R&D Tax Incentive: Public Statement from the deep technology start-up community in New Zealand on the Research and Development Tax Incentive (RDTI)
This public statement by Outset Ventures (formerly LevelTwo) is in relation to the Research and Development Tax Incentive (RDTI) and the recent end to Callaghan Innovation’s Growth Grant Scheme and subsequent transition of Research and Development (R&D) intensive companies to the RDTI scheme.
At Outset, we work with a significant number of R&D intensive, high-growth, deep technology companies operating in New Zealand, and have identified a number of challenges created by the transition to RDTI. Since 2018, we have been working with the early-stage deep tech community to understand how to mitigate these challenges and we have proposed four recommendations:
- Enable companies on existing Growth Grants to delay transitioning to the RDTI until at least FY2023 (April 1st, 2023)
- Ensure that companies transitioning to the RDTI are not impacted adversely through administrative overhead
- Provide cashflow certainty for companies moving from a Growth Grant to the RDTI
- Provide multi-year certainty on all R&D funding mechanisms for R&D intensive businesses
Presently none of these recommendations have been implemented, although we understand there is some work underway within certain agencies, but with uncertain timeframes on their implementation.
Biotelliga is grateful to have received a Callaghan Growth Grant that supported us to develop crop protection technologies that will reduce the use of synthetic pesticides in food production in NZ and around the world. Timelines from start-up to profitability in the AgBiotech sector are long (often ten years or longer) and significant investment is required, which can be sporadic. For companies like Biotelliga the regular in-year cash payments from the Growth Grant were a reliable source of ready funds that helped underpin and smooth-out funding from capital raising and other less consistent sources. In our view the RDTI as it is currently implemented – in particular the lack of pre-agreed in- year cash payment – is not a major incentive to the cashflow-focussed pre-profit tech companies that are most likely to be transformative in the economy and that need support the most. Damien Fleetwood – CEO – Biotelliga
The primary challenges faced by early-stage companies are the revenue difference between the Growth Grant and RDTI and the timing of payments. Both have a significant impact on cash-flow for early-stage companies, dramatically increasing the risk of failure. By way of example, the cash gap across those companies contributing to this statement is over $3m NZD per annum, caused by the cessation of Growth Grant Payments and the 12 to 18 months on timing for RDTI payments. The very real impacts of this cash gap in uncertain times are resulting in several outcomes including:
- Delay or reduction of research spending that would have previously been undertaken or increased
- Reduction in the ability to retain highly skilled staff, this is further impacted by the current border closures and reduced ability to bring in international talent.
– Staff turnover within small, early-stage companies often also means as significant loss of intellectual property and know-how. - Strategically looking at where future research and development spending will occur, particularly where offshore opportunities may be.
Increased pressure to raise additional capital, typically at lower valuations, as bank lending is typically unavailable due to the stage and risk profile of the companies
Outset again recommends:
- Ensuring companies transitioning to the RDTI are not impacted adversely through administrative overhead
- Providing cashflow certainty for companies moving from a Growth Grant to the RDTI
- Providing multi-year certainty on all R&D funding mechanisms for R&D intensive businesses
“The funding from the Growth Grant was a valuable source of funding that underpinned Pictor’s other sources of funding. For example, it contributed to Pictor being able to put additional resources into the development of our SARS-Cov-2 (Covid-19) Antibody assay that has been patented internationally and is now being fast tracked in the US. This assay has the potential to play a major role in fighting the pandemic. It is unfortunate that the replacement RDTI scheme has not been implemented on a timely basis. This is negatively impacting on companies like Pictor that previously received Growth Grant funding. Urgency is required to implement this scheme and avoid further negative impacts on the R&D focused companies that need this to support their R&D.” Howard Moore – COO – Pictor
It is important to note that early-stage deep technology companies are a key part of New Zealand’s knowledge-based economy, are integral to supporting our nations vision of “building back better”, and are developing technologies to improve our environment, our health, and our food systems. The described impacts of this cash gap has knock-on impacts on how quickly New Zealand is able to adapt to climate change, create and adopt new health technologies, and increase productivity in a range of sectors. This is not just a business concern for a handful of companies, this is a macroeconomic concern.
“The RDTI has already had a significant negative impact on our cashflow. Where we were able to claim 20% of our substantial R&D spend under the Callaghan Innovation Growth Grant on a quarterly basis, we now claim only 15% on an annual basis. Cash flow is king for early stage R&D intensive companies like Mint and the new regime is extremely unhelpful- particularly in the context of a global pandemic.” Will Barker – CEO – Mint Innovation
Summary
Early-stage companies working in the deep technology space typically take years before they generate revenue or make a profit. Early-stage deep tech companies tend to have a singular focus on R&D and IP generation with significant overheads (a high R&D intensity) – much more so than larger companies engaged in R&D. Unlike larger companies, early stage companies often lack the financial resources to manage R&D cash flow so growth is supported by private investment and R&D grants provided by Callaghan Innovation and other agencies.
“It’s unacceptable that this regime has created two tier support for R&D. Businesses in a tax paying position are able to get immediate benefit from adjustments in provisional tax, while deep tech start ups, the companies that will be critical to solving NZ’s biggest problems, have to wait 12-18 months for the cash to come back to them. It’s illogical and wrong. Companies are now having to focus on capital raising activities, diverting time and resources away from valuable R&D activities. We risk losing world leading deep tech businesses offshore depending on the requirements of future investors”Nadine Williams – National R&D Director – PwC
By ending the Growth Grant Scheme without considering the cash flow implications, funding for R&D and IP-intensive companies to get to the next stage in their development is severely limited. This is particularly crucial because their time to profit is significantly longer than that of software or other digital technology companies. Yet these deep technology companies are a critical part of New Zealand’s knowledge-based economy and have significant growth and employment potential. We strongly urge Government to consider our recommendations as proposed.
“The quarterly cash flow provided by the Growth Grant, enabled businesses to ramp up R&D activities and create additional skilled and highly paid jobs. Callaghan Innovation previously advised that approximately 50% of Growth Grant recipients were not yet in a tax paying position so why doesn’t this regime provide the critical in year cash flow that we know is needed? Without in year cash payments this regime puts R&D businesses in a worse position than they were, and at a time where cash flow is so important to support NZ’s Covid recovery”Mat Rowe – Executive Director – Outset Ventures
Yours sincerely,
Mat Rowe – Executive Director
Outset Ventures Limited
40 Kenwyn Street
027 700 8119
mat@outset.ventures
02 December 2021
This comment is written on behalf of several early-stage deep technology companies operating in New Zealand and at Outset Ventures. The following companies support this statement:
Background
Outset Ventures is a technology incubator and innovation precinct on the fringe of Auckland’s CBD that provides physical space, incubation, funding and support for young companies in the area of “deep tech.” In this context, deep technology is defined as “technology that is based on tangible engineering innovations or scientific advances and discoveries.” The companies that Outset supports are in a range of technological areas and industries but primarily span clean technology, aerospace, medical technology and biotechnology, agricultural technology, advanced manufacturing among others.
It is important to differentiate between what is broadly considered “tech” companies and the “deep tech” companies which Outset supports. “Tech” often encompasses software and digital innovation companies, whereas “deep tech” is restricted to describing companies which operate on the edge of science and engineering. The needs of these companies and the timelines on which they operate differ substantially. Deep tech companies are often heavily involved in generating, protecting and commercialising intellectual property (IP).
The companies supported by Outset are typically pre-revenue and are heavily involved in research and development activities, and thus “research and development intensive,” a term used by MBIE and Callaghan Innovation to define the ratio of research spend against revenue. Examples of companies that have resided within this innovation cluster include Rocket Lab,LanzaTech and Mint Innovation, with current residents including Biotelliga, Pictor, Dotterel Technologies, Avertana, Helico Bio, and Astrix. Outset currently incubates eighteen companies engaged in research and development activities, with the vast majority of their spend (approximately 80%) being on R&D.
These companies are partially reliant on government funding, but fund much of the operations of their companies primarily through private capital raising activities from local and international investors. The Outset resident and portfolio companies have proven to be highly successful in attracting investments with over US $500 million in capital secured to date. Attracting capital into New Zealand to fund deep technology companies is challenging, and due to ongoing COVID events and the benefits to enhance overseas investment through government funding is a significant factor in attracting and de-risking foreign investment. These benefits largely include Callaghan Innovation Getting Started Grants, Project Grants, Experience Grants and Growth Grants, as well as the research and development loss tax credit and similar schemes.