By Catriona Brown
It was with much huffing and puffing - and a few muttered expletives - that I made my way through Ian McConnell’s headline-grabbing note in The Herald on the support given to fledgling firms by wealthy private investors.
My feelings of mild outrage (and some disbelief) are, firstly, in connection with the somewhat simplistic conclusion drawn; secondly, the increasing amount of time I seem to be spending at my desk these days involved in such deals; and, thirdly, the relevant expertise of the quoted expert. I say relevant, for I’ve every reason to believe that Ms Davidson is indeed an expert in her field. Pinsent Masons note that Karen is a tax specialist, and Chambers and Partners note that she led the firm’s work for W&R Barnett (the holding company of “a diversified group of international commodity trading and agribusiness companies”, for those not in the know).
My point is simply that as someone whose day-to-day work consists of dealing with individual business angels, business angel syndicates and entrepreneurs and their fledgling businesses, I remain unconvinced that a tax expert, or indeed a firm whose focus is not on early-stage businesses (with the exception of the occasional report) is necessarily the best source of comment as to the levels of funding that continue to be made available.
My own workload, and that of my colleagues, would tend to suggest that there was probably the same level, or maybe more, investment last year than in 2010. A rough estimate perhaps but there certainly seems to be at least as much deal activity in the business angel community this year. Personally, I’ve set up two new business angel syndicates, keen to take advantage not only of EIS, but of SEIS – it’s like EIS, but aimed at even smaller businesses and much smaller investments (limited to a total of £150,000).
It’s unfortunate that the article neglected to mention that SEIS has even better tax advantages than EIS and that the final rules have taken a while to be finalised. This is in itself a factor which may (and I stress, may, because I have dealt with investments structured to take advantage of SEIS) be a more solid reason why a potential investor might wait before investing in a fledgling business. Indeed, this could be a reason why EIS hadn’t been applied for (you apply for SEIS first).
The conclusion to the article also omits a few factors that are relevant to investment activity. In addition to alternative structures for investments (as mentioned by David Grahame of LINC Scotland), the commentary does not take account of:
- follow-on investment rounds in the same company;
- benefiting from investments from foreign investors (which I have increasingly seen);
- startups expressing an interest in, and looking for advice in relation to crowdfunding (which grew by 54% last year, according to NESTA).
Looking at one crowdfunding site, I noted that of 16 opportunities which were (mostly) on their way to getting the investment they sought, only 6 had EIS clearance. In the spirit of fairness, I will add that many crowdfunding sites do use EIS as a way of appealing to potential investors.
I’m not going to call myself an expert. But from my experience, it’s inaccurate to suggest that the willingness of business angels to support fledgling firms is falling. Basing this conclusion solely on EIS applications is ignoring the true nature of how investing in fledgling businesses is developing.
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