Some start-ups not in tune on anti-government rhetoric
Fenn Bailey and Tom Howard of travel search engine Adioso.
Aussie start-ups have praised government policies to support the fledgling technology industry, with some obtaining valuable tax credits to maximise their investment dollars.
Start-ups are quick to blame the government for not providing more support, funding and resources but entrepreneurs at three Melbourne-based businesses have given the thumbs up to changes in the research and development (R&D) tax concession effective from this month.
The AusIndustry-administered scheme now provides increased tax credits for expenditure such as rent, software development and testing, and web hosting. For every dollar spent on research activities, companies can now claim a 45-cent credit, up from 37.5 cents.
Melbourne-based Adioso, Rome2Rio and CultureAmp are happy to claim the tax credits as an incentive. Adioso co-founder Tom Howard said tax credits were better than government grants.
Howard said there's a risk grants could subsidise poor business models in a type of "start-up welfare" , and cultivate a culture aimed at impressing bureaucrats rather than promoting innovation.
"Our gut feeling has been that by devoting time and attention to government grant applications, you risk taking your eye off the more important task of building great products for customers," Howard said. "There's a risk that in making your business concept seem sensible to grant approval officers, you may be less inclined to be bold and ambitious."
"I've seen other entrepreneurs get a bit addicted to government grants, and in doing so have built companies that are modestly successful but will never change the world."
Instead, he gave the thumbs up to the tax concession and, along with his co-founder Fenn Bailey, believed it strikes the perfect balance between government support and personal commitment.
The pair were at a pivotal point in Adioso's history when they accessed the concession. They had exhausted all the money raised from investors but still hadn't finished a key feature of their next-generation travel search engine. The tax credit helped the company stretch its dollars.
"We ran out of the money we raised from investors and had actually had not reached our development milestones and were actually in a bit of financial trouble," Howard said. "What the R&D rebate allowed us to do was spend a few more months on risky speculative development work, that we really wouldn't get investors to fund."
CultureAmp has developed Murmur, a human resources application to streamline employee-surveys. Co-founder Douglas English said start-ups must demonstrate how they can solve a problem and explain it in scientific terms: a hypothesis, experiments, observations, and conclusions. The criteria to qualify for the tax concession is aligned with the lean start-up methodology, and can help entrepreneurs prioritise their development.
The R&D activities should create a new solution to an existing problem, English said, that is fundamental to developing a product.
"The government has certain criteria they're looking for but it's almost up to you what artefacts you produce and how you demonstrate you meet the criteria. It fits with the different ways people go about doing the same thing," he said. "It's designed a lot better now around the way start-ups work and should be focused."
Rome2Rio co-founder Michael Cameron said the tax concession was one of the reasons he recently repatriated from the US to establish the company with Bernie Tschirren in Melbourne.
The tax credit has a multiplier effect for start-up spend, he said, a message that resonated with investors when the pair recently raised $450,000.
"If you raise half a million dollars, you can use the tax concession to bring in more money and make that go further," Cameron said.
"The valuations are going to be lower here but in some sense the government grants counter that. It's unfair to say the government is not doing anything, they're doing a lot with the tax concessions and Commercialisation Australia."
As at June 30, 2011, 8614 companies were registered for the R&D Tax Concession for the income year 2009-10, according to the AusIndustry website, which corresponds to $16.55 billion in reported industry based R&D expenditure.