It’s widely acknowledged that entrepreneurship and small growing businesses are key drivers of economies, particularly after a period of slowdown or decline.
It’s these smaller, more agile, businesses that push innovation and force larger companies to react – stimulating exports and international trade. Without this entrepreneurialism, the status quo would never be challenged and economies would stagnate.
The encouraging news for the UK is that David Cameron and the Coalition government seem to recognise this fact, and have designed initiatives to support entrepreneurs.
However, so far government has only focused on entrepreneurs, and not at all on the investors who back them. This is a critical oversight by the government, as entrepreneurs continue to struggle to obtain decent funding at reasonable rates from the banks.
This is not unexpected; new and disruptive businesses can have a great reward, but they are inherently risky and depend on investors who are willing to back them – this invariably means early stage venture capital (VC), not business banking.
There is currently a substantial gap between the funding required and the funding available to help entrepreneurs and small businesses in the UK and Europe, and the problem isn’t going to go away by itself.
The government has to look at ways of helping to close the gap. Personally, I believe that one of the best ways to do this is to offer tax advantages to make investing in small companies more appealing. For instance, removing Capital Gains Tax on any money made from an exit that is re-invested into small businesses.
This would encourage investors to invest more of their returns into small businesses, which would keep capital moving in the startup economy, and also the type of people who generate capital gains are likely to be entrepreneurs themselves and can invest their expertise and experience into early stage businesses and the entrepreneurial ecosystem as a whole.
Encouraging early stage investment
Recycling capital and skills is invigorating for businesses and the economy. Rather than relying on distant investors, unfamiliar with the daily challenges faced by entrepreneurs, you have highly driven, engaged and experienced investors – this is the approach that we have taken at Notion Capital and is the kind of approach that American entrepreneurs have taken in Silicon Valley, where it has clearly paid dividends in developing an environment in which startups and small businesses can thrive.
Encouraging more seed and early stage VC investment is achievable and there are a number of suggestions that have been flying around that would get support from the VC community and provide more capital for SMEs.
Some examples of these are variations on schemes already in place or adjustments to existing mechanisms:
- Enterprise Capital Trusts that would operate much like Venture Capital Trusts (VCTs), but would encourage entrepreneurs and high net worth individuals to invest in enterprise through generous tax breaks on returns.
- R&D tax credits could (or maybe should?) be offset against PAYE and NI liabilities during the year to improve cash flow for SMEs, as opposed to the current system where tax credits are reclaimed six months after the financial year ends.
- Growth Company ISAs: the ISA industry is worth around £178bn, most of which either sits in a bank losing value for investors in real terms, or is invested into large cap UK businesses that, frankly, don’t need the money. This money could be put to very good use in driving the economy forward by being invested in fast-growth businesses.
While the coalition talks a good talk on supporting small businesses, it is abundantly clear that more needs to be done to actively encourage these businesses throughout every stage of their set up and growth. The UK certainly has a huge supply of innovation and entrepreneurial spirit, and with a supportive investment eco-system in place there is no reason why “the next Google” should not be a British company.
Jos White is co-founder of early-stage VC firm Notion Capital.
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