Section 174 Is Creating a Cash Crisis for R&D-Heavy Startups — and It's About to Hit VCs and LPs Hard
(Which Fund Strategies Are About to Get Smoked — and Which Ones Can Just Chill)
Running an early-stage deep tech or biotech fund?
Bad news. You're about to get dragged barefoot across a gravel parking lot, and the IRS is driving the truck.
Doing boring old industrials or real estate? Congrats.
Pour yourself a drink, light a cigar, and toast to "minimal R&D exposure."
In the post-Section 174 world, LPs aren't just looking at your logos or your last brag deck.
They're asking real questions now:
How much cash flow risk are you hiding under that pretty IRR?
How likely are your companies to get body-slammed by a surprise tax bill?
Are you even aware this is happening, or are you about to find out during your next quarterly update call?
Here’s the no-bullshit breakdown:
Fund managers ranked from "brace for impact" to "vibe check only."
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✉️ If that’s you, just hit reply.
🎯 Special Office Hours (Rare Free Session!): How Investment Firms Are Layering AI Into Their Back Office and Deal Origination
Join us for a special office hours session today where I’ll be interviewing Jason Feinsmith, co-founder of DataOpsConsulting.ai!
Jason’s firm helps law firms adopt AI for growth and profitability — he’ll join me for a deep dive into how investment firms can layer AI into back office operations and origination workflows for LPs and deal flow.
🚀 Over his distinguished career in Silicon Valley, Jason has:
📈 Grown three tech businesses to #1 in their global industries
🛠️ Led a software startup to a successful exit
💼 Served as an associate at a venture capital firm during the dot-com bubble
🎓 He holds a BS in Engineering from Cornell University, along with an MBA and a Master’s in Computer Science from Stanford University.
Important: We normally charge for sessions like this — but today’s event is a rare freebie! 🆓
📅 Session Details
Date: Monday, April 28, 2025
Time: 1:00 PM Pacific Time (US and Canada)
Zoom Link: 👉 Click here to join
Meeting ID: 302 096 3309
Passcode: 905430
Who’s Screwed vs. Who’s Safe: Fund Vulnerability Spectrum
🧨 [Highest Risk: Severely Exposed Funds]
Seed and Early Deep Tech VC
Why They're Exposed:
Heavy R&D burn
Little to no revenue
Massive new 2025 tax bills that crush runway
What GPs Should Do:
Audit R&D exposure across portfolio immediately
Coach founders to maximize R&D tax credits and manage cash burn
Prepare bridge rounds or insider financings immediately, not later
Seed and Early Biotech VC
Why They're Exposed:
Clinical trial costs = R&D
15-year amortization if trials are overseas
Pre-revenue = zero margin for tax mistakes
What GPs Should Do:
Get founders into aggressive tax planning immediately
Work on lining up non-dilutive capital or grants to extend runway
Communicate with LPs before problems surface
Mid-Stage Frontier Tech VC (Series B/C)
Why They're Exposed:
Scaling hardware companies still losing money
R&D still 30-40%+ of total spend
Section 174 shock arrives just as growth equity interest is fading
What GPs Should Do:
Stress-test cash flow models assuming bigger tax liabilities
Tighten board oversight on new R&D initiatives
Pressure founders to right-size burn ahead of the next tax cycle
😬 [Medium Risk: Manageable Exposure]
Generalist Early-Stage VC
Why They're Exposed:
It depends on the GP’s portfolio mix: SaaS = okay, deep tech = pretty dicey
What GPs Should Do:
Segment portfolio by R&D risk, right now
Reallocate attention and reserves to the highest-risk companies
Start messaging LPs “We are actively managing 174 exposure. This is precisely how we are doing it:…”
Growth Equity Funds
Why They're Exposed:
Revenue helps, but hidden R&D expenses at tech-heavy companies
Section 174 could hit cash flows harder than expected
What GPs Should Do:
Re-check DD on portco expense structures
Identify companies where net income margins are artificially thin
Build extra runway buffers for 2025 taxes (2-4 extra months cash beyond planned spend)
Specialized Tech PE Funds
Why They're Exposed:
Buying SaaS and software-heavy businesses
Product and engineering expenses sometimes poorly categorized
What GPs Should Do:
Demand clean, detailed cost categorization during diligence
Stress-test projections for real tax obligations
Structure flexibility into debt covenants and earn-outs
😎 [Low to Zero Risk: Chilling Funds]
Traditional Buyout Funds
Why They're Exposed:
They're not. Profitable boring businesses = almost zero R&D exposure.
What GPs Should Do:
Mention Section 174 briefly in LP updates to show awareness
Enjoy your lower competition for capital
Real Assets Funds (Infra, Real Estate, Energy)
Why They're Exposed:
They're not. Dirt, bridges, and concrete don't have R&D expenses.
What GPs Should Do:
Maybe send a thank-you card to the IRS?
Possibly make a video for LPs explaining your take on R&D and 174