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FINANCE

Funding innovation

BRIGHT IDEAS
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but they will need to persuade more conservative minds to part with their cash. GrowingBusinesstak.es a look at the options available for companies involved in research and development
• • • H I M orking at the cutting edge I I I I of new technologies B A fl means there is a constanl mr pressure to develop new products. Whether the name of the game is hydraulics, nanotechnology, biotech or software, research and development (R&D) is a labour-intensive activity with no guarantee that a particular project will find a market. Indeed, while a true innovation could make you a fortune, the development process can burn cash at a frightening rate and, ultimately, the product may fail to find its way out of the laboratory. R&D is part and parcel of the way engineering company Husco operates. "It's essential," explains financial controller Steven Hough. "We are in a market where customers want us to continually push for better performance while still providing lower cost solutions." Husco supplies hydraulic parts to makers of machinery, such as JCB, and its customers not only expect cost-effective quality, but also bespoke rather than 'off the shelf products. It's not surprising then, that of its 30 engineers, around half will be engaged in product development at any
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given time - and it's a scenario that many companies will recognise.

LEGWORK
The good news is there's a lot of support available tor R&D. From seed finance through to UK government, European Union administered grants and even tax credits, businesses can access support for their ideas. That means you can get funding for early-stage science right up to the prototype and commercialisation stages. The bad news is that any company seeking to access funds provided by the taxpayer faces a significant amount of work if the application is to bear financial fruit. E-commerce software company Actinic has obtained two UK government sponsored grants. "The application for the first one in 2003 went very smoothly," says managing director Chris Barling. "But the second one was much more difficult to obtain. It took about two years of work." According to George Boag, chief executive of Targeting Innovation, a consultancy that provides assistance for firms seeking grants, putting together a successful pitch takes time. "A lot of business owners are attracted by the prospect of grant support but they aren't prepared to put in the work," he says. As Boag describes it, the application process is similar to pitching a product to a potential client. If you make a good case, then the reward is a lucrative contract. If you don't, then the money goes elsewhere. You have to demonstrate that your project meets their criteria, namely •

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FINANCE

Funding innovation

prepared for the market. The Development Projects Grant is intended to fund the creation of pre-production prototypes, a n d will pay up to £250,000. Meanwhile, the Exceptional Development Projects Grant provides up to £500,000 and focuses on products that represent a significant technological advance while being strategically important to their industry. The UK is not the only player. Europe's Framework 6 initiative is a key supporter of research projects, with the largest chunk of money reserved for projects involving cross border co-operation. This can also be accessed through the RDAs.
CHRIS BARLING

it. "You can go back six years and we received a substantial payment," he says.

VENTURE

CAPITAL

Private investment shouldn't be forgotten. For instance, Stratophase, a spin-out from Southampton University, funded research into biological agent detection using a mix of grants and private equity. "We found two investors: the IP Group and Easthill," explains chief executive Richard Williams, who adds: "With a good venture capitalist (VC), you get the money you need to commercialise the product." However, more than one investor means managing different exit expectations, which can be tricky for an early-stage business. The investment you attract will depend largely on where your business is. VCs and angels are looking for investment opportunities, and early-stage technology projects are often backed by so called 'seed funds'. Some are run by VCs, others have public sector involvement. Again, your local Business Link or Chamber of Commerce can help, while the British Venture Capital Association has details on VCs interested in specific technology sectors. Finally, don't forget potential customers. Stratophase is being paid by the Home Office and the Ministry of Defence to develop devices to sniff out harmful agents. If you have a technology that a government department or a corporate buyer needs, they may fund work on a prototype. •

It has to be said that grant funding is not a free lunch. "All the grants assume a contribution from the company itself," says Boag. To qualify, you have to demonstrate that you have additional finance in place.

that the development work in question is innovative. It's often helpful to use an adviser or consultancy to help you prepare your pitch. "They know what the funding bodies are looking for," says Barling. Local Business Links and Chambers can also help you find advisers and put you in touch with grant providers.

TAX

CREDITS

HM Revenue & Customs (HMRC) is also in the business of supporting innovation under the R&D tax credit scheme. "Tax credits are available for companies carrying

AVAILABLE

GRANTS

out pure research, applied research and development work," says Alan Marshall of

The main source of R&D funding in England is the Grants for Research and Development (GRD) scheme. It's overseen by the Department of Innovation, Universities and Skills, but the application process is handled by the nine regional development agencies (RDAs). Similar grants are available in Wales, Scotland and Northern Ireland, with the various devolved governments taking care of the process. The GRD scheme breaks down into four distinct flavours, each with its own level of funding. At the foot of the financial ladder is the Micro-Project Scheme. Aimed at businesses with fewer than 10 employees, it provides funding of up to £20,000 for low cost, short-term research projects. Greater sums are available under the Research Projects grant, which supports companies undertaking technical feasibility - or early-stage - research. To qualify, you must prove that the project is innovative and that the research process will last from six to 18 months. A maximum amount of £100,000 is available. The remaining two grants support the development of technology that is either approaching the prototype stage or being

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IT ISN'T ENOUGH TO BE PLAYING CATCH UP WITH A TECHNOLOGY ALREADY INVENTED "

Alma Consulting, a firm that advises businesses on how best to take advantage of the initiative. As with R&D grant funding, the emphasis is on innovation. "To qualify, you will have to demonstrate that what you are working on represents a technological advance," says Marshall. "It isn't enough to be playing catch up with a technology that has already been invented." But the tax breaks can be valuable. If your business is making a profit and employs less than 250 people, you can get a 150% deduction on your qualifying R&D expenditure. Meanwhile, businesses not in profit are entitled to a cash payment of 24% of their R&D spend. Husco took advantage of this, and while Hough concedes that a lot of background work was required to identify its eligible R&D and also cost it to HMRC's satisfaction, he feels it was worth
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USEFUL CONTACTS
Business Link vranv.biifincfslink.goo.uk General information on sow/res of funding British Chambers of Commerce wzvw.hritislwluimbrrs.org.uk Also provides help finding funding Alma Consulting wivio.abnncg.com Specialist financial and strategic advice Targeting Innovation uncxv.targetinginnovation.com Advice on accessing grants and taking technology to market BriHsh Venture Capital Association iVunv.hvca.co.uk Will provide details ofVCs and seed funds. Seedcamp www.sce.dcamn.coni Matching companies, investors and advisers

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g r o w i n g BUSINESS