BC Startups: The Government Is Not Your Friend | Hacker News Reader

BC Startups: The Government Is Not Your Friend

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72 pointskiwidrew28 comments

Without divulging problematic details about the industry I work in, let me say that government incentives in the US are not much better. In the industry I work in, the government can step in and crown winners and losers with various grants and subsidies. These grants and subsidies are so lucrative in fact, that many businessmen in this space are really not entrepreneurs so much as expert lobbyists.

The net result for society is actually much worse than just free market competition, because the companies that just focus on product can actually end up worse off than the companies with third-rate products that focused on making friends with politicians and bureaucrats.

And yet the industry is addicted to these subsidies and contracts. Its the only way of doing business that they are familiar with. They can't imagine the same industry without the government's involvement. As a result, I think the American industry is about to have an existential crisis when competitors from abroad arrive on these shores with new products that are actually built for novel markets, and not for a bureaucratic selection committee.

> that many businessmen in this space are really not entrepreneurs so much as expert lobbyists.

We call those "SBIR Farms". Get rewarded not on the products you create but by the paperwork you fill out.

This post puts into nice terms something I have been feeling for a while regarding my own startup. Why spend 40 hours filling out paperwork when I could spend 40 hours developing the product and actually making money? What good is a tax credit if I didn't pay any taxes because I didn't make any money?

SR&ED is a tax refund - cash in hand at the end of your taxable year.

"if you did not pay taxes". No income, no taxes, no refund, no cash in hand at the end of the year.

Yes if it works anything like the US system you could probably credit that would-be refund towards the following year, or the year after. But is that worth the time away from product when your company needs it the most?

It's actually a refundable tax credit. You receive it even if you have no income or profit (and paid no taxes).

All government-run company funding programs are flawed for one simple reason: the bureaucracy is unfit to judge early-stage companies.* The only protection the bureaucracy has is layers of rules and lengthy application processes. These barriers naturally increase over time as various bad actors game the system.

* Later-stage / mature companies can be evaluated on financial statements.

True, but in some cases the barriers that governments erect to enter the marketplace are barriers that I very much want. I want agribusiness to get their food to me in a clean state. I want car companies to demonstrate that they can produce a car that meets safety requirements before they can sell road-worthy cars. I want pharmaceutical companies to meet the basic requirement that their drugs do what they claim that they do. So not all barriers increasing are due to bad actors, but sometimes due to demands of society to have clean food, safe cars, and lead-free drugs.

Agreed - my comment is specifically re funding programs. Government employees are not equipped (to put it charitably) to evaluate the likelihood of success of startups. Their proxy metric is an onerous rules-based application process. Perversely, this excludes the startups they are trying to select for because those startups can raise capital elsewhere faster and on better terms.

The SR&ED complaint is not all the experience I've had. Received 3 successful grants in a row now, all prepared by a 3rd party consultancy. Payment is always fast. The first year we applied we were required to submit some extra documentation to support our claim. This amounted to submitting our git commit logs verbatim. They were happy with that.

You don't have to submit hour-by-hour breakdowns either. You submit what % of an engineers time was spent on SR&ED work and what the engineer's salary is. That's it.

I imagine it might have to do with which tax centre you're dealing with. Maybe the ones in BC are tougher than the ones here in Toronto/Ontario?

My experience, and several others I have talked to, is completely opposite of yours. Making the claim, even through a 3rd party consultant, was a pain in the ass and the results were very underwhelming. We needed to submit a lot more detail about the work done on the claim than that. Can I ask what years you did your claims?

2012, 2013, 2014

> You don't have to submit hour-by-hour breakdowns either. You submit what % of an engineers time was spent on SR&ED work and what the engineer's salary is. That's it.

OP here - the breakdowns and spreadsheets shown in this piece were designed by or with the CRA during the CRA's technical audits of one of my companies. The evidence log screenshot, for instance, was a template provided to us during the technical review that we were required to complete. (The claim was eventually accepted unadjusted FWIW.)

It's fine _if you're not audited_.

In Ottawa. We got audited for FY 2013. It was brutal. Took the entire FY 2014 to get our claim. We got it in full because of me explaining everything several times in front of the auditor. It's hard to do because you have to put everything into those specific terms that SR&ED qualifies: experimental development, systems uncertainty, blah blah blah

The man hours spent were not worth it. Nearly killed the company with the cash flow problems as OP mentioned.

Applied again for FY 2014, betting on not getting audited.

CEO asked around, found this runaround/hard audit was common for recent claims. We think it's one of those Harper government, we're-not-saying-there-is-cutback-but-there-is-a-cutback type things.

Great article by Ben -- see many comments that SR&ED isn't "that bad". The first time, it might not be. As you scale and add more engineers, the risk of audit starts to outweigh any benefit.

As you scale and add engineers, you should be adding operations people and documenting your system anyway. You'll be able to better determine exactly how much time is development time, and have the benefit of not needing your most valuable people doing firefighting work.

It's not a strict calculation of "how much is development time". For things like IRAP, the time spent has to be cataloged against a specific R&D project you've received the grant for. For SR&ED, you will be laughed at for claiming 100% of an engineers time.

There's a chasm between SR&ED being "easy" with less than 5 people and when you have enough "operations people" to make this "easy again"; I would bet that most companies don't have the operations resources until they are well over 50 people. At 50+ people, you're past the point where these grants can have the most impact.

Just forward the article to Bill Vander Zalm; he will descend upon the scene, deus ex machina and magically fix things.

No, don't forward, on second thought. It works better if you just silently pray.

I'm not sure I buy the SR&ED complaint. A friend of mine got some SRED credits refunded while he worked on a tool. It didn't seem to onerous from his perspective. Of course, that was a few years ago. Things may have gotten worse recently.

SRED has become more restrictive in the past few years. Legitimate technology companies are having their SRED applications denied (although its debatable whether their work involved Scientific Research and Experimental Development).

Also, maybe it's easier for an individual who works on one tool than for a whole organization? Personal anything is easier compared to corporate. The documentation comes from one source.

It's brutal, my company does SR&ED every year and it ties up all of the directors and our development lead for at least 3 months. The executives push it because all they see is the tax credits, but don't see the ridiculous amount of man hours that go into it.

For what its worth, it can be done successfully for considerably less effort than that.

Similar experience here. I've seen SR&ED bring all development to a halt for multiple months. 60 page documents per developer were not uncommon.

They have gotten a bit more restrictive.

In my experience The burden for SR&ED isn't actually too bad if you know what you are doing. Startups typically run into trouble with because they didn't document things as they went, and scramble near filing time.

This is my observation as well.

There's also a non-zero number of companies filing for SR&ED credits and complaining about the onerousness of the audits who, quite frankly, should not be eligible for SR&ED.

Paying devs to build yet another time tracking tool or yet another social network might be contorted to meet the letter of "advancing the state of science by encouraging R&D investment in Canada", but it certainly doesn't meet its spirit.

I think the original post was pointing more at a problem of investors pressuring companies to file for SR&ED (and to get the credits) even when they were not really applicable. I don't see how this is a problem with the program, rather than the investors, though.

When you actually are doing appropriate work, it has been reasonably manageable to both get and keep them. I have also, contra the OP, seen this work with 3rd party help on filing, although I wouldn't be surprised if this raises the scrutiny.

Yeah, no question that investor pressure to submit all of this inappropriate work is a big problem in and of itself.

It is, as you say, a good program, and I've had fairly reasonable experiences with it when the company in question was

1) well prepared and good about documentation the work. This is the part where a lot of people trip, because you want to document not just how time is spent but on how what it is spent on relates to the larger R&D goals

and

2) Doing work that truly does look SR&ED worthy. This is where third parties seem to specialize in dressing up mundane stuff as ground-breaking science, and why auditors seem to increasingly key in on companies using their services.

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