Written evidence submitted by SFC Capital
The Treasury Committee’s inquiry into the UK’s Venture Capital industry can become the catalyst for growth that Britain’s Startup community so desperately needs.
The Government will soon make decisions related to the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) that will either enable new waves of private investment for Startups, or sink the massive progress made in recent years to develop our world-leading Startup ecosystem.
Britain cannot afford the latter. The recent report by Beauhurst and SFC Capital, Seeding to Succeed: The Seed Stage of the Ecosystem, highlighted a detachment in our venture funding ecosystem. Notwithstanding anticipated challenges ahead, between 2020-2021 the later-stage funding market doubled the number of investment deals worth more than £1 million. Conversely, the early-stage funding market has plateaued at best, recording just a 1.2% increase in deals over the same period.
This pressure on our early-stage funding market was growing before covid, however, and long before rising inflation began compounding problems for Startups and Investors alike. The UK recorded 14 per cent fewer first-time seed stage deals in 2021 compared to 2015.
The SEIS and EIS (S/EIS) schemes have historically played a critical role as drivers of Britain’s world-leading Startup ecosystem. They are also responsible for building resilience into our small business economy. More than 30,000 businesses have received investment through the EIS with approximately £24bn raised from 1.9m individual investments. This would not have happened otherwise. Equally, the creation of the SEIS in 2012 helped to level the playing field for aspiring founders from different socio-economic groups. It lowered the barriers to capital for everyone, regardless of background, and challenged the inherently unfair ‘Friends and Family’ round which gives those from wealthier backgrounds a natural advantage.
The S/EIS can, and should, be key parts of a thriving UK Startup ecosystem. But they have become outdated and unable to fulfil their potential for UK Startups and UK plc more generally. Reform is needed to reinvigorate early-stage funding by making the S/EIS work better for Startups and Investors.
When taking evidence for this inquiry, I encourage you to draw insight from Pre-Seed and Seed voices as much as you do Venture Capital and Private Equity. At SFC Capital, we work with Startups at every stage of the UK’s seed funding ecosystem. Our S/EIS funds and angel investor network have been recognised as market leaders over the past decade and we are known as the UK’s most active investor. During your considerations, I would be delighted to share more of this experience and insight with you to help raise the voice of the early stages.
The £150,000 funding cap applied to businesses under the SEIS was designed for a time when that amount would generally provide enough runway for a new Startup to launch and sustain themselves for about a year. £150,000 will last a new business only a few months today. Regrettably, the SEIS, which has been the source of so much innovation during the past decade, is no longer fulfilling its original commitment to Startups.
By limiting the amount to just a few months runway, many companies are left at the starting post without adequate funding. I urge your inquiry to recommend swift action to reinvigorate our pre-seed and seed stage Startup ecosystem by doubling the SEIS funding cap from £150,000 to £300,000.
The EIS ‘sunset clause’ means that the EIS must officially be renewed by April 2025 or else cease to exist. In reality, though, that deadline is this year. Investors are already shying away from making EIS investments because there is no guarantee that an investment made today will still qualify under the scheme in three years' time (April 2025). You will understand the impact this has on investor confidence, especially at the riskier seed stages, and why the flow of capital is therefore being restricted.
Now no longer members of the European Union, and therefore no longer bound by a sunset clause requirement, I urge your inquiry to recommend the Government secures a Brexit dividend by confirming the permanency of the EIS.
The future success of Britain’s Startup ecosystem could depend on the outcome of this review. I wish you good luck as you take on this vitally important work and appreciate your consideration of this evidence from the front-line.