The Seed Enterprise Investment Scheme has the potential to help start-up businesses – so why is it being criticised when it is itself just a start-up, asks George Whitehead of Octopus Investments
ON 6 APRIL 2012 a new scheme was launched, offering generous incentives for investors backing start-ups, including 50 per cent income tax relief on investments of up to £100,000. The Seed Enterprise Investment Scheme (SEIS) set out to incentivise investors to back British start-ups – after all, such companies are often quoted as the ‘bedrock of our economy’.
Yet here we are, just three months later, and investors are already jumping to denounce the scheme, arguing that the investment limits are too small and that the taxman is ready to go to battle over the incentives.
The reality is that it’s far too early to start belittling the whole SEIS concept. After all, anyone who has done the maths will see the logic that SEIS makes for an extremely attractive investment proposition. If the stars align for an investor, with the right investor for the right company, then win or lose, there is a profit to be made – even if the company completely fails. Furthermore, if the company is really successful then there is no capital gains tax to pay on the up side. Clearly with this level of incentive there is still a lot to play for.
What people perhaps fail to realise is that there are other factors to take into consideration – nothing in life is that simple. For one thing, backing a start-up is an emotional rollercoaster and most investors will want to be sure of a strong return and real prospects before investing their money, time and effort into a project. SEIS investments –almost by definition – tend to be at a stage where there are numerous unknowns and the risks are stacked up.
Another important point of consideration is that it is true that for the vast majority of ambitious, genuinely disruptive businesses, where equity investment (rather than debt) is suitable, a £150,000 investment will not get them far. What’s more, many of the brightest entrepreneurs don’t want to dilute their shareholdings at the seed round and will instead bootstrap their way to a point where they can raise a more substantial round of funding at a better valuation so for SEIS to be really valuable the stars have to be aligned for the company and not just the investor.
THE SEIS INITIATIVE is, however, aimed at helping the entrepreneurs move from a ‘light bulb moment’ to the formation of an early stage business, and as such will be ideal for some companies who need that initial finance boost. What’s more, it would be foolish to ignore the great impact SEIS and other such initiatives have had on raising the profile of angel investing. SEIS has opened up the possibility of investing in start-ups to a whole range of people initially driven by the tax breaks to consider becoming more active angels.
For many the headline figures of SEIS have acted as the honey pot to attract investors who might then learn about the extraordinary benefits for EIS – something that opens up a whole range of really interesting businesses ideally suited to angel investors. It is important therefore that SEIS is seen in the wider context of the growing angel investment ecosystem in the UK and in that respect its ability to shine a light on the benefits of angel investing made it a success at its launch.
The fact of the matter is that young, fast growing businesses, such as those which SEIS was designed to help, face a multitude of challenges and it is tough for the stars to align for both the investors and entrepreneurs to make SEIS really work. It is, however, early days and in the meantime the profile it has generated has provided – forgive the pun – a halo effect for the rest of the angel market.
George Whitehead is venture partner manager at Octopus Investments