Why every Australian startup should be ESIC accredited - and every investor should want you to be

You are a startup founder doing everything you can to succeed, right? Then why aren't you doing everything you can to maximise your chances of success?

In 2016, the Australian Federal government, under Prime Minister Turnbull, introduced a range of tax incentives to make investing in early stage companies much more attractive to investors, such as Angels, and Angel-led groups.

Yet almost no-one in the startup community seems to have heard of them.

Of the many hundreds of startups that I've talked with over the last 3 years, less than 10% knew about the the great incentives designed to help them become more attractive to early stage investors. Of those, less than half either had, or planned to get the ESIC (Early stage Innovation Company) accreditation.

This is extremely surprising, given the plethora of announced startup accelerators, given that one of the self-assessed test is actually about successful completion of an approved accelerator program, and another significant measure, is the submission of a R&D (Research & Development )Tax claim.

So the policy initiative doesn’t appear to working as it should. (And to date, I've not been able to find any statistics as to just how many startup have been accredited, either self-assessed, or by private ruling through the ATO)

But perhaps that has to do with the fact that few founders and investors have spent time working out the benefits.

Rather than bore you with a raft of statistics, I'll share a couple of insights with you to give you a high level of why this is an important topic for every Australian startup, and in fact every early stage investor.

So let's try & break it down.

Can we agree that for an early stage company, securing your first investor, is a signal to large investors, such as VC groups or HNW (High Net Worth) private investors, that you are "on to something"?

 It's fair to say that VC groups are often not the best or "first money" into a venture, even though for a great many startup founders, that is - mistakenly - their first port of call when attempting to raise capital.

So your first investors, especially "buy-in/earn- in" advisory committee members, are a vastly underutilised source of first money, to act as an invest-ability signal.

Interestingly the hurdles that you have to jump through as a startup founder to qualify for ESIC are a good indicator that you are (or are on the way to becoming) "investor-ready".

Unlike a VC fund, who are pooling money from wealthy investors, mutual/superannuation funds, and private equity, direct investors and angels are typically investing their own money, and if that money is lost in an investment, it's not easily or readily replaced.

And unlike a bank who charge interest on a loan secured against assets (which they'll take if a venture goes broke), an investor expects a multiple return of their money.

They do this partly to cover the losses of the failed investments in their portfolio, and often, partly in the hope that they can re-invests the proceeds in other ventures.

So each private investor is typically very careful with who & how much they invest. A private investor is likely to lose their capital on a great many of the investments that they make.

In the case of an angel investor, they are typically seeking a 10 x return. Accelerators and advisory investors have a lower success rate and therefore appropriately higher benchmark of often 20 times.

(That’s not to say they all wouldn’t complain about higher multiples).

But 10x is a good example as any to demonstrate the math.

Let's say that you, as an angel investor (perhaps in convert with other investors), invest $25,000 each into 2 startups,. For fun, let's call them "Startup Amateurs", and "Global Stars" respectively. And lets say that 'Startup Amateurs' don’t get the accreditation & 'Global Stars' do.

In the case of 'GS', immediately after the cash invested is converted to shares, the investor would get a 20% tax offset (subject to a couple of rules), that they could offset against tax that they are due to pay. In effect that would equate to a $5000 refund, which they could then invest either in another venture, or if they are canny, set aside as a follow-on investment in the same venture.

Now I'm not going to talk about the timelines to exit or the improved likelihood of success, or time it will take each of them to secure their first round of investment.

But what I can tell you with certainty, is that greater than 99% of startup seeking capital, will not secure a first or second line of capital raising in current day Australia.

So in the scenarios where each of the startups actually does get to an "exit", which is in fact a liquidity event for a first investors, such as a trade sale or IPO (initial public offering), there would be an expectation that they would receive back their capital, and then achieve a 10 x return of capital, or in each case $250,000.

In the case of scenario A - "Startup Amateurs" achieves a trade sale, which realises their first investors a net 10 x return on their investment.

And let's say that scenario 'B' achieves the same outcome for "Global Stars"

The investor may then be entitled to receive some offsets - but I'm not a tax lawyer, nor am I in the habit of giving advice on those matters. So let's assume that in the case of SA, what they earn is taxable.

Depending on how the investor allocated the money, they would be required to pay capital gains tax of $62,500, leaving them with a net gain, of $187,500 against which to offset their losses on failed startups.

(Let me insert a potential major change here to tax law - we have an election coming up, and one of the major parties have flagged, that the CGT will be raised to 37.5%, so that tax would increase to $93,750, and reducing the gain to $156,250)

In the case of scenario 'B', the investor would be entitled to receive the gains CGT-free, thereby banking the full $250,000.

And if the investor were clever enough to re-invest their $5000 rebate, that tax free return would increase to $300,000.

The net extra cash returned back to the investor, which they are then able to re-invest is an extra $62,500. And in the examples I've outlined, that difference could be as high as $143,750.

So the choice for investors - all other things being equal- between ESCI & non-ESIC companies, couldn’t be more stark.

And fortunately, the ATO has published a handy little decision tool/calculator to help make that a little easier

And if you need a little help, either as a founder, advisor or investor, reach out to me here & I might be able to point you in the right direction.

Whether you are a startup founder or investor, I urge you to do your own homework, and get good advice that takes into account your own circumstance. I personally know which startups represent not just the best chances of success, but also the best return outcomes.

But let me ask; would you prefer to bet on 'Global Stars', or 'Startup Amateurs'?

"To Your Success", Daniel

If you like this post, comment on and share it, &  you might also enjoy other posts by Daniel Mumby such as

• Why I write, and why you can too (2.5k)
• Why women make stronger (and better) entrepreneurs
• Where is the right place to raise money for my startup
• Are you really an Entrepreneur, or just a small business person
• How To Go Viral on Linked In, without being an Influencer  
• How to raise $5million for your startup idea (and why you shouldn't)
• Why Pitching to a VC will almost always fail

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About Daniel

Also traveling under the alias of 'That Startup Guy', I am a founder of StartUp Foundation (The Startup Accelerator for Experienced Professionals) and am intensely, deeply, passionately dedicated to "The intersection between personal mastery & business entrepreneurship".

My goal is to help you, by guiding you through the steps, and past the challenges and pitfalls, to turn that 'Great Idea' into reality, whether it's a business, service, product, or to disrupt an entire market.

And if you've got an experience about startup success (or failure), comment about it. If you've got a question, reach out to me via your preferred social media, or other posts can be found here on Linkedin.