Sarah Barber, Chief Executive Officer at Jenson Funding Partners
It’s a welcomed move that the Chancellor has extended the EIS sunset clause until 2035, providing a boost to entrepreneurs seeking funding and nurturing the growth of the UK start-up ecosystem. Combined with the earlier 2023 increases in SEIS investment limits, this development heralds an exciting era for early-stage businesses, reflecting the government’s commitment to investing in the early stages to fortify the UK economy. However, despite these positive changes, questions linger about the investor appetite for early-stage investments.
Defining Early-Stage Businesses:
When we refer to early-stage businesses, it’s not merely about hitting the £1 million revenue mark. Instead, it encompasses the crucial period before that, where businesses are striving to launch their products or services. Unfortunately, there’s a noticeable void in early-stage investing at the pre-seed/seed stage in the UK. Comparing the number of open Seed EIS Funds to EIS funds reveals a significant disparity, with roughly 7 individual SEIS funds against approximately 60 open EIS funds. While some of this gap is filled by Angel investors, the challenge for startups lies in navigating the complex funding landscape.
The Equity Gap Challenge:
Most EIS/VCT funds in the market tend to invest at later stages, leaving a substantial equity gap for pre-seed/seed stage companies to grapple with when seeking follow-on funding. If these early-stage companies can’t bridge this gap, there’s a risk of fewer companies available for investment at the later EIS/VCT stage. Bridging this divide is imperative to ensure a continuous pipeline of deal flow for later-stage investment.
Risk and Tax Efficiencies:
Investing at an early stage inherently carries higher risk. However, the tax efficiencies of SEIS aim to mitigate some of that risk for investors. A study by Octopus Investments revealed a perception gap, with only 17% of advisers believing their clients are interested in early-stage investments, while 45% of investors express interest. The challenge is to bridge this gap in knowledge within the Adviser/HNW Investor community to encourage tax-efficient cash flow into early-stage ventures.
Consumer Duty Rules and Investor Awareness:
The introduction of new Consumer Duty rules is a positive step for investor protection, but there’s a question of awareness within the investor community. Waiting 24 hours to continue an investment journey might make some first-time investors question their choices. Advisers play a crucial role in educating investors about these rules, emphasizing the importance of making informed decisions and conducting thorough research before investing. A focus on experienced managers with a proven track record, longevity in the space, a robust deal flow, and quick deployment of clients’ cash can serve as an enabler for investors with the appetite to invest at an early stage.
In summary, while the extension of the EIS sunset clause offers a promising landscape for early-stage businesses, bridging the equity gap, addressing perception gaps, and navigating new regulatory landscapes are vital to ensuring a thriving ecosystem of early-stage investments in the UK.