Steinbeis Consultant Helmut Haimerl supports startups on the path to funding capital
German startups face a growing number of financial challenges and find it more and more difficult to raise venture capital. Last year, investments in hopeful enterprises amounted to roughly €6 billion – after hitting €9.3 billion in 2022. And there are few indications that the financing available to startups through the open market will undergo any fundamental shifts this year. Not only is the geopolitical situation unsettling, but the economic outlook is also gloomy. As a result, it is becoming increasingly important for startups to seek alternative options – primarily through funding opportunities offered by the government. This is not just a reference to the Future Fund and the €1.6 billion earmarked in February to support up-and-coming ambitious tech firms. Steinbeis Entrepreneur Helmut Haimerl is showing startups – but also established companies – some of the other, perhaps less-known options for attracting financial support and promoting corporate development.
The research funding approved by the German Bundestag on December 14, 2019 has proven valuable for many years. The research and development legislation passed in January 2020 was aimed at strengthening Germany as a hub of innovation and, in particular, stimulating research activities among small and medium-sized enterprises. Although the legislation was not specifically aimed at new companies, it is having a particular impact on the startup scene. This is because
- Research funding approvals boost corporate value. Companies gain recognition as a business engaging in research, like a seal of approval that can be used in external communications.
- Startups increase their market value among investors, meaning they can rely on increasing capital inflows from corporate tax refunds.
- When a tax refund is approved, this offers planning security to management; allowances become an attractive element of funding – over and beyond the venture capital market.
- In addition, companies do not need to go through credit checks. There is even the possibility for smaller, less financially resilient startups to apply for support. This contrasts with traditional subsidy programs, which require proof that funding will stay in place until project completion.
This situation has now become even more favorable with the passing of the Growth Opportunities Act. The maximum assessed value for calculating tax has been raised by 250 percent to €10 million per year. This means that if a company exhausts its research allowance, it will be entitled to a €2.5 million tax credit for consecutive years; SMEs, which include startups, will even be entitled to €3 million. Perhaps more importantly, in the future not only will wages be eligible for subsidies, but so will the procurement and production costs of depreciable, movable assets. This can be crucial for startups. For example, they can claim allowances for lab equipment and facilities, hardware and software required for complex and novel activities, test rigs, analytical devices, or apparatus used to make prototypes. Furthermore, in the future sole traders and joint business owners will be able to claim a €70 flat fee per working hour for tasks carried out by themselves.
Protein-rich biomass for pharmaceuticals and animal feed
The possibility of receiving tax incentives for investments and labor costs holds much appeal, especially for startups like 350 PPM Biotech. The fledgling company from Hamburg uses bacteria that feed on carbon dioxide to produce protein-rich biomass. Proteins can be processed into pharmaceutical products and cosmetics, or be used to produce animal feed and food supplements. One example of the benefit this brings in production is that it is no longer necessary to add fishmeal supplements. Production using large-scale fermentation involves complex processes, however, requiring financial outlays of several million euros. “The research allowance was an extremely important element of financing for us,” reports Erwin Jurtschitsch, the CEO of 350 PPM Biotech.
AI designs layouts for electrical installations
Founded six years ago in Rosenheim (right at the other end of Germany), InnFactory is a specialist in cloud-based software and app development. One of its departmental functions is specifically dedicated to the development of in-house solutions. Its most recent project resulted in an AI solution for drafting circuit layouts for use in the electrical installation industry. Once a laborious task – that was also prone to human error – circuit layouts used to involve adding sockets, light switches and radiator circuits to construction plans by hand. Now this task can be carried out by AI in a matter of seconds. To program the AI system, it was fed thousands of construction plans in advance – a task that is not only a challenge in technical terms, but also labor-intensive. The company was entitled to claim a retrospective allowance for the staffing costs of all the hours invested.
Requirements for funded innovation projects less stringent than expected
“Compared to R&D subsidies, the tax allowance for research is based on lower requirements regarding the degree of innovation,” explains Helmut Haimerl, Managing Director of Steinbeis Technologie- & Innovationsberatung. “Lots of the development projects that wouldn’t meet the high standards of project funding do, nevertheless, fulfill the requirements of tax allowances for research.”
After many years of working with R&D applications, Haimerl’s judgment regarding the eligibility of projects is both reliable and dependable. “Startups come at this from a fundamentally different angle compared to business corporations – the circle of stakeholders is easier to get your mind around; data is pooled centrally; things move quickly, but management capacities are extremely limited,” says Haimerl, who has now been advising firms on tech funding for around 15 years.
Proposals submitted to the Federal Ministry of Education and Research are referred to the BSFZ, the research allowance certification authority commissioned to assess innovation based on five criteria:
- It must aim to offer new insights
- It must be original in terms of creative potential
- It must be based on a plan and accounted for within a budget
- It must entail a degree of uncertainty regarding final outcome
- It must allow for the possibility of reproducibility
Startups often struggle with the self-critical thinking required to judge these criteria within the context of their own research projects. They also find it difficult to come up with watertight arguments to present to the BSFZ. For example, with IT projects it is not enough to develop a new application or platform if it is simply based on known methods or existing software solutions. R&D that is likely to attract allowances for software development, however, includes
- The development of programming languages and operating systems
- The development of software/technologies in specialized fields of application if this involves solving uncertainties of a technological nature
- Generally, the more dynamic or smart software is, the more innovative it tends to be
- Employing methods beyond the broadly implemented standards of technology
“The pitch decks for applying for research taxation allowances are fundamentally different from the usual bidding presentations. For example, we had to disclose possible risks in development. That’s not the sort of thing you’d want to come to the surface in normal investor presentations,” admits innFactory CFO Maximilian Grassl, “although it was actually quite helpful for us, because it made us question the entire development process again.”
“The tax support on research is actually one of the best ideas the Merkel government came up with. It underwent some major improvements afterwards, but it’s still way too complicated and convoluted. Without professional support, we’d never have received the research allowance,” adds Jurtschitsch.
As is rightly pointed out, very few startups have experience with funding applications, let alone systematic funding processes. This is where help is on hand from consultants like Steinbeis expert Helmut Haimerl, who calls regularly – often on a weekly basis – to ask probing questions about concepts, the degree of innovation, and potential technical risks. Working alongside project managers, Haimerl develops a coherent line of argument, in keeping with guidelines, to ensure it will hold up to intense scrutiny from the assessment panel. Once submissions receive approval, the tax authority checks actual expenditures. Summarizing, Jurtschitsch says: “We would never have been able to do this by ourselves. We needed a professional partner at our side.”
Finding such a partner boosts the chance of receiving a research allowance, which could be worth millions. For entrepreneurs, this is therefore a sensible investment of time and money – especially in these times of increasingly challenging funding options.
Contact
Helmut Haimerl (author)
Managing Director
Steinbeis Technologie- & Innovationsberatung GmbH (Munich)