Bringing start-up investing into the comfort zone
The ESIC incentive returned 20% of an investment as a tax offset. Seedchange’s fail-fast discipline looked after the other 80% — and produced 35:1.
The incentive
In 2016 the Commonwealth introduced tax incentives for investors in Early Stage Innovation Companies (ESICs), now in Subdivision 360-A of the Income Tax Assessment Act 1997 (Cth). An eligible investor receives a non-refundable, carry-forward tax offset of 20% of the amount invested, capped at $200,000 a year, and gains on shares held for at least twelve months can be disregarded for capital gains tax for up to ten years.
When the incentives were introduced, the Government cited a failure rate of about 95% for early-stage innovative start-ups. Most fail for want of cash in the “valley of death” between first funding and first revenue. Seedchange’s staged five-year budget was built to carry founders across it; its failure rate was 46%.
The incentive changed the risk of backing a new idea. It was under-used: many people had never heard of it, and those who had did not know how a start-up qualified. Seedchange set out to make it work for founders and investors alike.
What Seedchange did
Qualified the start-up
Seedchange incorporated each company, guided its founders through qualifying as an ESIC, and took care of the administration that bogs down most start-ups.
Ran the governance and paperwork
Registers, share issues, filings and shareholder reporting were done for the founders, so their time and money went into the idea rather than compliance.
Made it accessible
Investors could take up shares with a small deposit, with the balance financed, secured by personal guarantee and a charge over the new shareholding.
Managed the money
Funds were released to the start-up in stages under a five-year budget. The first tranche let the founders test the idea, and the staged budget gave them a runway to gain traction quickly.
Continuous evaluation
Each start-up was evaluated continuously. By the end of its first year, it had either shown its idea had traction or it had not.
The idea worked
The company continued, further funds were released for research, development and growth, and investors chose whether to stay invested, sell or partly sell.
The idea did not work
The company was wound up efficiently, with minimal losses and no mess. The founder learned what did not work and moved on to the next idea.
This is the Y Combinator principle — fail fast — made practical and paired with the ESIC incentive. The offset softened the cost of testing an idea; the discipline stopped money following ideas that had not earned it. Separating a failed idea from a ruinous loss meant more ideas were tried, and tried more boldly. The results table shows both outcomes.