TALKING POINTS

Why now is the time to act

• VCs are reporting fundraising in the past month as being down anywhere from 65% to 80% from this time last year. Financial Planners are suggesting similar falls in alternative investment activity from clients. Investors are understandably nervous at such an uncertain time and are putting their investment decisions on hold. Fundraising effectively is therefore mothballed.
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• The domino effect is VCs and Angel groups are rapidly having to lower allocations or suspend entirely follow on and first round funding to companies who were seeking cash before COVID19 struck but who are now desperate and facing an existential crisis. As a result, they face making crippling decisions e.g. laying people off, shutting down etc simply because of the wider macro situation. Companies who are mismanaged, don’t have a product market etc should be allowed to fail. Few of the companies currently failing fall into this category. They are failing because the market is currently failing. Through no fault of their own, a generation of high potential, high growth businesses are being lost.
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• The Government has so far not addressed the needs of startup and scaleup businesses (who employ 60% of the UK’s workforce). The British Business Banks CBILS scheme whilst available to EIS and SEIS funded companies is a complementary solution, but certainly not a solution in its own right. Many startups are pre or early stage revenue and cannot afford to repay debt now or further down the line.Businesses who have so far attempted to access the scheme report that unscrupulous banks are asking for personal guarantees which is unpalatable or are being turned away almost immediately. These companies need intervention focused on their short-term funding needs – EIS/SEIS can deliver and deliver quickly.
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• Response to our SME fundraising survey has been both staggering and worrying with over150 responses in 24 hours. Initial results show:
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  • 68% of businesses say the virus has affected their fundraising “a great deal”.
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  • 47% say they feel they will raise less than 20% of the amount they targeted.
  
  • 46% say without funding they will only survive for 3 months.
  
  • 57% say relaxation of EIS rules would lead to a rise in equity funding available to them.
  
  • 42% say without equity funding they have no alternative funding option (just 12% would be applying for a CBILS loan).
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• A temporary, short term increase to income tax relief can relieve the situation. An increased incentive can assuage investors nervousness at this time. The availability of income tax relief has been identified as the key driver in encouraging greater investment into EIS and the level of relief has always been closely correlated to the amount of investment raised as HMRC’s statistics have shown us over the years. We believe an income tax rate relief of 60% is sufficient to incentivise investors to turn on the funding taps again without asking the Government to make too onerous a commitment.
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• 60% income tax relief is a huge tax relief and incentive for HNWIs and wealthy individuals. Whilst the relief would largely benefit groups who arguably do not need more tax reliefs, this is an opportunity for them to support the UK economy in a time of crisis. They can give something back to entrepreneurial, early stage businesses and gain a feeling of having made a positive contribution at a time when so many people feel helpless. Their capital investment is still very much at risk even with such a generous tax relief. The opportunity cost is that the Government is forced to borrow more to support startups at, in all likelihood, a greater cost than the tax relief they will need to pay. Better, however, to allow private individuals to bear the cost of initial investment.
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• We also believe the Government should consider a Government funding programme run through BBB either on a matched funding basis or by allocating funds to EIS managers to invest in identified companies – the advantage here is speed of deployment as EIS fund managers have pre identified companies ready to invest into but because of the decimated private investor fundraising environment don’t have the money to do so. It would sit nicely alongside CBILS for firms that require equity and don’t qualify for debt funding. As an indicator we have just surveyed over 250 SMEs and only 10% said they would be applying for CBILS even though 65% said without fundraising they wouldn’t survive the next 6 months.
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• EIS is a scheme that is already in place so the new rate of relief can be put into operation very quickly. No need to build anything from scratch. A quick win. Jobs can be saved immediately. As Boris would say, it’s “oven ready”.
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• Through a crisis comes opportunity. EIS is focused on developing high growth, innovative, technology based firms. By seed investing in these firms the UK can steal a march on Europe and catch up with the States and fund these firms for the future for the betterment of the UK economy.
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