The Seed Enterprise Investment Scheme and the ‘Oliver Twist effect’
Please, Sir. Can I have some more? The success of SEIS, its unintended consequences for growth businesses, and how to solve the problem
Reports that the number of start-ups applying for the Seed Enterprise Investment Scheme have shot up by 73% is nothing to be sniffed at. The scheme is a fantastic incentive, making it much easier for many very early-stage businesses to raise funds for growth.
What I expect is that a major push to raise awareness about the scheme has had a positive effect on uptake. It is no longer just in the interest of start-up businesses to seek out the incentive. We are seeing investors themselves and advisers, the latter of whom can often be a little slow off the mark, now keen to promote the advantages of what is a very helpful scheme.
What I hear from The Supper Club members, who represent some of the UK’s most impressive high-growth firms, is that SEIS has transformed the funding landscape and that due to the brilliant benefits of the scheme, investors are increasingly wanting to invest solely in SEIS registered companies.
Unfortunately, experience is teaching us that a simple oversight in the set-up of the scheme could have a number of unintended consequences, which might well be damaging to SEIS registered start-ups and even worse, the wider growth agenda itself.
You can currently raise up to £150,000 through SEIS, an amount which has created a quandary for many high-growth businesses; or what I would like to call the ‘Oliver Twist’ effect.
Any founder knows that raising finance is a time-consuming and lengthy process. We often find ourselves stuck between a rock and a hard place in the very volatile period of early-stage growth. On one hand, working daily to deliver against a strategy investors are buying into and at the same time, becoming tied up in the process of seeking additional funds.
Neither of these tasks can be dropped to the wayside, however one can only hope that the latter will not take too much time away from the former.
Unfortunately, the reality is that for any truly high-growth company, raising funds through SEIS will not give them enough cash to achieve impactful growth. For a business that wants to make a landgrab and get to market fast, £150,000k is simply not enough.
Thanks to a restriction that prevents linking SEIS to EIS, businesses cannot guarantee additional funding from initial investors. The result will be that once these companies have gone through the time-consuming process of financing, they will simply have to do it again, having proven nothing in the mean-time to top up the funds they need to establish real growth.
They may well have had a gentleman’s agreement that agrees a further round of funding, but essentially, they will be asking ‘Please, Sir. Can I have some more?”
The future of SEIS?
The second unintended consequence of the scheme is that it may be creating wrong behaviours. It could be argued, with strong evidence, that businesses seeking funding of up to £100,000 shouldn’t be using SEIS.
They will almost certainly be giving away too much equity at this stage in their business and would do much better seeking alternative forms of funding which put them at far lower risk.
The solution could be simple, to double the threshold to £300,000, freeing up high-growth companies to get the funding they need in one round, limit the potential for early-stage businesses to syphon off equity for funds and ultimately, open up the opportunity for much greater growth.
If the intention is to establish a nation of high-growth firms, we must give our early-stage businesses room to grow. The surge in applications for SEIS is significant, but with small amendments, the real benefit could be so much bigger.
Duncan Cheatle is the CEO and founder of The Prelude Group and The Supper Club. www.thesupperclub.com