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Saturday 19 August 2017

A new approach to S/EIS


Ask yourselves - what is the purpose of EIS and SEIS? Is it to help individuals get richer or is it to help UK plc?


Equity Crowdfunding relies almost entirely on the Government tax rebate systems SEIS and EIS. Without these there would be little investment. So from that standpoint, it is working - it is releasing private cash into companies as an alternative to the banks and VCs etc, where money has largely dried up or is too difficult to access for start ups and small SMEs.

So the next question is what happens next? What does this money achieve? Well the answer is a little more disappointing. The end goal of Government intervention into private funding of UK start ups, has to be the long term benefit of UKplc. You simply cant have Government handing out money from the public purse, to allow punters to go on a Saturday One Arm Bandit Spree - risk free. That wouldnt make any sense. And if further fallout was such that other SME's suffered as a result - because these newly funded, poorly run businesses went bust owing them money, then that would be crazy, right?

Well this is pretty well what Vince Cable set up. Investors openly tell us that its only because of SEIS or EIS that they take a punt. Some take an interest in the business, but many we have spoken with dont - some even admitted not reading the plan at all, they just like the rewards and with the rebate it makes sense even if they lose their principle. Is that helping UKplc? 

I have sat through numerous meetings and conferences on ECF, where the main speaker isnt an entrepreneur, but a lawyer. His is the most listened to section of the event and gets the most queries. He isnt talking about marketing, product development or cashflow. He's talking about how to maximise your S/EIS benefits. 

When a small business raises £250k on an ECf platform for their plan, and within a year has gone bust owing trade creditors that again, something in the system is wrong. Crowdcube now have around 60 failures (closures, so not accounting for the 100 plus that are zombies) to 3 dubious successes - the best exit being by sale to an overseas company, thereby taking any future benefit out of the UK. In fact 2 out of the 3 'successes' have been sales to overseas companies. 

It might all work better if the companies applying on the platforms were better chosen, or in some cases were actually chosen. A simple new director's course and test might help? If you havent passed it you cant access S/EIS. I am constantly staggered by the naivety of most plans and they never fail to back me up. If we really want to help these start ups we need to start at the beginning. The money so far wasted on tax rebates for 'investors', better described as punters, in businesses that never had a prayer of lasting 2 years let alone 10, could have helped fund this course and test. We'd be in a much better position now. It would allow easy access investment, help to protect investors, benefit the platforms and the businesses and most importantly benefit UKplc, which is where we started.

It's not instant, so wont be liked but it has to make more sense than HMRC pouring yet more tax payers money down the drain. 

All comments welcome. 

13 comments:

  1. Several issues with that.

    - There are a lot of successful crowdfunding campaigns without (S)EIS. All those based outside the UK, for starters. seedrs hosts many such.
    - There are a lot of investors who are not eligible for (S)EIS by virtue of not themselves being UK taxpayers. Again, abundant evidence on seedrs.
    - While Vince Cable made changes, he didn't set up the system. The origins go back to John Major, and survived many years of Labour government. All parties realise that tax breaks to investors are a cheap and efficient way to help small/growing businesses raise money.
    - There is an expectation that many will fail, while some will do OK and a minority will become Unicorns. If crowdcube, or ECF in general, is funding a disproportionate number of dodgy propositions, that's growing pains for the sector, but it's tiny in the overall picture.
    - See https://www.gov.uk/government/consultations/financing-growth-in-innovative-firms

    I'll try OpenID again, but that's fallen down in a heap in the past on this blog, so I may end up anonymous.

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    1. As you know, we concebtrate on Crowdcube here. So most of this is irrelevent.

      A minority will become unicorns is highly optimistic and not backed up by any evidence.
      Vince set up the system we use today so I cant see your point.
      Growing pains last how long - now in year 7 and no sign of improvement
      A lot of investors......... come on you need to produce figures not adjectives if you have a valid point. Seedrs host many such.....again nice gloss but what are the real figures, my guess is that the overseas companies have a UK subsiduary like Faction Collective which was EIS. If you wish to make a point do try to use some facts please.

      Yes agree its small fry but its growing and even small, shouldnt we try to get it right?

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    2. Actually your link illustrates part of the problem. Hammond isnt looking at the right things. If we want to create long term sustainable world beating businesses then we need to start at the start - you cant just throw money at it. If one thing has been proven beyond doubt by ECF, then it is that 90%+ of the businesses that apply for ECF havent a clue how to run a business. Get this sorted by using EIS and SEIS as a lever. Then we might get somewhere. Fussing over where the investment is going to come from is opening the box by going in through the side. Funding crap business is no good its not a success and it's just plain stupid.

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    3. We may be slighty at cross-purposes. I'm talking about (S)EIS as part of the overall picture of tax-advantaged equity funding of small/growing biz. The fact that a small part of that comes with ECF is just a recent trend, which might evolve and grow, or wither and die. I think of a flutter on a seedrs campaign as a more worthwhile alternative to going to the bookies to bet on the races, as others might do.

      A minority will become unicorns is highly optimistic and not backed up by any evidence

      The first Unicorn to be backed by tax-advantaged equity funding in the UK was Zoopla. Happy to say it made me a few quid, though through VCT rather than ECF investment.
      Other investments have crossed the floor: Tossed had a successful seedrs campaign to fund further expansion, a couple of years after being a somewhat-profitable VCT exit.

      Growing pains last how long - now in year 7 and no sign of improvement

      It's not in year 7 for most of us. In my fast-moving field, many of the things I worked on twenty years ago are still emerging.

      A lot of investors......... come on you need to produce figures not adjectives if you have a valid point.

      Point taken. My anecdotal source is seedrs, which shows the country of those investors who don't choose to remain anonymous. There are many from around Europe. Maybe seedrs could be persuaded to publish some real data on the subject?

      Seedrs host many such.....again nice gloss but what are the real figures, my guess is that the overseas companies have a UK subsiduary like Faction Collective which was EIS. If you wish to make a point do try to use some facts please.

      A look at current campaigns would confirm at an anecdotal level. A Dutch company producing a pregnancy toy, now at about half a million (many times their target). A German company doing online bike hire, quickly went into overfunding. A Portuguese company doing cork, though that looks likely to fall short - investor questions turned up a questionable structure. None of them EIS-qualifying. And that's just three that spring to mind, after I had taken sufficient interest to post one or more question to discussion.

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    4. Take your point but as this blog is about Crowdcube and their abuse of S/EIS and ECF then your points whilst interesting are not consequential. You missed Brewdog in the Unicorn section although as you cant realise the value maybe a unicorn with a small bump rather than horn. Others are not relevent here - see above.

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    5. Do you think UK residents invest in these EU companies or is just a sign that Seedrs is developing more into the EU?

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  2. My submission to the government's Financing Growth review was along similar lines.

    I tweeted a copy here:
    https://twitter.com/AndrewHolmes82/status/897461256155779074

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    1. Fine but this doesnt help start ups. It helps investors claim more back which is not what EIS and SEIS should be about. We are looking down the wrong end of the lens. My idea would hugely increase the chances of ECF businesses going o to actually achieve something which would in turn provide a return. But we can agree that this is the starting point.

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    2. The way (S)EIS helps startups is by encouraging equity funding which otherwise wouldn't be available, or if available it would be it a lower valuation.

      From the point of view of angel investment and accelerators, the investors do always seem to focus on the details of the businesses. I can't comment on CrowdCube investors, however.

      I think SEIS is too generous and should probably be scrapped. But EIS still leaves the investor with risk and extending it to people without a high liability to income tax would increase the number of investors from a background of business rather than just high earners.

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    3. Fine but it doesnt tackle the real issue - most people funding via Crowdcube dont have a clue how to run a business, so why spend tax payers money on them? Use the S/EIS lever to encourage them to learn more and we might see better results. The evidence is all over the blog and rather than being teething problems it is getting worse

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  3. My personal opinion is that just like a listing every company crowdfunding should have some sort of FCA regulated NOMAD backing them. Without this it is the wild west. Cc see themselves as a platform only and leave the rest to tge market.....but it does frustrate me that so much money goes into hyped junk.....it is money down the swanney and could be used for genuine opps

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    1. No!!!!!

      1. The level of red tape implied could be a killer for many. These are small biz.
      2. AIM is a "wild west", and that's *with* NOMADs.

      I'm really not familiar with crowdcube: there's too much about it that fails to inspire confidence (and that's before I discovered this blog). If it's really as bad as Rob paints it, it'll sink in due course. Possibly hastened by commentary here.

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  4. I can't really see why the govt would care about exits. I would imagine they are more interested in jobs, so actually a "zombie" could have a positive effect.

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