Running any a business is a challenge, running an early-stage business is like climbing a cliff without a rope. Many early-stage businesses are now hanging on by their fingernails and we must ensure that private investors are motivated to support them.
Many of the most innovative early-stage companies – those working on technologies, systems and processes that can have a profound impact on society – are at risk of closing because they are not eligible for the Coronavirus Business Interruption Loan Scheme (CBILS). Banks are ill-equipped to assess equity allocations having neither the infrastructure nor expertise, while most small business are deemed uncreditworthy.
Other government schemes, while they should also be applauded, also fall short of helping thousands of start-up and small businesses. The coronavirus job retention scheme, for instance, prevents people working if furloughed – small companies generally have very few staff – so if staff are furloughed the company is dead anyway. Small companies often have weak balance sheets, providing a few weeks or even just days of free cash flow – there is no resilience.
The chancellor readily admits that the emergency government loan schemes he has implemented in recent weeks leaves around 20 per cent of businesses out in the cold and that he is trying to find ways to help them. We believe we have found a way.
Increase EIS tax relief to 80%
Along with many others, including platforms, funds, companies, business leaders and the Enterprise Investment Scheme Association, we are lobbying the government to immediately increase tax relief for investors who are willing to back recovery and innovation.
At zero immediate cost to the Treasury, I want the government to increase the tax breaks for investing in Enterprise Investment Scheme (EIS) companies from 30 per cent to 80 per cent (this seems an appropriate level because it will motivate investors and reward them for taking the long-term risk to back our most innovative companies). I believe this could raise £2bn for small companies and lay the foundation for entrepreneurs to rebuild the country.
The EIS is a powerful funding system. It provides a regulated, well-managed and proven deployment framework for investment capital to be allocated to our most innovative businesses, which provide employment and growth opportunities throughout the UK. Last year, £1.9bn of capital was injected into more than 4,000 businesses. Studies have shown that for each £1 invested, the government gets £4 back in tax revenue, while nine jobs are created for every £1m investment.
‘Fundraising is down by around 70%, starving many start-ups of vital capital’
This year, it couldn’t be more different. The vast majority of EIS fundraising activity takes place in the weeks leading to the end of the tax year. The coronavirus crisis has come at the point when EIS companies are raising funds and this has had a significant impact. Fundraising is down by around 70 per cent across the industry, starving many start-ups of vital capital.
At Vala, we have had to refocus our strategy on ensuring our existing portfolio of companies remain strong. They have revenues, contracts and funding to help mitigate the situation.
However, we are likely to turn away around a dozen great, new and exciting companies that we hoped to support in April because the capital flow has diminished.
Many hundred other great companies will be left in the cold across the year – and these are the very companies that we need to drive recovery. If government provides the mechanism to kickstart investment, we can deploy capital quickly and carefully to ensure the best start-ups provide employment and continue to innovate.
In times of high volatility and rapidly reducing asset prices, investors and their advisers will naturally wait. This effect is most exaggerated with what are perceived to be more risky asset classes. It is highly unlikely that investor sentiment will turn around any time soon – I suspect that EIS investment levels will not pick up for at least six months. However, it is not the shortage of capital available for investment but the risk appetite of investors.
The increase in EIS tax relief will have two effects: first, it will overcome the fundamental objective that these assets are too risky at this point in time, irrespective of the advantageous tax reliefs. Second, it will release the capital that is being stored up and is not currently being used in the economy.
More than 2,500 people have signed our petition urging the government to make immediate changes to the tax relief offered to private investors who are willing to take the long-term risk to support innovation in the UK. The government has the opportunity to create the foundations for economic recovery through one simple amendment to its own small company investment incentives – the EIS.
Entrepreneurs are key to economic recovery during and post coronavirus. We need their vision and determination, their stubbornness – and the learning both their failures and successes have created. They are used to managing crisis on a daily basis. It’s in their DNA. With the right government support, entrepreneurs can act as the cornerstone of rebuilding our nation. They can help pioneer new approaches to medicine, to communication, to work and play and help us make sense of the new world.
Jasper Smith is the founder of Vala Capital