British intelligence – the Government needs to support domestic investors

Why look to foreign investment when there is so much untapped investment potential here in the UK, questions Stephen Page

The Chancellor’s Budget was another show of British spending force, including a £6bn uplift for the NHS, an increase in the minimum wage, and billions committed to the “levelling up” agenda.

After the raft of support for UK start-ups at the beginning of the pandemic, the Chancellor went one step further, committing £150m to a UK angel investor programme intended to support investment into start-ups in the British regions and £1.4bn to a Global Britain Investment Fund designed to help lure in foreign investment. This £1.4bn has been earmarked to drive investment in what the Government defines as “key British industries” such as electric vehicles and life sciences. While the £150m of funding for regional angel investors is of course most welcome, we should be questioning why 10 times more funding has been allocated to attracting foreign investment when there is still so much untapped investment potential here in the UK.

‘Foreign investment might take over British innovation – potentially irreversibly’

Foreign investment is certainly a vital part of the UK’s start-up ecosystem, but there is always the risk that future profits and returns will eventually move outside the UK to overseas investors. The Government should therefore be doing more to encourage and incentivise domestic British investors. One simple way to do this would be to make changes to the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).

Despite the impact of Covid, the 2020/21 tax year for EIS was, in the end, a successful one, with fundraising from EIS funds surpassing £380m. Look at earlier-stage companies, however – the pipeline of businesses which should be jostling to define the key UK industries of the future – and the news is bleak.

The number of first-time funding rounds into UK seed-stage start-ups declined for a second consecutive year in 2020, to 36 per cent below the 2018 peak for such deals. Some of this decline can be attributed to the impact of Covid-19 in 2020 – from dented confidence to changes to the investment landscape and founders’ priorities caused by the Government’s introduction of the Future Fund and other financial relief programmes. But only some. The issue is simply that there are too few early-stage businesses seeking SEIS funding. There should be tens of thousands of companies taking advantage of SEIS every year, not less than 2,000 as it currently stands. And that shortfall is down to how SEIS is restricted.

Increase the SEIS funding cap

There are some simple changes to this scheme that would encourage greater investment from within the UK. As it stands, the SEIS funding cap is £150,000 – it has been at this level since its inception in 2012. The world has moved on, though – early funding rounds, even at the seed stage, are getting bigger all the time, and many start-ups are having to turn their back on SEIS because their funding needs exceed the cap. Increasing the cap to £250,000 would address this issue and unleash capital that is currently going unutilised.

Meanwhile, the qualifying period for SEIS – currently two years – should be increased to three years in order to increase the number of companies that can claim SEIS, as many miss out due to the complexities of the approval process. To that point, a simplification of the rules would encourage greater uptake of the scheme.

This is not the first time that EIS and SEIS have missed out when the Government has revamped its support for investment in start-ups. When the initial Covid shock hit investor confidence, the Government announced the much-needed Future Fund. Designed to ensure that access to funding would not be interrupted for companies that needed it, it provided investment matching for companies who could raise private money – the theory being that Government co-investment would de-risk deals for private investors and keep the money flowing. In reality, the Future Fund was predominantly used by VCs to double down on their existing investments, rather than to make new ones – the scheme only really benefited companies that had already secured venture capital funding, excluding the 99 per cent of “true” start-ups that are still pre-VC. While angel investors could in theory participate, the Future Fund’s Convertible Loan Notes (CLNs) were not compatible with the SEIS and EIS vehicles through which the vast majority of them invest, and therefore very few took the plunge.

Foreign investment will always be vital when it comes to supporting the next generation of UK start-ups, and it is only right that the Government continues to encourage it. But there are simple steps that can be made alongside the £1.4bn Global Britain Investment Fund that would open up untapped investment opportunities from within the UK. By making simple changes to the fantastic support schemes already in place, investment from within the UK can work alongside foreign capital and support the Government’s rhetoric about “levelling up”, “building back better” and creating a “science superpower”. If these changes aren’t made, foreign investment might take over British innovation – potentially irreversibly – and that could come at a significant cost to the UK economy in the long run.

Stephen Page is founder and CEO of SFC Capital