The funding barrier holding growth firms back

Octopus Ventures' managing director Alex Macpherson calls for legislation to better enable follow-on funding rounds for ambitious companies

Alex Macpherson, managing director of investment house Octopus Ventures calls for legislation to ensure ambitious companies get the follow-on funding rounds they need

With the emergency Budget fast approaching, changes in policy relating to smaller company investment are high on the agenda. Government endorsed vehicles such as venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS) are a key route for investment into this space, and so it’s vital that legislation around them evolves in line with what UK SMEs need – and never more so than now while we are climbing slowly out of recession.

Delivering support to small and mid-sized businesses means that, long term, we’re also supporting the future UK economy via the creation of jobs, tax revenue and profits that comes from SME growth. In effect, any policy changes introduced tomorrow on 22 June will have a far-reaching impact on recovery.

There’s a particular concern around VCTs. We know that the market for these is significant, with over £340m in inflows last year (Association of Investment Companies). With the need for tax-efficient investment increasing in this environment, and the reduction in tax relief for pensions, more investors have been attracted by the strong tax benefits VCTs offer combined with the potential for returns at this stage in the economic cycle. The market looks set to continue growing and it makes sense for the government to harness this potential to promote small business investment.

However, while on the one hand there is this considerable opportunity to fund and support growth firms, on the other hand the current strict criteria set out in the legislation around VCT investments, actually results in a policy paradox. We believe it could be the right time to announce a change in policy to assist and promote those businesses that are growing successfully. At the moment, the legislation dictates that investment from VCT funds into any individual company is limited to £2m in a 12-month period and an investment cannot be delivered to a company with more than 50 employees.

That means we can’t continue to support those companies that are starting to succeed and expand, and need additional funding in order to continue on this trajectory.

Each time this barrier comes down on a company, it cuts off opportunities, relationships and the possibility of growth that could benefit all, not just entrepreneurs and investors but the UK nation and economy. The coalition government faces a huge challenge in restoring stability, but if the right kind of further support for UK small and growing businesses forms part of the legislative framework, it will be on course.

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