I WAS disappointed to read the criticism the finance industry levied at the new Seed Enterprise Investment Scheme (SEIS). For example, an article in this paper concluded: “The SEIS is a gimmick and will not be particularly fruitful for investors or the economy.”
The critics highlight the risk of investing in start-ups. Of course, the risks are high, but to focus only on their existence, and not on who could take them and how they could manage them, misses the point. Equally, to consider risks and returns only in the economic sense overlooks the key motivation for many seed investors.
The SEIS will allow individuals to earn up to 78 per cent tax relief on investments of up to £100k in start-up companies. The start-up sector is in particular need of an immediate boost. There is no well developed market for seed capital in the UK. Those who control the capital markets have little experience in assessing early-stage start-up opportunities. On the contrary, the US does have a more developed market, which is part of the reason huge growth companies like Google, EBay and Facebook all emanate from there. Clearly, such cases create huge benefit for their economies.
A well developed seed capital market cannot develop overnight, nor is that what the SEIS intends. That must be a medium-term objective. The SEIS intends to create immediate impact by stimulating today’s seed investors – namely, friends and family and seasoned business people.
Commentators on seed investing often lump friends and family in with “fools”. Yet there is sound logic behind why they can make good investors. If you ask most venture capital firms, they will cite the number one thing they consider in an investment is the team behind it. No one knows them like their friends and family, and nothing will motivate an entrepreneur like delivering a return for them. Equally, nothing scares entrepreneurs like losing their friends’ and families’ money, which often puts them off asking for it. The SEIS changes that by dramatically reducing the capital at risk.
Seasoned business people, on the other hand, are perhaps most capable of assessing the virtues of a start-up from within their industry. Moreover, they can offer that start-up significant guidance, in turn potentially having a far more profound impact on society than they can in their day job.
In my experience entrepreneurs find senior industry figures to be incredibly supportive. They often receive more attention and help from them than they did in all their years combined as an employee.
The SEIS may be just the prompt such individuals need to translate support into active investment and mentorship.
That is not to say such investors shouldn’t take advice – start-up dynamics can differ significantly from blue chip ones. To that end, several initiatives are kicking off with the aim of introducing people from the City to the world of angel investment. One such is the new Angels in the City initiative, supported by the City of London Corporation and delivered in collaboration with London Business Angels. It is running a series of events to raise awareness among London’s financial community of the benefits of supporting early stage start-up businesses.
The SEIS is not there for traditional fund managers to critique from the sidelines. Those who it is aimed at are its best judges, and thus far they – the angel community – have welcomed it with ringing endorsement.
Adam Price is the founder of VouchedFor.co.uk – a new start-up that aims to make it easier for people to find the best independent financial advisers.