited partners that provide the capital to the fund. The fund invests into companies. If the fund is to get a return, it needs to be 10x return as the one company could be the entire return for the fund. General partners get a salary plus typically a 20% carry.
Venture Capital is very limited in Perth with just 3 Funds operating:
- Go Capital
- Jindalee Partners
- 808 Ventures – (London, San Fran, Perth)
Matt’s slides can be found here Angel investors and VC in Perth
Sheryl Frame: Government Funding in Perth
- There is a number of funding opportunities from government. Accelerating Commercialisation
- R&D Tax is the flagship program and an entitlement. If your business meets the eligibility criteria, you will get a proportion back on what you spend on innovation
- Entrepreneurs program
- Business management
- Incubator support
- Innovation connections – to ratify technical veracity of product. Short term research program, 3-6 months.
- Accelerating commercialisation is a competitive grant program
- Eligibility criteria includes:
- Novel – Defendable IP
- Between R&D and first sales (which means VC won’t fund)
- Ability to match funds – $100k to $1m
- Company group turnover
- Need for funding
- Market opportunity
- Value proposition
- Management capability
- Execution plan
- National benefits
- Business.gov.au – there are a huge number of Federal grant programs that are available
- State govts in other states provide more state based grants
- Many businesses still find it difficult to get angel and matched funding
- Eligibility criteria includes:
Dr Greg Smith – SciVentures investments Pty Ltd: Winning More CRCs and CRC projects
Cooperative Research Centre projects
Cooperative Research Centres are often an overlooked source of funding. Creating a CRC is difficult, however accessing funding for projects is relatively much easier to achieve. Far more R&D is done in business than in education and govt combined – so businesses should look at it.
CRC projects are single stage, with up to 3 funding rounds per year. Industry receives the money, with decisions on funding are announced within 6 months of application. Funding is up to $1m per annum for 3 years.
- Industry impact
- Project activities
- Education impact
- Governance of the project
- Value created
- What do you industry partners want? If there is no support from the industry growth centre, a project is unlikely to get up
- Excellence of research
Dr Liz Dallimore, KPMG: R&D Tax
- R&D tax – there are many organisations that offer to help with R&D tax
- Documentation is important – both from experiment (hypothesis) and action
- A decision needs to be taken on the application on principle vs 100 point test (most choose the latter)
- Incorporated for < 3 years is a challenging hurdle for many given the time taken for research
- Corporate tax rate is changing which will impact the value of the R&D tax incentive
- Early stage investor tax break is worth bearing in mind when seeking capital
Adam Levine: K&L Gates: Crowd Funding
- Two main types of funding
- Product crowd funding
- Donation crowd funding
- Last year new equity legislation in Australia which requires 3 entities
- Have to be a unlisted public company now, but soon Pty Ltd will come in
- The company must be domiciled in australia
- There is an assets and revenue test
- Investor cap is $10k in 12 months
- Can only offer ordinary shares
- Max raise is $5m in 12 months
- 1 crowd fund open at a time for a total of 3 months only
- Disclaimer required in document (IM style document is required).
- 7 licences awarded to intermediaries in Australia now
- Share equity licensed in WA
- West Winds Gin doing a raising
- ICO is risky in Australia – Gibralta, Malta, Singapore already ahead of the curve here
What to Do Next
Emergination can assist your business get investment ready through helping with strategic thinking, developing a plan of action, and helping in building your sales and marketing engine. If you would like to know more, please feel free to contact us to arrange an initial obligation free and confidential discussion about how we can help you.