~strategy~
‘T
here is a relationship between entrepreneurialism and the emergence [of an economy]
out of recession. Quite simply there is usually an increase in start-up businesses’ – so says David Mellor, head of national corporate business at accountancy firm Crowe Clark Whitehill. And judging by the various enterprising initiatives and amendments introduced by George Osborne in his brief time at Number 11, he most decidedly concurs with Mellor’s sentiments. In the first 15 months of the coalition
government there have been a raft of changes to Venture Capital Trust (VCT) legislation, amendments to the Enterprise Investment Scheme (EIS), regional rejuvenation plans, research and development inducements and other business measures.
vCts revisited
Chilton Taylor, Baker Tilly’s head of capital markets, observes that businesses have largely welcomed the budget changes to VCTs (for details, see box, page 24). He argues that the previous restrictions on employee numbers and assets meant that only very small companies could utilise VCTs and acknowledges that, ‘At the moment, VCTs are a vital source of funds for [smaller] companies on the market.’ However, Taylor recognises that this has
caused problems for other smaller fish in the SME pond. ‘With VCTs becoming one of the few active players in the market, and with no- one else investing, they’re able to invest in less risky opportunities. This leaves early-stage companies finding it difficult to raise funds’.
attraCting investMent
March saw the government also re-invigorate EIS. The changes announced in the Budget have seen the rate of income tax relief given under EIS increase from 20 per cent to 30 per cent, matching the current tax relief for VCT
investment (for details of both, see box, page 24). John Cheney is founder of Workbooks,
a company that provides online customer relationship management and business applications to small and medium-sized enterprises (SMEs). He says, ‘When the government raised the rate of income tax relief in March, it made it even more attractive for people to invest in businesses like ours. ‘We’d never qualify for a bank loan and so
any way you can fund high-growth, capital intensive businesses needs these routes because the venture capital market has been a lot quieter over the last few years.’ To date, Workbooks has raised £5.4 million
in two funding rounds. Some £1.4 million of that was secured in July this year but Cheney acknowledges that investors become more risk-averse in a recession, despite the government’s efforts to stimulate investment in small, often high-risk, start-ups. He adds, ‘We are lucky in the sense that we
have run businesses in the past and have a network of people that we can turn to for investment. But if you were starting out without that network today, it would be very hard to find people willing to invest.’
Motivational Measures
PneumaCare co-founder and CEO Ward Hills agrees that EIS is a ‘huge motivation’ for angel investors. The business, which has created and developed a medical device that uses 3D imaging to measure lung function, has so far secured £2.5 million of financing, of which £400,000 was raised through EIS. ‘The first two investments were primarily
for technology demonstration and prototype development. The most recent investment is to build our commercial team,’ he explains. Hills says that having access to the right
resources and funding has accelerated the company’s growth significantly in just over two years, given that medical devices generally take longer to get to market.
However, Hills also believes there is a
funding gap when it comes to raising seed finance in the UK. ‘There is an unknown where the capital required is larger than individual investors can easily provide but too small for an institutional investor,’ he adds.
seeds of growth
Mellor points out that a new stand-alone scheme, called the Business Angel Seed Investment Scheme (BASIS), aims to plug the equity gap between £250,000 and £2 million. Published in July as a consultation document, the consultation period comes to a close on 28 September. Information published by HM Treasury
regarding BASIS warns that it could bring ‘additional complexity’ to the tax system. But ‘provided the administration is not too onerous’, Mellor believes the scheme would work for start-up businesses. ‘The complaint that’s often been levelled at
EIS is that while it’s welcome, it places a lot of bureaucracy on the small business that has to comply with the record-keeping,’ he continues. ‘Bureaucracy is a challenge but I think it’s
a fair challenge – if you want a tax break to stimulate a particular part of the economy, the more focused it has to be.’ However, Simon Loopuit, CEO of VoxGen,
which develops self-service automation technology for phones, says complex schemes deter private sector support. Loopuit has been on both sides of the
funding fence, having been an investment banker prior to founding VoxGen. He admits that his years of experience in investment banking gave him a perspective not afforded to many business owners. ‘It helped me enormously to understand what the drivers are for investors and to be able to look at my business through the eyes of an external investor, which is extremely important. ‘Before you raise money, you have to invest quite a lot to put in place the right structure.
business xl 23
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