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How Can A Startup Stay Afloat In Lean Times?

There is no such thing as instant growth, but there are things that can help

23Jan

The path of a startup is never easy, with time and money being two resources that they often struggle with in their first two years. Not everyone is capable of generating profit instantly, but access to capital is critical for growth. Since investors may be there to support with funding, they can also add enormous pressure by asking for a good ROI which a startup may not provide fast enough.

One of the reasons why startups fail is that many are unaware that aside from venture capital, the government can also provide support and funding. With any business - small or large - there is little sense in waiting for a benefactor to offer help directly, so it's worth looking for options yourself.

So, how can a promising but poorly resourced startup stay afloat without investors and crowdsourcing?

One of the options is to try to benefit from R&D programs.

In the US, R&D incentive programs are available at all levels - federal, state, and local - these can be life-saving when promising startups generate little to no profit but have big ideas. The US Small Business Administration (SBA) alone offers several options, with the Small Business Innovative Research Grant Program (SBIR) and the Small Business Technology Transfer Grant Program (STTR) being amongst the most popular. Both programs are designed to stimulate the development of technological and biomedical fields to boost innovation in scientific, educational, and non-commercial sectors. In order to be eligible, a startup must meet specific (strict) requirements from the government such as revenue generating potential, meeting the core needs of the government in terms of the innovative value of their product, and that a company is collaborating with at least one non-profit research institution during the program.

For those who are not related to science or medicine, it can be useful to look at R&D tax credits. Thanks to the Protecting Americans from Tax Hikes Act 2015, from 2016, eligible small businesses whose gross profit is less than $5 million and who have been operating for less than 5 years can claim the R&D credit to reduce the employer's payroll tax liability. The Act is the result of the governmental strategy review towards young businesses, acknowledging that in the first few years, many startups are not capable of generating enough taxable revenue.

Eligibility for the tax credit is less strict than with the SBIR and the STTR incentive programs, which require collaboration with research institutions. However, in order to benefit from the tax credit, startups must demonstrate some exceptional knowledge of their product and business plan. Particularly, they must show the product development process, including all experimentation and prototyping. Even though the tax credit doesn't require a project to be a groundbreaking innovation, there must be proof that a new product either acts as an improved version of a conventional product or service, including performance, quality, design, or methodology.

However, startups must acknowledge that whether they work with institutional investors or incentive programs, ROI should always be the top of any agenda, as regardless of getting funding, without ROI every company will fail. 

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