“A life-or-death moment”: As pre-revenue startups fall through the JobKeeper cracks, how will they survive COVID-19?

JobKeeper startups

Sally-Ann Williams, chief executive of Cicada Innovations. Source: Supplied.

After a frustrating few weeks of will-they-won’t-they, it became clear last week the Australian Taxation Office will not provide an alternative test that could make pre-revenue startups eligible for the federal government’s JobKeeper wage subsidy scheme.

The scheme caused much confusion and raised many questions around who would be eligible, and what the criteria would be. The initial threshold of a 30% drop in revenue was decried as unsuitable for high-growth businesses, new businesses, or those with fluctuating turnover.

It also didn’t cater to pre-revenue businesses, which, by definition, have no revenue in the first place from which to decline.

At one point, a Treasury fact sheet suggested there could be alternative eligibility tests for any business that “significantly curtails it’s operations”, offering a glimmer of hope for affected pre-revenue startups.

But, when the ATO’s list of alternative tests was revealed, no such allowance was made.

Speaking to SmartCompany, StartupAus chief Alex McCauley says he was actually surprised when there was even a hint pre-revenue startups would be catered for.

“My conversations with government around pre-revenue had largely involved a sense that [they] were mostly people building out of their basement,” he says.

“There wasn’t a sense that pre-revenue companies were a big part of the crisis that we needed to help here.”

And, while there’s still a possibility the criteria could change, he’s not holding his breath.

The ATO is responsible for deciding what the tests will be, and how they will be used, he notes.

So, to add an additional test, or amend the existing ones, just requires the tax commissioner’s signoff.

“It’s not an impossibility that there will be another test that could include pre-revenue companies. We certainly will have those conversations with the tax office.”

But McCauley had already been having these conversations, and advocating for pre-revenue startups. It’s not like this was an oversight.

“There’s clearly been a decision not to include them,” McCauley explains.

“It’s not something they didn’t think about. It’s something they actively chose to do.”

A life-or-death moment

In real terms, being left out of the JobKeeper scheme will have a different effect on different pre-revenue startups.

Sally-Ann Williams, chief executive of deep-tech startup incubator Cicada Innovations, notes that ‘pre-revenue’ covers a broad spectrum of businesses.

But being a pre-revenue startup usually doesn’t mean you’re a newb, she tells SmartCompany.

Especially when we’re talking about deep-tech pre-revenue startups, we’re talking about companies that have been established for a number of years; raised significant capital through grants and funding, and through venture capital; and are solving complex science and engineering problems.

In the world of COVID-19, these startups find themselves at one of two ends of a spectrum, Williams says.

“If you raised a significant Series A or something in the last four or five months, and you’re still in that development phase and you’re not looking for sales yet … you’re probably okay,” she explains.

Those businesses can focus on their research and engineering, and continue lining up tests and trials.

“Where it’s really, really tough is companies that were going to look to raise, or were in the process of fundraising, and looking at their Series A and beyond,” she adds.

“For them it is potentially a life-or-death moment.”

“We don’t have any visibility”

One startup that is feeling the pinch is Gilmour Space Technologies, a Queensland-based spacetech startup with just shy of 50 employees, working on technology to get satellites into orbit.

Founder Adam Gilmour tells SmartCompany he and the team were scheduled to attend industrial conferences that have been called off, including one in the US in March, where he was hoping to get some contracts signed.

“We don’t have any visibility on when we’re going to be able to go out and talk to customers about launching with us until next year.”

This puts a dampener on Gilmour’s prospects of bringing revenue in, but it also has an impact on the startup’s ability to raise funding.

“We wanted to get launch contracts to help us raise investor money,” he says.

At the same time, the advice from VCs to their portfolio companies has typically been to try to stretch their cash runway to two years. For Gilmour, that’s no different.

“Our investors have said we have to maintain cash levels for a lot longer than what we thought we had to,” he explains.

At the end of the day, the startup’s biggest expense is it’s staff. And he won’t be able to keep everyone on board.

“We have to reduce people … and it’s something we expect to have to do soon,” he explains.

“We’ve switched from being in a position where we’ve been growing the business and growing headcount, to having to go the other way,” he says.

“We’ve gone from accelerating our technology development to going backwards, or moving a lot slower.”

Technology development will now move more slowly, and that means a slower time-to-market, Gilmour adds.

Instead of looking at commercially launching rockets in early 2022, he’s expecting a delay of a year or more.

If, in a worst case scenario, the investor market is still slow in 12 to 18 months, the startup will be forced to make more cuts.

“Then, if it’s still bad after that, then we go out of business,” Gilmour says.

It sounds like a bleak picture, but Gilmour actually considers himself one of the lucky ones.

The startup raised $19 million in late 2018, and still has cash in the bank.

“There are companies out there that were planning to raise money within the next six months,” he says.

“They’re in a lot of trouble.”

Ecosystem support

For startups like Gilmour Space, there may still be light at the end of the tunnel.

There is an ongoing campaign for changes to the R&D tax incentive scheme, that could see them secure next year’s rebate early, for example.

But there’s also a need for additional support mechanisms, Williams says, particularly for companies that have already secured investment.

“We’re really not looking at every company,” she says,

“We’re looking at those that have already raised, that have got growth, got jobs, they’re close to building the future economic growth that we want … They’ve already been validated to an extent.”

The government also already has schemes in place to recognise innovation companies, through early-stage innovation company (ESIC) investment incentives, for example.

These could potentially be used to assess eligibility for the JobKeeper payments, Williams suggests.

“That would be a lot less companies that government would have to allow into the JobKeeper than every pre-revenue company.”

There are also ways to secure additional venture funding for these businesses, she adds.

For example, the UK government is offering matched investment in startups, taking an equity stake in the business.

A scheme like this would pay off for the Aussie government, too, “not just from an equity return, but also for jobs and for sovereign manufacturing capabilities”, Williams suggests.

“That’s a double win.”

What can startups do?

But, as we all know, no government scheme or economic ecosystem changes overnight. So what can startups do now to best weather the storm without the lifeline of JobKeeper?

First and foremost, it’s about reducing your cost base.

“See where you can limit costs. That’s even more important to pre-revenue companies,” McCauley advises.

That can include negotiating things like rent payments, or cloud hosting or licensing fees, he says.

Those providers are aware of what COVID-19 means for businesses, “and they’re open to discussions”, he notes.

Williams concurs that cash flow is the most important thing here.

“Your cash flow is everything in business,” she says.

“Those that have many months of cash flow are going to weather this storm and they’re going to become much more rigorous in how they run their business and how they optimise.”

For startup founders, there’s also a balance between focusing on business, and doing what has to be done to make sure you get to the other side.

“You have to be future focused and you have to be looking for that opportunity,” Williams says.

“You have to be prepared to press pause on something if there’s a new opportunity that presents itself.”

That could mean a pivot, a sidestep into an alternative industry, or launching a whole new product, she adds.

“Where is the opportunity adjacent to what I thought? If it’s there, push for it and have a shot at it,” she advises.

“It’s going to be critical to business operations on the other side.”

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