Originally written by Alistair Marsden on Small Business
As an entrepreneur, it’s crucial that you understand the scope of the funding landscape. You wouldn’t start your business without knowing the market and your customers inside out, and the same approach should be taken to investment.
Often, entrepreneurs can become so preoccupied with chasing funding that they lose sight of the bigger picture. They don’t fully consider which funding source is the best fit for their business in the long term.
What is SEIS/EIS investment?
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are a huge part of that funding landscape. They are designed to encourage investment into startups and early growth-stage companies through offering tax incentives to investors.
Investors can place a maximum of £100,000 (SEIS) or £1,000,000 (EIS) per tax year in return for equity.
Tech startups in particular can snap up a lot of this investment – the higher startup failure rate in the tech sector means that these businesses can easily prove that investor capital has to be at risk for both SEIS and EIS.
Some organisations that provide operational support to help found startups – for example through mentorship and the provision of a team and other resources — have now launched their own SEIS and EIS funds, including my own company Nova.
SEIS and EIS makes funding for startups more accessible and enables entrepreneurs to tap into a bigger pool of capital.
When theSEIS/EIS fund is an offshoot of an organisation that is already committed to helping entrepreneurs, the benefits are amplified:
- Encourage larger sums of investment through helping to lower risks of startup failure
- Deploy funds more regularly
- Help foster a better relationship between fund managers and entrepreneurs
- Ensure the fund is used in the best way possible.
In return for equity, SEIS/EIS can alleviate a lot of the headaches and unblock many of the barriers that entrepreneurs face.
Read: EIS and SEIS are foreign concepts to many business owners
Easier access to capital
SEIS and EIS are purpose-built vehicles for innovative startups to receive investment. The tax wrappers offered to investors exist to increase the amount of money available to startups, while also removing some of the barriers to access. If we consider the other funding options available to startups, many carry some sort of risk or barrier which prevents access to funds.
►Bank loans can be a source of readily available funding for startups. However, this may require entrepreneurs to utilise their existing assets as security against the loan in case they can’t pay it back – for example, their house. This degree of risk could act as a big deterrent for entrepreneurs, particularly those with a young family. Alternatively, they may not own assets of enough value to secure the loan against.
►Rallying friends and family to invest – often the first port of call – also carries significant risk and potentially requires a lot of convincing, in the first instance. If the business fails, their money will be lost and that’s a big risk, mental barrier and emotional burden for entrepreneurs to take.
►Likewise, with angel investors, the personal connection might be there but it still requires a lot of convincing to get them to part with their money.
Generally, it’s hugely wealthy individuals who would seek to use SEIS/EIS. If you can find somebody who fits this category – this could be an angel investor, and in theory could also be friends, family, or an acquaintance – then SEIS/EIS can calm down some of the things you might be nervous about as an entrepreneur, such as putting someone’s capital at risk.
The tax wrapper acts as a sweetener and could lessen the blow of any losses, ultimately helping to soothe some concerns and making it easier to convince investors.
Read: How can my small business make the most of tax reliefs available?
Less risk = more investment
When a startup specialist has its own SEIS/EIS fund, that risk can be reduced even further. This is because when the organisation itself is working with the startup, committing time, resources, and experts to it, it’s less likely to fail. (Nova’s startups, for example, are five times more likely to succeed than the average.)
This reduced level of risk is much more attractive to investors, giving them the confidence to invest more through an SEIS or EIS fund – creating a much bigger pool of capital for entrepreneurs.
Timely deployment of funds
Rather than relying on external SEIS/EIS funds that might only deploy twice a year, operating their own fund enables startup specialists to deploy investment more regularly, which means startups do not have to waste time chasing other forms of investment.
Less regular injections of funding mean that startups can often run out of fuel before reaching critical milestones. For tech startups in particular, where profit is often not a realistic target for the first few years, releasing SEIS/EIS funds more regularly could be a lifeline.
Where investment is the only means of financing a business pre-profit, it can help tech companies to reach important initial growth metrics, such as daily/monthly active users or retention rates.
Direct connection to fund managers
For any type of SEIS/EIS investment, the process for entrepreneurs is the same: they pitch to the fund manager.
When a startup specialist has its own fund (which operates as a standalone entity), the benefit is that the fund manager is not some remote figure with no previous knowledge of your business. Instead, they will understand the business models the entrepreneurs are working on and there will easy access between them.
Ultimately, this will help to increase an entrepreneur’s chances of a successful pitch, particularly early on in a startup’s lifetime, as the fund manager will be able to more easily identify progression and potential.
Making SEIS/EIS work harder
Finally, entrepreneurs benefit when a startup specialist manages its own SEIS/EIS fund because they will ensure the capital works harder. They too have a stake in how the startup performs, so they don’t help secure investment and then take a step back. A co-founding company will play an active role in ensuring the fund is utilised to maximum effect to make the startup a success.
Alistair Marsden is chief marketing officer of Nova, which has co-founded over 80 tech startups to date and generated over £100 million in shareholder value
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