An original financing solution for ‘not yet profitable’ SMEs investing in R&D
09 April 2018
Neftys plays a crucial role in the innovation ecosystem. It offers start-ups and SMEs investing in R&D a form of bridging loan and, in so doing, solves an important headache for many innovators at a critical stage in the evolution of their business when heavy investment in R&D is yet to pay off.
Here 4iP Council speaks to Arnaud Chambriard, a former investment banker and Neftys’ founder about his company’s offer, the role of patents and licenses in investment decision-making and the nature of knowledge transfer between public and private researchers in France.
Can you explain how the Neftys solution works?
Neftys offers SMEs pre-financing for their R&D tax claim. It is a niche offer - we are the only company in France to do it. We provide SMEs with funding during the time gap between the day they invest in R&D and the day they are reimbursed for their R&D tax claim. It is an advance in cash for their R&D expense at a crucial time in the company’s evolution when investment is often high and the profitability that banks and other investors require has not yet been yielded.
We work through an on-line platform that is quick, efficient and simple and our loan acceptance rate is close to 90 per cent. The funding we offer has proven very helpful for SMEs who I believe to be the heroes of our time. What they achieve within constraints and in the face of huge uncertainty is enormous. We have supported over 200 companies to date and in the past two years alone have financed up to 170 million euros through cash advances.
What is the R&D tax incentive in France?
In France, for every euro invested into R&D you get a 30 per cent tax credit in the year or two following your investment. If you do not pay corporate tax, you don’t loose the credit because it can be reimbursed in the years that follow.
The annual amount claimed under the R&D tax credit in France is about six billion euros. Close to 20,000 French companies are eligible to make the claim and the distribution of the six billion depends on company size. Around four billion goes to large and medium sized enterprises and approximately 18,000 SMEs share the remaining two billion.
Do the innovative SMEs you fund have common traits?
Yes. First, they are all R&D intensive companies. Many are in biotech, digital, electronic and chemical industries. Second, none of them are profitable which means they are non-bankable and ineligible for loans. Their R&D investments have not yet transformed into turnover.
Short video on the work of Neftys client, BioAxial, a French biotech SME working in the area of cancer detection and healing.
What drives their request for a cash advance?
They could be in an emergency cash flow crisis and unable to pay wages without our help. Often, they come to us during the time consuming process of raising equity or because a contract or tax credit has been delayed.
Who backs you?
Our platform is backed by large private investors, the French National Pension Fund (Caisse de Retraite) as well as by public investors like the Caisse des Dépots, the European Investment Fund and Chambers of Commerce.
What are your criteria for agreeing to loan and do SME IP portfolios influence your decision?
Our number one criterion is the tax risk. We need to be sure of the eligibility of the R&D expense i.e. that the filing for a tax credit is for a legitimate expense. Patents - owned or licensed – are a very strong indicator of R&D. SMEs often license to develop innovation. This is very typical in biotech. Fundamental research has a good reputation in France but public labs are not always good at transforming their work into applied research. Licensing is one of the means used to bridge public research and private application.
Knowledge transfer needs stimulation in France and French tax law on public R&D expenses incentivises it. For every euro invested in public research the tax deduction is multiplied by a factor of two. So, instead of receiving a 30% reimbursement, the investor receives 60%. SMEs managing big research projects can sub-contract part of the R&D to public labs and when they do this, the expense associated with the R&D cost is subject to double the tax advantage.
Should banks lend to non-profitable SMEs?
As a former banker I sympathise with banks. They need to feel comfortable that loans will be paid back for regulatory reasons and also because for every euro invested into loan portfolios, they have to invest in share capital. Generally banks don’t like the idea of financing IP because it is so difficult for them to value – with the exception of strategic IP such at a patent for a big drug.
If a bank has 1000 employees plus overheads and everyone has 50 clients, out of the 50 only one will be doing R&D because the majority of SMEs do not do R&D. With this ratio, banks will never have the capacity to understand R&D. It is a missing skills set. The only way to serve those SMEs investing in R&D is to focus exclusively on them.
What is your experience of the R&D tax deduction system, do you see areas for improvement?
Equality before the law is a fundamental concept in France. However what I see, and what is very frustrating for SMEs, is inequality in the rate of R&D tax deduction across different French regions. The window for the tax reimbursement is in theory six months, but it can be one month in one region and 18 months in another and it is very unpredictable as the same regional office can have different reimbursement rates. Tax controls are also very dependent on the style of the individual who performs them. All of this can create treasury gaps for SMEs and, because of the delicate nature of their business, it can kill them. You might think such delays are favourable for Neftys but because we are a fund investing in SMEs, such delays block money that could otherwise be released to finance another SME.
Do you have a message to inventors today?
Well done! You are the heroes of our time and of our economy because you work under such pressure and within such constraints. I admire my clients hugely because I see them doing some incredible research on cancer, Alzheimer’sand other areas that really touch our lives. Their work is fundamental and they waste too much of their time having to navigate the system.
Do you have a message to policy-makers?
The situation today is much better that it was in the past because there is more equity financing available as well as different types of fund which is good. However, the system is still far too bureaucratic and legal and tax frameworks change too frequently, which creates uncertainty.
What is next for Neftys?
Our plan is to expand our offer further across Europe. Most developed economies offer R&D tax credits. Stay tuned.
The views expressed in this feature are those of the interviewee and may not reflect the views of 4iP Council or its members. The purpose of this feature area is to reflect thinking on the topic of intellectual property and enable open discussion.