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Stop whinging and get your ESIC tax breaks already

If I had a dollar for each time the startup community, including investors, complained about the federal government not doing enough for innovation, my favourite charity would be drowning in funds.

Take the federal budget as a recent example where many decried the government’s lack of support for innovation and ideas. The moaning and groaning was as predictable as sunrise despite a $1.1 billion funding package being announced (and broadly praised) in December 2015.

But there’s one big carrot dangling in front of us that’s been largely a mystery to the startup ecosystem and individual founders – Early Stage Innovation Company (ESIC) tax incentives – part of the $1.1 billion National Innovation and Science Agenda (NISA) package.

Nearly one year after coming into effect, the scheme continues to be grossly under utilised, with many founders unaware they even exist, as the Financial Review reported earlier this month.

This revelation comes as no surprise. The Turnbull government and its Innovation Minister, Arthur Sinodinos, and his predecessor Greg Hunt haven’t and didn’t do much to market or champion this scheme. Perhaps they’re trying to bury all things tied to innovation after there was lack of cut through with voters in the last election but that’s another story.

The job to promote this program has fallen on our laps; I’m happy to lead the charge if our government is asleep at the wheel.

Firstly, I’ve noticed mixed messages given to the startup and investment community by tax experts and this includes some of the biggest names in the business. In one instance, the advice by an accountant – who claimed to specialise in ESIC incentives – was rebuked by a startup that had recently gained ESIC status.

My advice before starting this process is to speak with startups that have earned ESIC status and the advisers who helped get them there.

So why is being an ESIC important to a startup?

Firstly, it opens up new pathways to capital and much need cash flow because investors will receive tax incentives to invest in your company. This will benefit any type of investor, from family and friends to angel and venture capital.

Investors may be eligible for a 20 per cent tax offset (capped at $200,000 per investor per year for ‘sophisticated’ investors and $50,000 for other investors) and won’t be subject to capital gains tax for 10 years on the sale of an ESIC investment held at least 12 months.

Having ESIC status tells investors you have bags of potential and is an attractive investment tax-wise. There is no other scheme that’s this generous for investors in the taxation regime.

Successful ESICs and their advisers will tell you that two of the biggest ESIC misconceptions are:

– As a founder who’s pumped capital into their startup, you’re not eligible for ESIC tax incentives.

– A company must have high growth potential before it can qualify as an ESIC.

If a founder injects new funds and owns under 30 per cent of the company, they are eligible for ESIC tax benefits.

If your company passes the 100 point innovation test it can achieve ESIC status without having to prove high growth potential. Many are also unaware that companies can obtain 50 points if they are undergoing or have completed an eligible accelerator program.

The innovation test is cumulative which means companies don’t have to meet all the criteria to qualify.

The government, for all its shortcomings, has established a framework that’s quite generous to startups and investors. It’s time the community steps up to immediately help themselves instead of reverting to their default whinging mode.

Steve Baxter is an entrepreneur, investor, founder of technology start-up hub River City Labs and founding director of StartupAUS. He tweets at @sbxr. Steve is also a ‘shark’ on Shark Tank Australia which returns to Channel Ten on June 20, 8.30pm AEST.

Can you make money and save the environment?

It’s no secret that fashion isn’t my strong suit. In fact, I have as much interest in it as watching paint dry. So when Anna Walsh walked into the Tank to spruik her clothing business, I braced myself for an unfamiliar ride.

Anna started Bodypeace Bamboo Clothing six years ago which makes a range of eco-friendly apparel from shirts to dresses and even jeans.

For years she ran boutiques that dabbled mainly in cotton but in an effort to “go green” the Byron Bay native began researching different materials and realised that cotton actually uses more chemicals than any other crop.

She was seeking $90,000 for a 15 per cent stake, valuing her business at $600,000.

And why should we invest in her company? Her big pitch was that because bamboo was good for the planet.

She wasn’t clear how the funds would help and would defer to the investor for advice.

This was early in the piece and I was sceptical that it was a viable business (although the products were good quality). Anna didn’t do herself any favours when she couldn’t answer a simple but important question: what’s your revenue?

I was quite surprised. When pitching your business for investment, you have to get your numbers down pat: profit, loss, sales, margins … the basics of any business.

To her credit Anna later redeemed herself and revealed that the business had registered revenues of $1.7 million, was up 83 per cent every year and making $150,000 in net profit.

Perhaps her temporary blackout was a result of first time jitters in the Tank but those figures really impressed me.

When asked if she wanted to have run a big business or save the world, Anna replied “both”. She openly stood by her convictions despite being grilled by potential investors. That’s a good lesson for entrepreneurs – if you don’t believe in what you’re doing or what you can achieve, why should I invest in you?

Anna surprised me yet again when she somewhat rejected my $90,000 for 25 per cent offer, saying she felt her business was undervalued at $600,000.

She held her ground and that really impressed me. It’s important to know what you’re worth and not let anyone devalue you or your business.

I revised my offer to give her exactly what she wanted, followed by Janine Allis’s $90,000 for 20 per cent proposition. Anna wanted both Sharks in the mix and we settled on $180,000 for 30 per cent in total ($90,000 for 15 per cent each).

What did we learn from Anna? A solid business with good returns coupled with unwavering faith in your enterprise will surely whet the appetite of potential investors.

Four Queenslanders walk into a bar …

Speaking of appetite, Friday Beers came about when co-founder Lee Mathers was too busy to stock up the fridge on a Friday afternoon. He dispatched his friend Keegan Sard to the bottle shop but the beer selection left much to be desired.

They pondered over what could be and the idea to deliver craft beer at your work place on Friday afternoons was born.

Friday Beers wanted $25,000 in return for a 10 per cent stake, making it worth $250,000. Operating in Brisbane, it had plans to expand to Sydney and Melbourne.

The beer was of high quality, and a great way to usher in the weekend. No lock-in contracts, hidden fees and you can start and stop as you like.

More importantly, the company was already looking to diversify into wine, cider and food to cater to office parties and other occasions.

The Sharks were told the two-month old company could easily manage 5000 deliveries around the country.

It was an impressive potential pipeline of well-heeled corporates which got me doing my numbers and thinking of the bigger picture: at $50,000 a week, Friday Beers would be hitting $2.5 million a year by selling beer alone. But yearly sales could probably double as the company expands its range of offerings.

This proved that Friday Beers wasn’t a one trick pony – an important factor when I decided to provide the capital required since delivering beer isn’t new and the model could be replicated by others.

Investors need to be able to visualise a rosy future and Friday Beers had the right value proposition to make me drink up!

Steve Baxter is an entrepreneur and investor, founder of technology startup hub River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia.

Missed an episode of Shark Tank? Watch full episodes here.

This article was originally published on Linkedin. Read the article here.

How these startups made us all bite on Shark Tank

On the surface there couldn’t be more stark of a contrast between the two founders I chose to invest in on Shark Tank last night – Mick D from The Adventure Group (TAG) and Michael Timbs of Betswaps.com.

But when you look deeper both shared common traits that had more than one Shark circling. In the end the thing that led to the quality of the outcome for the entrepreneur was the fact that multiple sharks competed for the deal. This drove up the valuation from initial low-ball offers. He who has the gold sets the rules; if you NEED investment and only one investor wants in then your chance of a cracking result are low indeed.

It’s hard enough to whet the appetite of one investor, let alone two or three at one go. Getting them to fight over you is really no mean feat. So what made them so special?
TAG.

Mick came into the tank looking for $100,000 in return for a 20 per cent stake in his company, valuing his business at $500,000.

TAG offers high-quality, unique and adventurous outdoor experiences for clients alongside some of Australia’s former special forces operators (like Mick, a 20+ year armed forces veteran serving in the Australian and British Special Air Services units). I had previously invested in two of his comrades from the Australian Special Air Service Regiment (Indoor Sky Diving Australia ASX:IDZ – a great investment that will return my fund), as such I know that that unit tends to select and then train individuals who have a low tolerance for mission failure – I already knew the calibre of the individuals involved.

We were told that TAG offered “unique sensory experiences with a strong special forces flavour”. I can believe that from the memorable entrance – first impressions count and are quite helpful. Being ex-Army myself that got me intrigued (to be honest the sight of special forces soldiers rappelling from up high at the beginning of Mick’s pitch was quite exciting).

TAG aims to build resilience, teamwork, and leadership through two “experiences”: the Cave consists of the ex-Special Ops forces teaching small groups of people skills that could save lives.

SOE simulates what it’s like to be on a real mission. It comprises seven different high-end experiences where a small team of clients are taught how to plan, prepare and carry out a mission including hostage rescue, and escape evasion recovery.

Depending on which mission is chosen, it typically involves parachuting, planes, trains, automobiles, and boats.

I thought this was clever – it meant TAG could upsell customers six other times after they’d done it (SOE) once. I was sitting back thinking, “I’m liking this already”. But there were lots of reasons not to like it, including:

– The main risk – whilst Mick uses and will bring on more ex-special forces personnel to the deliver the authentic experience to customers he is fronting the business

– It is a body shop – you leverage people to get extra revenue and that is tough – it can be done and lots of businesses do it but if you had the choice you wouldn’t.

TAG’s conservative revenue for next year was $500,000, and triple that a year later.

Fellow Shark Andrew Banks got the ball rolling an offer $100,000 for a 35 per cent stake.

While I liked it, I felt there were many moving parts with the business but was willing to go in halves with Andrew ($50,000 each for 17.5 per cent apiece). Andrew is a great investment partner in this business, the target market for the flagship product are senior executive with decent disposable income looking for an experience they can get nowhere else – Andrew has amazing exposure to that space.

Naomi Simson then decided to throw her hat into the ring with a $100,000 offer for 25 per cent of TAG — plus a business manager — conditional on her being able to list it on her online platform.

The advice to Mick was to decide who he wanted to do business with before negotiating.

Mick’s gut feel was two sharks would be better than one so he asked Andrew and I to reconsider for $100K for 30 per cent, which we agreed.

FIRST IMPRESSIONS

One of the biggest mistakes an investor (or anyone for that matter) can make is to judge a book by its cover.

Thankfully, I did no such thing when the baby-faced Michael Timbs walked into the tank. The 24-year-old turned out to be a shrewd businessman – four sharks ended up taking the bait before a deal was finally done.

Unlike TAG, there was no sensational entrance for Betswaps … just a screen and a portable poster.

Betswaps is touted as the world’s first sports tipping marketplace. It essentially sells information. Michael was asking for $200,000 for 10 per cent equity, valuing his startup at $2 million.

Betswaps is not an online bookmaker – which I’ve got a real issue with. It sells tips or information for more than 40 different sports and over 100,000 different betting markets.

For example, if you’re a novice punter on Melbourne Cup day, Betswaps allows you to compare top horse racing tippers, see their win-loss record, profit and return on investment (for those who followed their tips).

Customers can then see who has tips available for sale and securely purchase them.

Michael was confident in his pitch and knew his numbers well: $100,000 in revenue, including $25,000 last month alone. It’s forecast to pass the $1 million sales mark next year.

Most of the revenue comes from selling advertising.

I was first out of the gate with a $200,000 offer for 35 per cent. I wanted to get this into play, I knew it had legs and wanted to smoke out any other interest.

Michael was resolute. He refused to budge, saying he was set firmly on 10 per cent and I was asking for too much.

Andrew came in with 30 per cent for the same amount while Naomi heated things up at 20 per cent.

New Shark Glen Richards made the playing field very uneven, agreeing to take 15 per cent equity for $200,000.

I lowered my 35 per cent offer by 5 per cent but to avail. Michael just stuck to his guns. It was annoying but I respected that. He could only do that (with confidence) because he had forced four of us on the hook.

He revealed that Betswaps had recently started raising capital and was overwhelmed with interest. A common tactic in this process but I was not surprised, if it was not true it sure worked as a negotiating ploy.

At that point I could have taken a punt or let it slide. Every investor knows they’re taking a risk in these situations and that you win some and lose some but I was confident that Michael and his team could deliver the goods.

In the end Glen and I agreed to take a 15 per cent stake for $200,000 in Betswaps. Michael got a great result only because he left lots of sharks in the game – if you are selling you want an auction with lots of bidders – the vendor always does better in that situation.

Unlike TAG, Betswaps gets to leverage network, software and a marketplace, its revenue is not proportional to its staff count. These businesses are enticing, they are the ones you want to own, run by good, capable and eager founders in an area they have a head start in.

Both TAG and Betswaps were successful on the day because they had the basic ingredients to succeed: a compelling offering, good business acumen and a passion for their venture.

It’s important to stick to your guns and have a clear plan when negotiating – always have a bottom line, middle and walkaway point. Otherwise you might give up too much equity and live to regret it.

Steve Baxter is an entrepreneur and investor, founder of technology startup hub River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia.

Missed an episode of Shark Tank? Watch them here.

This article was originally published on Linkedin. Read the article here.

Why this Perth inventor scored an own goal

There are times you come across a homegrown business idea with the right ingredients to succeed or a stellar product that’s destined for big things.

When Perth-based David Lambasa walked into the tank last Sunday to spruik Clever Score — his modular scoreboard business – there was a lot of promise. The product was cleverly designed and easy to use – two very good ingredients to have in any offering.

David was seeking $200,000 in return for a 25 per cent stake to help Clever Score expand internationally. He had been running the business for 10 years with no margin erosion – factors that looked good on the surface. But as we digged deeper there were some clear red flags which later turned into no-go zones. David was repeatedly asked how much sales Clever Score registered each year but somehow kept avoiding the question. Getting him to share some basic numbers on how his decade-long business had been performing was like trying to get blood from stone.

As a potential investor, I found that extremely frustrating. It felt like he had something to hide. It felt like I couldn’t trust him. And this is a major problem in any relationship. We gave him a chance to redeem himself and he finally revealed that he makes roughly $200,000 a year in sales. He insisted though that his profit margins were good. As we probed further we were told that his costs fell between $70,000 and $80,000 per annum, leaving a balance of $120,000 if the top end figure is used.

We’re later told that he takes home less than $75,000 in salary. How the remaining tens of thousands of dollars are spent remained a mystery. I found it to be the most confusing thing ever pitched to me. I had no idea what I was investing in, no idea what was on offer, and I had no details of what the required $200,000 would be spent on. In the end, I decided I couldn’t work with him and was out.

Here are some tips on how David could have done better:

1) Explain what the investment would cover. Whether it’s $200,000 or $2000, investors want to know how their money will be spent. Don’t forget that most investors have had their fair share of long nights, challenges and struggles to achieve success so why should they just sit back and freely dole out cash?

2) What problem are you trying to fix and how do you fix it. David wanted to expand internationally as he felt he had done enough to corner the local market. However, he no idea how to go about it and wanted ideas from us Sharks on how to maneuver international markets.

3) What are the forecasts or success metrics? Details were again scant and David had no data or numbers to explain the return on investment in return for $200,000. When buying property, would you part with your money without getting an understanding on the suburb, its median prices, growth potential and demographic information? So why are investors expected to give anything away without first understanding what’s in it for them? My advice to anyone pitching their business is to have precise answers when asked how their money will be spent. No pussy footing, no beating around the bush – just get to the point and back it up with facts.

Steve Baxter is an entrepreneur and investor, founder of technology startup hub River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia.

Missed episode one of Shark Tank? Watch them here.

This article was originally published on Linkedin. Read the article here.