Access to finance or the honey pot in this case is the second fundamental area that needs to be improved for startups to flourish.
Tier 1 Investor VISA grants the right for any foreign national to live and work in the UK if they qualify an amount of capital equal to £2m or more to be invested in the UK. This grant disqualifies government bonds and property investments.
Reforming this is to direct ore capital into startups. The recommendation that The Entrepreneur network & COADEC makes suggests lowing the limit. They suggest reducing the qualifying threshold for these investors if investing in particularly high-risk ventures. Ventures that would typically qualify for EIS/SEIS , whilst maintaining the old threshold for low-risk investments.
Another suggestion to improve the overall efficiency and impact of this reform is to also remove additional barriers to risk capital. There is a requirement to top up an investment if the value declines. Due to startups being highly volatile this can make it exponentially expensive moving investors to low-risk investments.
“Speak to most founders and you’ll consistently hear feedback that without SEIS and EIS relief, they may not have been able to get their businesses off the ground.”
Emma Sinclair – Co-Founder of EnterpriseAlumni
Another hot pick is advance assurance for EIS SEIS (Enterprise investments scheme and seed enterprise investments scheme). This scheme is very popular with startups however the system needs to be better optimised for our evolving economy. This scheme basically de-risk investments in early businesses by providing tax relief incentives. EIS & SEIS raised a total exceeding £2bn helping 6,000 startups. 58% of angel investors said they would not have invested at all, if the reliefs were not available.
Streamlining the process would play a large role in its impact. An application is meant to take 15 working days however this often last more than three times the duration. Baring in mind that startups need access swiftly to enable them to take advantage of an opportunity. Creating a standardised EIS/ESIS pre-approved Shareholders’ Agreements and Articles of Association to reduce the time required. Low-risk applications could also be outsourced to accredited independent advisers.
There is a requirement for investors to be identified in applications for advanced reassurance, this is to prevent “speculative applications” this makes sense until applied practically. This process has consequentially created a situation where startups need advance assurance to attract investors (tax-relief incentives) but can’t get advance assurance without an investor to be identified on the application process.
Unleash pension fund capital!
Unleash pension fund capital! As a startup we would prefer to seek finance within our country however, the capital is not available and easier to source from abroad. Venture capitalists completed £63.7bn of deals in the US and only £5.8bn in the UK in 2017.
The government has spent several years working out how they can release some of the capital held in a Defined Contribution scheme. In doing so we can mirror the same levels of capital invested in other countries like the US. 98% of capital funding comes from institutions. Outside of the UK this stands at 55%. If we increase the liquidity of the pension funds then we can drastically increase our invested venture capital in the country.
Currently UK DC schemes are expected to exceed £1 trillion by 2029. 5% of that equates to £50bn funding used for startups. This would put us over £55.8bn invested in the UK on venture capital deals. By doing this we actually strengthen the performance of these schemes and offers protection in these retirement savings.
These funds are currently restricted from investing in startups through VCs because of a statutory 0.75% cap on annual fees. VC fees are considerably higher than passive asset classes as management is more intensive for VC investments. If the threshold is adjusted to take into consideration performance fees for managing such investments then that capital can be unleashed.
Research carried out finds that such a change could lead to the retirement savings for an average 22-year old could be increased by as much as 7-12%. This means that the general public can benefit increasingly from the performance of quickly growing startups in the UK economy.
Of course our government provides assistance for our startups to grow. They do this by providing patient capital via the British Business Bank. The bank uses two schemes: British Patient Capital (BPC), and Enterprises Capital Funds (ECF).
Although the two schemes are meant to differ based on scale of the fund awarded and duration to approval and type of investment they in practice don’t particularly differ. both schemes primarily support funds larger than £30m which doesn’t aid new managers or investment diversification.
So how to improve this? What they suggest improving the diversity and the value brought to the VC market. More backing for genuine fund managers that are encouraged to offer training to new emerging managers. These emerging managers could attained funds of £5m+ through the ECF suggested change whilst getting the supported needed.
For true long-term growth to occur the British Business Bank should attempt to remain fairly independent from central government. Why you may ask, well my answer to you is look at Brexit. A few years of complete uncertainty that has led to not a lot of changes happening although being called for. It’s important for the investments of many people to be protected from political whims that can cause disruptions in our lives.
“HMRC’s new advance assurance process has placed fledgling companies in a catch 22 scenario, as it requires applicants to have already identified their prospective investors. This risks locking out many enterpreneurs looking to raise capital for the first time, who want advance assurance before they go out to the market seeking funding that they will qualify.”
Emma Sinclair – Co-Founder of EnterpriseAlumni
The UK is lagging behind in R&D expenditure when compared to other countries we only ranked 11th in the EU. Believe it or not but with the current GDP growth in R&D we will not hit our 2027 target until 2053 which is a 2.4% of GDP to be spent on R&D in the UK.
You should believe this quite easily which is that the tech sector is growing 1.5 times faster than the rest of our economy. However, they are being denied their R&D tax rebates in critical innovative systems.
This is due to how the criteria for qualifying these rebates are calculated, for example data imperative to any company, is not deemed consumable in the R&D process. Therefore the cost of acquiring data sets to appropriately understand the process is not valued in the eyes of HMRC. The use of cloud providers also hinders the efficiency of R&D tax credits by being void when taken into consideration.
80% of startups undertake vast amounts of user interface (UI) and user experience (UX) research. This is to delve into how well the front end of their product/service works. However, the cost this incurs is not fully claimed due to the outdated model that R&D tax credits work on. Fresh startups find it to be critical to invest in innovative solutions to be able to compete with large competitors. However, with the costs not being claimable or fully claimable it hinders their ability to adapt to fierce market.
The attempt to professionalise Innovate UK grants has led to it becoming increasingly bureacratic and managerial. As a result, innovative firms are less likely to apply for funding via these grants due to length of time and cost of applying and the level of reporting necessary for them.
It has been highlighted that these research grants aren’t well targeted and many good projects fail approval. Inevitably this system separates bad from good but also the good from the good in some cases.
The next step forward would be to simplify the system and improve it’s targeting to ensure no good ventures fall through the cracks. One suggestions is to pilot a lottery-based funding system, where applications passing a certain threshold and automatically entered. This mitigates the risk of market failure where VCs have decided not to support the venture. This means that exceptionally unique firms have a second roll of the dice to approve their application for funding.
“To develop an effect regional startup strategy, the next government should look at developing the networks and infrastructure that is required to share transferable best practice between tech clusters.”
David Dunn – Chairperson of UK Tech Cluster Group.
Without a doubt a coherent regional startup strategy would have a beneficially massive impact on our economy. The requirements of startups in different regions of the UK differ massively. Unfortunately the government tends to take a one size fits all approach which rarely works or breaks down. Another point to be made is that obviously the investment landscape differs across the country. Manchester investments would be substantially different to those further down south.
To counter this we can build a national network of support for startups to tap into innovative VC funds whilst creating diversified clusters locally/regionally. Hopefully this would improve confidence in these areas for releasing funds from VC managers that primarily invest in London. There is a drag between investments schemes and local support. These systems should be intrinsically linked to provide a more streamlined support network that is cooperative.
The regional startup strategy must take into account the root causes of many of the variables that play a role in UK business success. There needs to be a clear understanding of these elements with research backing it to ensure it is executed effectively.
Thank you for reading and keep those eyes peeled for my next article!https://www.linkedin.com/embeds/publishingEmbed.html?articleId=8414889958328430284