Earlier this month Boris Johnson and Rishi Sunak called upon the nation’s investors in an open letter angled towards “seizing the moment” in the midst of a growing shift towards investing in early stage companies.
Following investment into UK startups hitting a record £5.1 billion in the first three months of 2021 alone, the Prime Minister and Chancellor have published an update encouraging UK investors to “Ignite an Investment Big Bang” as a result of increasingly favourable market circumstances.
Inviting investors to “recognise the quality other countries see in the UK” by investing in the promising early stage companies that helped the UK attract 63% of its total VC investment from overseas in 2020, the letter puts forth why a re-adjusted investment portfolio may be key to harnessing Britain’s burgeoning startup landscape - both on an institutional and individual level.
A focus on early stage investment
Less than eight weeks on from the Business Secretary’s update that reaffirmed the £22 billion of R&D funding set to be injected annually across Britain by 2024-25, the new open letter by the Prime Minister and Chancellor looks to have further cemented the government’s future focus on early stage innovation and those investing into it.
Written with the goal of encouraging further economic growth by supporting the UK’s flourishing startup sphere, the open letter suggested that - now more than ever - UK investors are faced with the potential to benefit from considerable long term growth whilst contributing to real, measurable social impacts by investing into early stage companies post-pandemic.
The letter, cosigned by the Chancellor and Prime Minister wrote:
“To seize this moment, we need an Investment Big Bang, to unlock the hundreds of billions of pounds sitting in UK institutional investors and use it to drive the UK’s recovery.”
Following data released earlier this year that showed more than two thirds of the £11.3 billion invested in UK tech companies in 2020 came from overseas investors, the letter highlighted the popularity of the UK’s dynamic startup ecosystem to international investors, and encouraged UK investors to share the benefits others outside of Britain are noticing as a result of it.
“It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country.
Currently, global investors, including pension funds from Canada and Australia, are benefitting from the opportunities that UK long term investments afford, while UK investors are under-represented in owning UK assets.”
To combat the outsourcing of investment growth, the PM and Chancellor have suggested that a shift in focus from short term assets to long term assets could be essential, with more structured, domestic, tax efficient venture capital routes highlighted as the key to both individual and economic prosperity.
How can investors benefit from this growth?
This shift in focus could see investors swap volatile, short term-oriented investments such as stocks and shares for more structured, risk-calculated venture capital options that boast more long term goals.
By investing into the UK’s most promising early stage companies using longer term venture capital vehicles, investors not only have the opportunity to support a new wave of impact-driven startups primed for growth, but can also be reassured with the additional blanket of generous risk-minimising, return-maximising tax benefits they can provide through tax efficient vehicles.
Three of the most popular routes open to experienced investors when looking to do so are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) - with all three highlighted specifically in The Treasury’s recent “Build Back Better Plan for Growth”:
“The Seed Enterprise Scheme (SEIS), The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) effectively target market failures in SMEs’ access to growth finance, and together have supported over £31 billion of finance since their introduction.”
These schemes offer investors generous advantages in the form of EIS tax reliefs and SEIS tax reliefs in particular, which - ranging from up to 50% income tax relief to capital gains reinvestment relief to inheritance tax relief - can considerably minimise downside risk for experienced investors looking to shield their capital from market fluctuations and tax cuts.
Unlike highly popular investments like stocks and shares which, although have the potential realise high returns in shorter periods of time, can be notoriously volatile, government-led schemes such as the EIS and SEIS can give investors the ability to mitigate downside risk and plan for later life effectively with a more reviewed, structured, long term approach.
Though for some a longer term approach than stocks and shares, tax efficient investment schemes have the ability to target equally high money-on-money returns all the while actively contributing to the UK’s diverse startup landscape.
Speaking on the effectiveness of tax efficient venture capital schemes, the Prime Minister and Chancellor added:
“We want to see UK pension savers benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements.”
Deciding the most appropriate route
Although investments that can be angled with short term gain as a focus (from stocks to shares to cryptocurrency) undoubtedly have their place for investors seeking potentially strong investment growth and instantly realised returns, for investors with longer term growth goals, the often highly volatile nature of such investments can make them problematic.
Recent events such as the cryptocurrency market crash and severe fluctuations in the global stock market have highlighted the unpredictability often attached with such investments especially, and - though preceded with strong performances - have planted a firm question mark on their place in many investors’ portfolios.
Contrasted by the growing encouragement the UK VC market has felt following two consecutively record-breaking years for early stage investment, the recent shift in attention from stocks to startups has come as little surprise to many observing the space, with the recent wave of government support noticed across the last 6 months further consolidating investors’ decisions to rebalance their portfolios’ focuses on stocks and startups.
From Kwasi Kwarteng’s “Plan for Long Term” growth to Rishi Sunak’s “Build Back Better Plan for the Future” and finally Boris Johnson’s “Investment Big Bang”, recent data and government support suggest now could be the best time for investors - both institutional and individual - to benefit from the UK’s burgeoning startup landscape.
And though bearing an obvious level of risk associated with venture capital investments, when heavily mitigated with tax efficiencies and thorough scrutiny into portfolio companies, Britain’s current, ever-innovating, impact driven generation of emerging startups pose investors an especially fruitful opportunity ahead of what is set to be another strong year for early stage innovation.