SEIS has attracted a new wave of investors to startups
7 min read
03 December 2014
As a tax incentive that is the envy of investors around the world, SEIS is bringing new investors to the table but needs more exposure, says Stephen Page.
Stephen Page, chief executive officer of Startup Funding Club, started out as an entrepreneur working on DOS database software in the last 80s. Over the last five years he’s been investing and working to help startups get funding, setting up funds and making investments to take advantage of boon in entrepreneurialism created by Seed Enterprise Investment Scheme (SEIS).
We spoke to him about the new investors that have entered the market because of the scheme and how important it’s become.
When did you realise how useful the SEIS scheme was going to be?
SEIS came about just over two years ago and it was clear this was going to be a real catalyst for investment. At that time I’d become a mentor on an accelerator that had been set up to give advice and funding. In those days there were only a few accelerates, now it has increased ten-fold. SEIS is part of the reason for that, it’s really opened the floodgates for early stage investing.
It was obvious that because of the tax relief the opportunities for investment were going to increase. We set up Funding Alpha [in 2013] and raised just over a million pounds. We invested that into 15 companies in the period up to April this year, that included a products companies, a perfume company, a drug kit, low-cost tablets, snack food company, lots of tech, a good profile of 15 companies. They’re all going well, some have raised more money.
Could you briefly outline how SEIS works?
SEIS is specifically bought in to help brand new startups. Startups have to have been trading for less than two years and have assets less than £200,000, approximately, and the maximum amount of investment is £150,000. One investor can’t invest more than £100,000 per tax year. The tax relief is 50 per cent on tax paid previously; if you invest £10,000 you’ll get £5,000 back through your tax code as a refund.
There are other benefits as well. There’s no capital gains tax after three years. If you invest money that you’ve made through a capital gain you only pay half of capital gains tax. If you sold a property, made £100,000 and invested that through the scheme you’d only pay 14 per cent tax instead of 28 per cent – you’re de-risking your investment by 64 per cent in that case.
It’s great for de-risking. Historically an angel investor is a professional, this has brought people into the fold who have good salaries, want to take a punt and like getting tax back. Those are the people that will invest into an SEIS fund or crowdfunding.
How popular has SEIS scheme been over the last two and a half years and do you think it’s been successful?
The problem is it hasn’t been well known. We have two new funds and we do a lot of events, where we present opportunities to members of private clubs. If you ask them: “Who knows what SEIS is?”, the answer is not many. Two years ago none, one year ago 10 per cent, now 25 per cent. It’s gaining popularity, but it’s still not widely know. We need to market the fact it’s a great mechanism.
What about in terms of the startups that are using it?
Tech was the big thing in London. There’s always fashions and trends, but generally across the broad there’s a massive growth.
It’s definitely increased activity. We’re seeing ten startups a week and the quality is a lot higher. The whole startup scheme is exploding, particularly in London, and part of that is because of SEIS. Inevitably most startups are looking for £150,000 in their first round of funding, because that’s the ceiling for SEIS. It’s become an industry standard situation; the first funding is the SEIS round.
What kind of investors are using SEIS? How has this changed as experience with the scheme grows?
A whole new raft of people has emerged as investors. That’s fantastic because it means more companies are being funded. Whether they understand fully what they’re getting into is another issue. If people don’t understand their best bet is to invest through a fund.
Crowdfunding’s maturing and it’s changed. When it started it was very much the guy on the street putting in £50, if you look at what’s happening the investments are larger and more sophisticated.
The danger with unsophisticated investors is their expectations are not going to happen. They think if they invest £100 to £1,000 that they will get something back in a year or two, that’s not going to happen. It’s three years minimum, probably five.
Now that the scheme’s been extended indefinitely is there anything else you would change?
The £150,000 [ceiling] going up a bit to £200,000-£250,000 that would be a good thing, maybe the individual allowance too. Otherwise it’s a great scheme.
I’m not sure anywhere in the world has something exciting as a tax relief like this, they [foreign investors] are staggered when you show them this. A lot of European companies are now coming over and setting up headquarters here because of the tax breaks.