Making Seeds Grow
There’s no doubt that the SEIS is being hailed as one of the success stories. Since its introduction in 2012, SEIS has helped some 1,250 businesses - and activity continues to increase. 19 start-up companies per week now benefit from investment under SEIS, each raising an average of £72k. Of course, companies have to pass stringent selection criteria, such as having fewer than 25 employees, less than £200k in assets and been trading for under 2 years. In addition, many activities such as financial services, property or agriculture are excluded, thus focussing more on sectors like tech. In essence for every £2k an SEIS investor places with a company, £1k is returned as reduced income tax liability for the investor and there’s no capital gains tax at all.
Given the high failure rate of tech start-ups, this generous level of tax reduction is needed to make a real difference. Hence a typical reaction to the Budget announcement: “Raising the first round of funding is tough for start-ups – and the risks associated with investing in brand new businesses are high. In order to grow global businesses, entrepreneurs need plenty of funding and support, and today's Budget announcement recognises this.” The only negative reaction is simply that the opportunity to raise the upper investment limit from £150k per investor was not adopted.
So for anywhere looking to grow it’s tech sector, having an SEIS type scheme looks like a no-brainer. In Jersey, half of it is already in place as there’s no capital gains tax anyway. But there’s no incentive to risk money (on which tax has already been paid) unless the potential returns are attractive – and the very high risk nature of start-ups works against such investment. Although there may be an initial tax loss to the Treasury, the close involvement of the investor can make all the difference to a start-up.
This is because, as any start-up knows, money on it’s own is never enough. Finance is only part of a wider need to establish know how, relationships and skills in all sorts of areas. This is what so-called smart money brings and why contestants on the real Dragon’s Den often decide on who they choose based on what else they contribute. It’s also the reason that crowdfunding only really works for businesses that need to connect with general consumers through equity – it brings in money and perhaps clients but not business relationships or expertise. And more than this, there is all the eco system of services and facilities, from connectivity to working space to finance and legals. This is what a real incubator offers.
So the warmth that funding provides – SEIS or otherwise - is essential but you also need space, light, support - and the right atmosphere to grow.