British start-ups are being urged to think twice before accepting checks from investors lured by tax breaks, after new analysis revealed that companies relying on the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are failing to scale.
Antler, a Singapore-headquartered pre-stage venture capital firm, compiled statistics on more than 40,000 UK funding rounds over the past decade and concluded that the schemes, long held up by successive chancellors as the crown jewels of British finance, are backfiring.
Only 12 percent of all UK companies raise follow-on funding after their first round, according to Antler research. For those supported exclusively by EIS or SEIS funding, the picture is even bleaker: just 3.7 per cent went on to secure further investment.
Adam French, a partner at Antler and a familiar face in the British venture scene, did not mince his words. He argued that these programs prioritize “quantity over quality” and fail to provide founders with the critical funding they need to grow into the kind of truly mobile businesses they are.
“If you were an investor in a SEIS fund, you're very happy that you're going to get 30 to 50 per cent of your investment back as a tax benefit on your tax return, and you don't really care about the outcome of the business you're investing in,” said Mr French.
The difference with conventionally based startups is stark. When a company found at least one institutional or angel investor active in its opening round, the ongoing share of capital raising increased to 25.7 percent, nearly seven times the amount seen by the tax collection alone.
“The only way to do good business is to find companies that continue to be traders, and tax credits don't have that mandate,” added Mr French. “They're not looking to take unusual risks because that's what you have to do to make a lot of money.”
SEIS was launched in 2012 by former chancellor George Osborne to improve the flow of capital to Britain's emerging industries, building on the old EIS, which dates back to 1994. Both offer substantial assistance designed to compensate investors for the high risk of financing uninsured businesses.
Under current rules, investors can spend up to £1 million in a tax year, rising to £2 million for so-called knowledge-intensive companies that invest resources in research and development. Hold the shares for at least two years and any losses may be offset against income tax, a provision that, in effect, allows the Ministry of Finance to write off most of the depreciation.
For more than a decade these initiatives have pumped billions of pounds into Britain's creative economy, and have many defenders in Whitehall and the City. But Antler's findings will spark a long-running debate about whether tax-led investment is really building Britain's next generation, or just creating a small industry of tax-free inward portfolios.
Antler's analysis found that companies that raise $1 million or more in their opening round are likely to attract more backing, suggesting that check size remains a meaningful indicator. But Mr French stressed that the quality of the investor at the cap table was more important than the headline figure.
His message to the founders is clear. “My advice to founders is to make sure that you are very selective about who you take money from,” he said. “Don't look for the first capital that sits on your desk, make sure you look for the right money.”
For Britain's army of budding entrepreneurs, the warning comes at a critical time. With corporate funding still well below the 2021 peak and spending costs high across the board, the temptation to take any money on offer is rarely great. Antler's data suggests that succumbing to that temptation can be a sure path to the end.
