Is the Spring Budget supporting the scale-up space in the UK?

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During his Spring Budget earlier today, Chancellor Rishi Sunak announced support for the UK’s entrepreneurs and scale-up firms – but what does it all mean in practice?

New visa reforms have been introduced, which are aimed at recruiting highly skilled migrants. This will be achieved through a new unsponsored points-based visa to attract the best and most promising international talent in science, research and tech – in order to support scale-ups and entrepreneurs across the UK.

In further support for entrepreneurs – Suank is launching a new Future Fund Breakthrough to help fill the scale-up funding gap. More than £20m grant funding is now available to apply for. According to government data – a 1% growth in the value of scale-up firms could increase the value of the UK economy by more than £36bn.

Commenting on the Budget and supporting entrepreneurs and scale-up businesses, Ian Warwick, Managing Partner at Deepbridge Capital, said: “Today’s budget has been rightly focused on economic recovery and jobs. With any period of economic recovery, it is agile companies which tend to lead the way. The UK continues to be a leader in the start-up and scale-up ecosystem and this will be increasingly important over the months and years ahead. As well as the Covid-specific measures introduced by the Chancellor, initiatives such as the Enterprise Investment Scheme will continue to be vitally important in empowering growth in the UK.

“Given the economic impact of the global Coronavirus pandemic, it is remarkable that we have such buoyant OBR forecasts for the coming years. Now that the healthcare crisis is hopefully approaching the end, economic recovery was quite rightly at the centre of the Budget. We fully expect that the innovative technology and life sciences companies that we work with will be at the forefront of this recovery. Entrepreneurs and scale-up businesses will lead the way for growth.

“The announcement of a Recovery Loan Scheme, with a Government guarantee to lenders of 80%, is welcome news for all businesses. In the UK, we have a great funding eco-system which this Scheme will further support.”

Sanjeev Gordhan, director at Newable Ventures, comments: “The announcement of The Future Fund Breakthrough initiative to help fill the scale-up funding gap for technology businesses is welcome news, as are the proposed consultations on tax relief and enterprise management incentives. As part of this review, we would hope to see an increase in the amount that can be invested under SEIS, which would allow potential high growth companies to raise a bit more at seed level and get onto the EIS stage. SEIS currently caps investment into very small, high risk companies at £150,000. Compared to the seed stage in America, our levels are still very low – more money would certainly help.”

Michael Niddam, Managing Partner Kamet Ventures said: “We’re delighted to see the government continuing to back the UK’s sharpest entrepreneurs and invest in our thriving tech ecosystem with its announcement of the new Future Fund: Breakthrough. However, with 60% of all startups failing within the first 3 years, there is huge pressure on the government to choose the startups with the most growth potential and this is no mean feat.

“The government needs to look at new approaches to investing to ensure public funds are used responsibly and effectively. The scientific approach adopted by venture builders is one way to significantly de-risk investments as every startup goes through a rigorous process to identify product market fit and business models are rooted in insights from sector specialists. The next steps the government takes will be crucial and I hope they seek out the right startups to fast-track UK innovation so we can maintain our position as one of the leading tech hubs in the world.”

Evie Mulberry, Managing Director, Astia comments: “The Chancellor’s commitment of £375m into fast-growing UK tech companies is welcome news as the government outlines its path out of the pandemic, especially as that sector is critical in terms of job creation. However, as the Future Fund: Breakthrough looks to match government money with private sector venture capital, we need a commitment that this investment fund is distributed to include businesses with diverse leadership teams. In 2020 less than 9% of venture capital was invested into companies that included women anywhere in the founding or leadership team, less than 2% was invested into women CEOs. Huge efforts have been made to bring attention to these woeful figures, which have been exacerbated by the pandemic. This is not a pipeline issue, these businesses are there to fund and I hope the government takes this into consideration when they assess which businesses to back.”

Moray Wright, CEO, Parkwalk Advisors said: “The devil will be in the detail but it’s great to see the government announce an equity based scheme that allows Enterprise Investment Scheme (EIS) investors to co-invest, unlike the Future Fund loan based scheme which resulted in a misalignment of interests among investors in companies that took the loans. Last year,  there was a dearth of later stage funding in the UK, which meant tech start-ups were all too often bought by overseas rivals. This fund will help tech companies remain and thrive in the UK.”

Stephen Page, CEO SFC Capital said: “Over the last year there have been a record number of new companies created in the UK. These are the companies that will help drive our economy in the future and preserve the innovation pipeline. To support them we need to ensure that they can access both Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) investment as easily as possible. However, these systems are complex to apply to, for example many EIS rules act as a barrier for many potentially high-growth companies. I hope to see a change to the current restrictions on businesses using EIS and SEIS from ‘the age of the business’ to ‘the size of the business’.

“As well as this, raising the limit of investment for SEIS from £150,000 to £250,000 could help propel these future leaders forward. With these changes we can actually support true early-stage businesses, rather than companies that have already got backers with big war chests to help support them.”

Will Fraser-Allen, managing partner, Albion Capital said: “The Chancellor revealed in today’s Budget the extent of the profound and lasting impact Covid-19 will have on our economy, and the challenges to a successful recovery. Amid the stories of job losses and corporate administrations that have plagued the past year there has been a bright spot for UK business: a raft of exciting young growth companies that are thriving despite dire external conditions.

“UK scale-ups have excellent pandemic-proof qualities. The Chancellor has recognised that these companies will be a key plank in re-building the economy, and is paving the way to allow pension funds to invest in innovative scale up companies to support our recovery.

“Typically, UK scale ups provide solutions to significant, previously unsolved problems and the most successful are able to build a ‘moat’ of differentiation that separates them from competitors. They often operate in ‘mission-critical’ areas of business offering services that cannot be switched off – for example, cybersecurity, remote working, digital medicine – even during a global health crisis and economic downturn.

“Venture capital trust (VCT) managers have supported high growth healthcare and technology companies for a number of years and have witnessed first-hand their capacity for driving an innovation-led economic recovery in the UK. We believe they will be key to creating jobs and driving improved prosperity by accelerating the development of the digital economy and rapid adoption of digital healthcare.”

What more needs to be done?

Commenting on funding for traineeships in the Budget, Lee Elliot Major, Professor of Social Mobility at the University of Exeter, said: “We need to be bolder in terms of creating more opportunities for the Covid generation – that means universal training and upskilling in the workplace, and expanded places in higher education. Otherwise a whole generation will be permanently scarred by the pandemic. Our research suggests an 11 per cent decline in social mobility for the under 25s, which represents a huge waste of talent that will undermine our national economic growth.”

What about the start-ups?

Dr Keith Arundale, Senior Visiting Fellow at Henley Business School who specialises in private equity and venture capital, said: “The big shock to UK businesses is of course the huge jump in corporation tax to 25% in 2023, the upper end of what had been expected. Fortunately, small businesses with profits of £50,000 or less will continue to pay tax at 19%. Businesses will be keen to see the detail on the new super deduction whereby they can reduce their tax bill by 130% of cost of investment.

“The anticipated and feared capital gains tax reform did not materialise, at least not for now, much to the relief of entrepreneurs and to private equity firms who dread their carried interest being taxed as income. The Chancellor is to be applauded for focusing on getting Britain working again as we hopefully come out of the lockdown.

“What we also need is more financial support for start-up businesses, not just government matching funding for companies that have already received third party investment. Whilst the Future Fund has invested £1 billion in 1,000 start-ups this had to be made on the back of third party investment already received. SME businesses raising money for the first time have seen a 44% decrease in finance in the period since March 2020 compared to the prior year and 20% fewer deals*. VCs and business angels are avoiding this space.

“Furlough must end eventually; we need support for the many people expected to be made redundant and encouragement to start their own businesses. The new recovery loan scheme to replace the bounce back loans and Coronavirus Business Interruption Loan Scheme, continuing business rates relief to end of June, and the 5% reduced rate of VAT for hospitality businesses to end of September are certainly welcomed. As is the first ever UK Infrastructure Bank which will support some £40bn of green, innovative, fast growing businesses.

“Going forward, if and when the Chancellor does eventually raise capital gains tax rates, this could result in entrepreneurs moving overseas and PE firms also relocating to avoid their carried interest being taxed as income. A recent report from Beauhurst revealed that 85% of founders would consider moving their companies abroad and 72% of business angels would be less likely to continue investing in UK companies if capital gains tax reform came in – scary figures!”

Tim Mills, Managing Partner of ACF Investors commented that the Budget is “the right thing” for UK growth: “The Chancellor has done the right thing for UK growth in not changing the strong support already in place in the UK for early stage companies, with EIS, Capital Gains Tax, entrepreneurs relief all unchanged. In particular, the investment community will be reassured by the decision to maintain the current level of Capital Gains Tax. The addition of further relief for R&D investment is welcome but it is important that this provision helps early stage companies looking to innovate in the market and not just established and mature companies.”

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