In this month’s Leap 100 poll, we asked our Leap 100 companies about the Treasury’s consultation, “Financing growth in innovative firms”.
Ahead of the November Budget, the Treasury is asking why, when the UK has such a great track record in starting innovative businesses, we arguably grow so few to scale. It identifies the principal issue as a lack of “patient”, or longer term, capital, and proposes a new National Fund.
However, the Treasury appears to be weighing the relative merits of funding this against the incentives provided by current tax reliefs.
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What is the evidence for a patient capital gap? The Treasury cites studies which show that we under-perform in growing businesses to scale compared to the US: not only do we grow fewer “unicorn” firms (those that reach a US$1bn valuation), but UK companies also undertake fewer funding rounds and raise less capital on average.
The Leap company poll results support this: 76 per cent agreed that UK firms lack the long term finance they need to scale up.
The Treasury also points out that, while there are some positive examples of patient capital investment (e.g. by family offices, charities, and new listed patient capital funds), it is not enough.
The proposed solution for a new National Fund is welcome. Although not designed to be a long term measure, it would allocate public funds through the British Business Bank for investment alongside the private sector, with a view to kick-starting a new patient capital culture.
However, the Treasury is also consulting on how far to keep current tax reliefs, including EIS, SEIS, VCTs, Entrepreneurs’ and Investors’ reliefs.
It outlines a working assumption that the reliefs are relatively costly, do not reward longer term investment, and are not directed to the businesses with most need.
Yet in the poll, 90 per cent of our high-growth company respondents said the reliefs were valuable in attracting investment.
There is a paradox here: these reliefs were never designed to reward long term investment, but to incentivise entrepreneurs and investors involved with early-stage businesses by providing some means of mitigating the (considerable) risks they take.
Indeed, they appear to be successful in creating the very innovative companies we now want to grow to the next stage while not harming opportunity for later stage investment. It would be of concern if cutting back these reliefs squashed the very entrepreneurial ecosystem we have been so successful in creating.
A further paradox arises in the consultation’s focus on businesses remaining independent. The Treasury should arguably not ignore the benefits of other options, such as a strategic sale or joint venture – these can also be successful in helping a business owner continue to grow a business.
Seeking to address the patient capital funding gap is an extremely positive and welcome step.
However, businesses will continue to need to draw on a range of funding options for differing reasons and at different stages, and care will be needed to maintain those.
All eyes on the November Budget….
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