The evolution of funding for innovation since 2017

Incremental changes to funding for innovation have meant that some big, longer-term developments in this space have tended to fly under the radar. At Radium Capital , we’ve had a front-row seat that has allowed us to watch, encourage and instigate innovation funding’s evolution over the past seven years. Since our first Radium Advance in 2017, demand for our R&D financing has only accelerated. Right now, our team from the West Coast to the East Coast and everywhere in between is busier than ever. So much so that we’re at the milestone of $750 million in funding advanced to Australian businesses with R&D, of all sizes and from all sectors. It’s a phenomenal feat that has seen us deploy over 2,250 advances to hundreds of homegrown innovators.

With this watershed moment for our business top of mind, we’re reflecting on the growing importance of R&D finance and the changing landscape of funding for innovation more broadly. So, in this blog, we’re unpacking the technological advances, government policy changes, and global crises, as well as the seismic social and attitudinal shifts that have conspired to change, for the better, how, why and when innovation is funded. But before we dive into how funding for innovation has evolved, let’s take a look at R&D financing.

A brief history of R&D financing

The Federal Government R&D Tax Incentive (R&DTI) was launched in 2011. Its guiding mission was to encourage R&D that might otherwise not happen and would likely deliver wider benefits to the Australian economy. The R&DTI refund was originally pegged at 45% of every eligible R&D dollar spent. However, in 2015 an Australian Government review of the R&DTI concluded that the incentive wasn’t meeting the mark. A suite of amendments were made to the R&DTI to make it ‘fit for purpose’. The proposed changes were to enhance the R&DTI’s integrity and administration and ensure the incentive reached companies it was designed to help. As a result, in 2016, the R&DTI refund rate was trimmed back to 43.5 cents in the dollar.

Securing the future of the R&DTI

Between 2018 and 2020, the R&DTI was plunged into a period of uncertainty after the Senate referred the draft bill that contained further changes to the R&DTI to the Senate Economics Legislation Committee to consult, review and report on[1]. Two years and one pandemic later, the incentive’s future was secured in the 2020 Federal Budget. Now, eligible businesses, depending on their company tax rate, can receive up to 43.5% as a tax refund for their eligible R&D investment. There is no cap on refund amounts and the maximum annual amount for eligible R&D investments has increased to $150 million.

Meeting an unmet need?????

Despite the many ups and downs of the R&DTI, one of its features has remained a constant Achilles Heel. Although eligible businesses with eligible research and innovation can attract tax refunds of up to 43.5% on their R&D expenditure, recipients can wait up to 18 months for their money. It goes without saying that 12-18 months in the start-up and scale-up world is an eternity. Especially since cash flow is needed to keep businesses afloat and being first to market is critical for innovators.

Bridging this cash flow shortfall for innovation funding was the market gap Radium Capital strived to meet when we burst onto the R&D lending scene with our first loan on Valentine’s Day 2017. And we’ve been feeling the love ever since. Created by entrepreneurs for entrepreneurs, Radium Capital’s simple, reliable and accessible financing took a few months to gather momentum before becoming a hit with clients and a runaway success for our business. After taking around six months to deploy our first $10 million in R&D funding, we now average more than that every month.

How funding for innovation has evolved

Radium Capital’s State Managers serve our clients in every Australian state and territory. They’re on the front line, helping our clients access capital and connecting them with the innovation support ecosystems and communities we’ve helped to build. The advice and insights of our State Managers not only help our clients, and partners, they also shape Radium Capital as a business. So, we’ve canvassed our State Managers for this blog and asked them for their views on how funding for innovation has evolved and, importantly for our clients, where they see it heading. Here are their top insights.

Alternative finance is a thing of the past

When it comes to how R&D financing and funding for innovation have evolved, our State Manager for Western Australia, South Australia and the Northern Territory, Roy A Smith has seen it all. Roy has been with Radium Capital since 2017 and has witnessed, first-hand, the changes to the innovation funding landscape and the different challenges innovation businesses have faced.

“Back in 2017, the term ‘alternative finance’ was used to cover pretty much anything that wasn’t a bank loan,” Roy explains.

“The alternative finance label made business founders and managers a bit wary of R&D financing and other non-traditional finance, such as peer-to-peer lending.

“But the pandemic changed all that. The shock to the economy and society made every business reassess their cash flow and capital options.”

Everyone, including Radium Capital’s existing and potential clients, had to adapt and embrace digital technology. And this was great news for Radium as we had pioneered a platform solution to unlock the potential of R&D finance.

Out of the shadows

The socio-economic impact of COVID was the trigger for Radium Capital and other new lenders to go mainstream and stop being seen as ‘alternative’.

“More and more potential clients and advisory partners sat up and took notice of Radium Capital,” Roy says.

“They realised that our financing is a flexible and accessible source of capital for innovators. Clients wanted us to help them reach their business goals and advisors and players in the start-up ecosystem were eager to partner with us.”

And it wasn’t just clients and advisory firms that had shifted their stance on funding previously considered new or unknown. Clients seeking investor funding for example, iCommand, found that investors such as venture capitalists were noticing their Radium Advances and viewing their businesses more favourably as a result.

Flexibility and agility are here to stay

With clients and advisers taking a closer look at Radium, something else changed. In the early days, R&D financing was a little-known and under-utilised source of funding.

“Founders would come to us at the eleventh hour, after exhausting other avenues. With our fast turnaround times and different take on security, we were often able to assist where other lenders couldn’t,” Roy says.

The Adelaide-based baby wearables start-up Goldilocks Suit is a client that used a Radium Advance to keep its doors open and then went on to achieve phenomenal success.

While some clients still use Radium Advances as a one-off capital injection or bridging finance, hundreds of clients use our R&D financing strategically, building regular Radium Advances into their financial model.

“We’ve worked hard to raise awareness among innovators about their eligibility for the R&DTI, and how they’re able to not only access it early with Radium Advances, but also the different ways they can deploy their loans to achieve specific business goals faster,” Roy explains.

Virtuous circle for innovation funding

Radium Advances are uniquely flexible, scalable loans that clients can use to match their R&D funding and cash flow needs with pinpoint accuracy.

While clients can use the money for any business expense (not just R&D), reinvesting Radium Advances in more R&D can allow businesses to grow their refund by up to 50%.

“Flexibility and agility in business took hold at the start of the current decade and are here to stay,” Roy explains.

The Radium Advance is flexible and agile finance, so this shift towards greater flexibility benefitted our clients by giving them a far more strategic approach to funding their innovation.

Regional innovators and ascendant technologies are funding magnets

Oriane Juncker is our State Manager for Queensland & the Australian Capital Territory (ACT). Oriane joined Radium Capital in 2023. And in that time has continued to build on Radium’s strong presence in Brisbane and raise awareness about R&D financing in regional Queensland and the ACT where we are beginning to see more innovators base themselves.

“A fascinating trend is that increasing numbers of innovators are launching and running businesses outside of capital cities and throughout regional Australia,” Oriane says.

“It’s part of a societal and technological shift that began with the pandemic.

“Today’s founders know that they can work, live and build a business anywhere.

“So, they’re choosing to stay in their hometowns or relocating to where they really want to live, rather than moving to a major city for work and business reasons like they would have previously.

“At Radium Capital, we’re responding to clients who are part of this growing trend, by investing time in areas such as rural Queensland, and looking at how we can grow innovation ecosystems and communities regionally.”

Ascendant technologies take centre stage

Patrick Stewart is our State Manager for New South Wales. Pat joined Radium Capital in 2021. He has been instrumental in growing our business on the East Coast, leveraging our partnership with Cicada Innovations and building Radium’s innovation communities and ecosystem in the state.

“What stands out for me is the impact up-and-coming innovation sectors are having on the innovation funding landscape and the start-up ecosystem in general,” Pat explains.

“We have the AI megatrend and non-AI start-ups are exploring how and whether they can incorporate it into their innovations.

“But first and foremost, Australia is a global leader in tech solutions, particularly software, and our farmers and agricultural resources are second to none and incredibly resilient.

“And because of Australia’s world-leading agricultural industries, Agtech is certainly a sector that’s in the ascendancy.

“So, we’re seeing an uptick in demand for Radium Advances and other capital as these Agtech inventions race to get to market first.

“We’re excited to be supporting this convergence of software technology expertise and agricultural excellence.

“These ground-breaking innovations are on track to solve global challenges, put Australia on the map as a global leader in this space and transform the Australian economy.”

?Female founders are staking their claim

Tim Hynes is our State Manager for Victoria and Tasmania, and he has been with Radium Capital since 2021.

“Over the past three years, we’ve seen a marked increase in female founders and founders with diverse backgrounds entering the innovation space,” Tim says.

“Between January and March this year, Australian female founders reeled in record high levels of investor dollars for their businesses which is heartening to see.[2]

“We’ve also seen an uptick of female founders using Radium Advances to accelerate their R&D and business growth.

“Radium Capital alum Lauren Barber (MACN, CNS) , Founder and CEO of NeedleCalm Pty Ltd , is a female entrepreneur who has done precisely that.

“There is still much more to be done to support founders. And, we’ve been trying to help shine the light on underrepresented founders by backing awards and initiatives that support this group of entrepreneurs.”

The CORE Innovation Hub Hot 30 Awards 2024 were a prime example of our outreach and support in this space where Radium Capital sponsored the award for Female Led Innovation.

“And for the third year running, Radium Capital was a major sponsor of the BioMelbourne Network ’s Connecting Women Lunch, as part of our support for female founders and their innovation communities and ecosystems,” Tim says.

The rise of collaborative ecosystems and communities to fund innovation

A crucial and very welcome trend that has emerged in recent years is the tendency for different funders to work collaboratively to support start-ups and scale-ups.

Today funding ecosystems tend to operate on a shared goals basis, in particular, helping start-ups and scale-ups succeed. And our State Managers have been playing a lead role in Radium’s drive to identify and grow these ecosystems and communities that can nurture innovation in Australia.

“Previously, financiers, investors and accelerators tended to compete for clients, but now they see each other as complementary and often collaborate,” Pat explains.

“And Radium Capital’s partnership with Cicada Innovations in Sydney and Melbourne is a perfect example.”

Radium Capital has always seen itself as a source of funding that can complement other sources of capital because we’re a specialist financier, and we don’t typically compete with other lenders on security.

“Investors tend to view start-ups and scale-ups that use Radium Advances more favourably because these provide consistent capital,” Tim says.

“So, we’ve been forging partnerships and expanding our networks to build communities that our clients can access to give them the best chance of success.”

The future of funding for innovation

Funding for innovation has transformed in the space of a few years. Has your start-up or scale-up kept pace with the change? Are you confident that you have accessed and optimised the capital sources your business has at its disposal?

We’re looking forward to seeing what happens in the R&D and innovation funding space in the years to come. And if the last few years are anything to go by, it’s going to be exciting! Even if you don’t qualify for the R&D Tax Incentive, we’re always happy to connect you with our extensive network of expert advisers who can help you take your business to the next level, if we can’t.

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[1] TREASURY LAWS AMENDMENT (RESEARCH AND DEVELOPMENT TAX INCENTIVE) BILL 2019 Response to the Inquiry by the Senate Economics Legislation Committee. (March 2020). [online] https://researchaustralia.org/, Darlinghurst: Research Australia, pp.1–18. Available at: https://researchaustralia.org/wp-content/uploads/2020/03/Senate-Committee-Sub-RDTI-Bill-Final.pdf.

[2] www.cutthrough.com. (n.d.). Cut Through Quarterly 1Q 2024 | Insights. [online] Available at: https://www.cutthrough.com/insights/cut-through-quarterly-1q-2024

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