Amid a backdrop of global uncertainty, the UK’s venture capital industry is having to confront its own set of existential challenges.
The uncertain future of the Enterprise Investment Scheme (EIS) has been causing a great deal of concern for entrepreneurs and investors alike. The Treasury Committee’s Venture Capital report, published in June 2023, called on the Treasury to extend the current sunset clause for the EIS and VCTs beyond April 2025. But while the Treasury confirmed this extension in its October response, no other details or formal extension date have been provided. The Treasury’s confirmation merely said it “recognises the need to provide certainty to founders and investors and will provide further details on the schemes beyond 2025 at a future fiscal event”.
For many, that was not the full-throated and unequivocal reassurance they had been hoping for. Without a timeline for those further details, discussion of proposed changes to the EIS, or even a clear expression of the scheme’s viability beyond that date, is this extension a reliable indicator of longer term Government support, or merely a stay of execution? It’s an important question, because continued concerns over the future of the EIS, and the potential repercussions of enacting the EIS sunset clause, are profound. Discontinuing the scheme, introduced in 1994, would affect thousands of small businesses across the UK. Furthermore, a significant 90% of investors who have invested via the EIS have expressed concern that its discontinuation would dramatically shift their strategy away from high-risk start-ups.1 We hope the Chancellor uses his Autumn Statement to confirm a long term extension to the Scheme, and details of any amendments.
Adding to this complexity is the impending General Election, which must take place before January 2025. This only helps to underscore the urgent demand for planning and policy clarity, particularly with regards to the EIS, but also for other key investment areas too. For example, the Alternative Investment Market (AIM) has been the subject of considerable speculation regarding talk of scrapping inheritance tax, and the potential impact this would have on companies listed on AIM that qualify for Business Relief.
Lack of venture capital diversity and regional disparity
It was unsurprising that venture capital firms, most of which are based in London, came under fire from the Committee’s report and were singled out for focusing their investments too heavily on London and the South East of England. While the Treasury has made clear its belief that “a diverse and inclusive business ecosystem is good for customers, entrepreneurs, businesses, and investors”, there are still stark regional disparities in UK venture capital investment, with a dominant focus on the London-Oxford-Cambridge triangle.
An overwhelming 59% of investment is concentrated in that South East triangle1, side-lining other regions in terms of financing and growth opportunities. While Scotland captures about 12% of total investment, most other regions, including South West England, only account for 3-7% each. The danger is that high-potential businesses in these areas find themselves overlooked and ultimately starved of the funding and support they need. As Treasury Committee Chair Harriett Baldwin MP noted in the report: “We heard that firms outside London tend to take longer to get established, which means they are disproportionately penalised by the upper age limits of businesses that can benefit from investment supported by the EIS and VCT schemes.”
In March, the Government announced plans to increase public investment in science, research and innovation of up to £22 billion by 2024, talking about ambitions for the UK to become a science and tech superpower. The latent potential within our science, tech, and innovation sectors, and not just in the ‘triangle’, needs to be unlocked, now more than ever, and venture capital has the means to do just that – provided it is given the firm backing of government.
Whilst it might not seem like it, given the wider cost of living crisis and grim economic forecasts, now is a great time to consider investing in early-stage innovative, venture capital backed businesses. One such example in Blackfinch’s portfolio is Tended, a Lincolnshire-based company founded in 2017 that has been winning plaudits across the world. Tended designs intelligent personal safety wearables and monitoring systems. These wearables combine ‘geofencing’ technology with behavioural science to ensure on-site workers are kept out of harm’s way. The company saw considerable success during the pandemic with a reliable social distancing product, and it now utilises this centimetre-accuracy positioning technology to help keep workers on construction sites and around railway tracks within safe zones, without crossing a ‘virtual fence’ into potential danger. In October, Tended was named in Time Magazine’s ‘Best Inventions of 2023’ list, a considerable achievement, matched only by its recent announcement of a new contract with the European Space Agency.
Tended is living proof that venture capital helps outstanding companies thrive, wherever they are. But companies like Tended, their backers and their customers, need clarity and certainty, and if we want more firms like Tended to succeed globally, so does the rest of the UK.
The global economic situation may look unpromising, but it doesn’t affect the long-term macro trends that are accelerating the most innovative business ideas. Firstly, venture capital is distinct from other asset classes in being less closely aligned to economic trends.
Secondly, the world will continue to face huge problems and challenges, and we believe technology remains the best solution to tackle these. Whether it’s building more sustainable energy networks or delivering better, more efficient technology services, entrepreneurs and start-ups are at the forefront of solving these challenges in their pursuit of building a better world – and world-leading companies.
Thirdly, it’s important to remember that economic downturns have, in the past, been times of immense creativity and innovation as founders are forced to focus on the real problems facing the world, and the most urgent needs in a capital efficient manner.
Tough economic conditions act as a huge motivator and, for the best entrepreneurs, the ability to absorb risk and thrive is what differentiates them from the competition. In turn, this works to an investor’s advantage by instilling greater resilience in founding teams.
So, despite the economic headwinds, there are opportunities for those entrepreneurs and, in turn investors, ready to take them. Those that do will have an outsized impact when the economy fires back to life, as it always does following a downturn.
– Mark Brownridge, Strategic Director at Blackfinch Group
Mark has over 25 years’ experience in Financial services, most recently as Director General of the Enterprise Investment Scheme (EIS) Association. Previous to that, he spent 10 years as Head of Research and Development at Mazars, a leading UK financial planning firm. Mark is a Certified Financial Planner, Chartered Financial Planner, Chartered Wealth Manager and Fellow of the Personal Finance Society and previously sat on the Chartered Institute of Securities and Investments Accredited firms committee and TISA’s Distribution Policy Council.
1 UK Business Angels Association (VCM0037) https://committees.parliament.uk/writtenevidence/109214/html/ para 3.2