Written evidence submitted by Roliscon Ltd
I write as someone who is an active stock market investor including in Venture Capital Trusts and have historically been a director of several start-up and early-stage companies that have benefited from EIS schemes.
My comments are as follows:
The venture capital market is certainly a lot healthier than it was ten or twenty years ago. It is now relatively easy for early-stage companies to get finance if they have a sound business proposition.
You can see this from the growth in the funding raised by Venture Capital Trusts (VCTs) which according to the AIC raised £1.13bn in the tax year to 5 April 2022. Venture Capital Trusts have been very successful in supporting the growth of early-stage companies many of which have subsequently listed on AIM.
VCTs have been able to raise these funds from private investors because of the attractive tax benefits they provide. The risks associated with VCTs (and the companies in which they invest) are substantial however and without the tax benefits they would not prove attractive to private investors. The last set of changes to the rules for VCT investment have increased the risks and it has yet to be shown what the long-term impact of those changes will be so I suggest that changing the rules or amending the tax reliefs to investors should not be considered until the impact is clearer.
As regards the EIS and SEIS schemes I feel that the tax benefits are so high that they encourage investment in projects that are not likely to be commercial successes. They also affect the valuation of early-stage companies in general, i.e. make the values higher than they should be. It is not in the long-term interests of the venture capital sector to have valuations put on companies that are shown in retrospect to be excessive.
As regards the merits of strengthening the venture capital industry you mention four areas for comment:
As regards international best practice, I have some experience of the USA business environment and there is a big difference there in the availability of staff with sales and marketing experience in comparison with the UK. Those are the essential skills in early-stage companies. There is also more willingness for staff to move location with low-cost rental accommodation readily available unlike the UK. It’s all the little things in the business environment that makes the difference. But the UK is much better than most other countries in the rest of Europe.
The major difference in the USA is a large homogenous market which makes it easier for start-up companies to succeed.