The Enterprise Investment Scheme has been a cornerstone for the funding of the UK’s innovative tech ecosystem since its launch in 1994.
To date, the scheme has supported more than 30,000 businesses, raising more than £24bn to help provide the vital capital companies in cutting-edge sectors and technologies need at their early and growth stages.
Recent analysis from Growthdeck shows that appetite for EIS has bounced back post-pandemic, with a 10 per cent year-on-year rise in projected EIS raises for 2022.
Start-ups born out of British university research have also secured record levels of funding, earning £2.5bn in equity investment in 2021, up 69 per cent from the £1.5bn in the previous year.
The Treasury Committee’s inquiry into the UK’s venture capital industry, which is expected to report shortly, provides another opportunity to ensure our investment schemes are fit for purpose to best support the UK’s position as a global leader in knowledge-intensive innovation.
Coming to an end?
There is currently a 'sunset clause' in place in relation to income tax relief that is offered by the EIS and also the Venture Capital Trust scheme, which means the schemes will no longer exist after April 2025. This clause was requested by the EU to review the assistance the UK government was providing to UK businesses under the scheme.
While the general consensus is that the UK government will not let the schemes expire, now is the time to begin discussing what the future looks like for these fundamentally important schemes and how they can be changed for the benefit of investors and the growth companies they support.
EIS and VCTs are mechanisms that allow the investment of patient capital into the next generation of UK businesses and the sunset clause presents a potential risk.
If the government does not reassure investors now that both EIS and VCTs will continue beyond the sunset clause, we could see a decline in those willing to put patient capital into the schemes today. This in turn could lead to a gap in funding between now and the government’s plans to introduce updated schemes, impacting the UK’s innovation pipeline.
It is all well and good for the fund managers of EIS portfolios to be reassured through their ongoing discussions with the Treasury that the scheme will not end in the coming years, but communicating this to investors, without the guarantee from the government, is where the problem lies.
Not only will further delay in announcing that EIS and VCTs will continue after April 6 2025 impact the investment pipeline, but it could also impact the key environmental technologies being developed today, which are delivering such crucial outcomes as lowering carbon emissions.
The venture capital industry in the UK is now, in many respects, a well-established ecosystem.One such example is motors manufacturer YASA, which was spun out of Oxford University in 2009. Its innovative electric motors offer a scalable, low-cost means to manufacture vehicles with significantly reduced environmental impact without compromised performance – a company that offers true impact when it comes to reducing our dependence on fossil fuels.
Through patient capital that relied heavily on the EIS, the business was able to scale, growing from a team of 12 in 2012 to 200 by 2019, with its motors in production vehicles for the likes of Ferrari and McLaren.
The continuing impact of the technology goes beyond automotive, with YASA’s aerospace spin-out Evolito developing a prototype with Rolls Royce, which has broken both altitude and speed records for electric aircraft.
YASA was acquired by Mercedes-Benz in July 2021, but is maintaining its R&D headquarters in the UK. Evolito is just one example of a potential future beneficiary of EIS funding.
The success of a UK startup such as YASA is fantastic to see, but it must be recognised that the journey from being spun out of Oxford University to exit was more than 10 years. There were many investors who supported the business throughout this journey, but the EIS was instrumental throughout.
The businesses that could IPO or exit in the next 10 years are currently receiving the funding through such schemes. This is yet another reason why investors need reassurance that their EIS and VCT investments will continue beyond 2025, so they can continue funding the YASAs of the future.
The venture capital industry in the UK is now, in many respects, a well-established ecosystem with many investment companies who focus on a wide variety of investment sectors and several stages of funding.
We should not let something as easy to resolve as a sunset clause deter the investors of today from securing the success of the UK’s innovation pipeline tomorrow.
Moray Wight is chief executive of Parkwalk Advisors
