In a funding landscape growing increasingly challenging for tech startups, the quest for capital has led many to explore alternatives to traditional equity investment, such as government tax incentives and grants.
While it’s a common belief that chasing this type of funding can be a time-intensive distraction for founders, Jason Robertson, co-founder and partner of Nimbus Synergies, an early-stage, healthtech-focused venture capital (VC) firm headquartered in Vancouver, has a different perspective.
“We’re in what we might call a risk-off environment for fundraising,” Robertson said. “Anything entrepreneurs can do to progress their ventures before they actually need to [raise] is going to make them that much more successful.”
One of those things, according to Robertson, is to look at SR&ED financing, which “virtually all” of the companies in Nimbus Synergies’ portfolio that are eligible for SR&ED have used. Robertson characterized this form of financing as part of the “standard course of innovative businesses.”
“[SR&ED financing] is very valuable for entrepreneurs and founders in building and retaining value within their businesses, but also making it much more likely to actually be fundable by an investor in the future,” he added.
In a conversation with BetaKit, Robertson shared why he recommends SR&ED financing to his portfolio companies, and how companies can use this tool strategically.
Getting cash in the bank faster
For early-stage Canadian tech companies, one of the most accessible sources of non-dilutive funding is the Scientific Research and Experimental Development (SR&ED) program, which offers refundable and non-refundable tax credits for eligible research and development expenditures.
SR&ED distributes over $3 billion in tax credits annually to roughly 20,000 claimants, with about half of those credits being refundable. Despite these tax credits being a valuable source of growth capital for early-stage companies, that value isn’t realized overnight.
“There’s a huge time lag between when they start spending on eligible expenditures, and when the money hits the bank,” Robertson said. “One of the things we’re really cognizant of is the strategies and tactics they can use to take advantage of those tax credits sooner.”
SR&ED financing allows companies to use the SR&ED tax credits they’ve earned the right to claim through eligible expenditure to secure non-dilutive working capital throughout the year instead of waiting months for the CRA refund. For startups eligible for SR&ED financing, the benefits are multifold, according to Robertson.
Reducing the mental load on founders
The first and most obvious is that founders can quickly access additional capital to develop their product and scale their businesses. Robertson noted SR&ED advances turn distant receivables into growth capital in as little as two weeks, which is a big deal for early-stage companies with little access to capital.
Unlike other non-dilutive financing methods like bank-provided debt financing, which typically involves rigorous reporting obligations, SR&ED financing offers a more streamlined approach. As Robertson put it, it’s essentially a “set it and forget it” process that vastly improves the speed and ease of fund disbursement.
“If you can get that cash sooner, that can allow you to support your activities without having to necessarily go and seek dilutive capital.”
Jason Robertson, Nimbus Synergies
“If you can get that cash sooner, that can allow you to support your activities without having to necessarily go and seek dilutive capital,” he added.
SR&ED advances also have a built-in protective mechanism compared to standard loans, since companies can’t over-leverage on anticipated refunds. Robertson explained that a typical SR&ED loan permits ventures to borrow up to 75 percent of the SR&ED value accrued through their operations.
“When the company eventually receives its SR&ED refund, it can take that delta between 75 percent and 100 percent to repay the entirety of that loan, and still have funds left over,” he added.
Why is this important? For one, it reassures VCs like Robertson, as well as founder and board members that once the SR&ED refund is received, the company has no latent obligations. A second benefit is that it eases the mental burden on founders, who typically don’t have much in the way of collateral. With no personal guarantees required, founders are shielded from personal liability for loan repayments in scenarios where the business can’t meet its obligations.
“There’s enough existential risk and stress when building a new, innovative venture, that you don’t need another one,” Robertson added.
He said this is especially important in lowering the barrier to entry for first-time founders and underrepresented founders. “I think we, as an ecosystem, need to think more fulsomely about how we help innovators and entrepreneurs build their businesses without having to rely on things like that,” he explained.
Turning SR&ED advances into a flywheel for growth
While SR&ED advances offer great benefits on their own, Robertson believes the founders’ strategy in reinvesting them into R&D can be a key factor in a startup’s ability to scale.
Firstly, understanding the interplay between SR&ED financing and VC is a smart move for future fundraising. Robertson argued that, to investors, a company with more cash on hand means more than a company expecting receivables. This means if and when startups do look to raise dilutive financing, those SR&ED advances offer a threefold advantage.
“One, we as investors don’t have to put in as much money, and two, the money we put in may be at a better valuation for the founders,” Robertson said, adding that when less money needs to be raised, rounds generally close faster.
The second strategy Robertson advises companies is to reinvest SR&ED financing back into eligible SR&ED activities, which he said can increase SR&ED returns by a substantial amount.
Leading SR&ED financing platforms offer advances based on accrual, which means companies can draw down multiple times a year as they continue to spend on eligible expenditures, which Robertson said creates a steady and optimal cash flow.
“The amount that you can borrow is that much greater based on the reinvestment, and so all of a sudden, you create this really fascinating flywheel that allows you to scale more quickly,” he added.
By leveraging the cyclical nature of reinvesting SR&ED financing into additional SR&ED eligible expenditures, Robertson said companies can not only strengthen their financial footing but also create a more solid foundation for future growth.
This approach aligns with a broader goal he has for his portfolio companies: to spend less time worrying about cash flow and red tape, and “more time building.”
Brought to you by Easly.
To see if SR&ED financing is the right fit for your company, get in touch with the experts at Easly, a leading SR&ED financing provider that helps companies nationwide access capital.
