By Matthew Cushen
The simple answer is because your potential investors do.
No credible entrepreneur would consider launching a product or service without getting into the head of their consumer. They would make sure they understand the needs they were satisfying, when, where and how competing options where purchased and consumed, and what it takes to influence the consumer.
It’s no different when ‘selling’ your business to investors. The more you understand about them, their rationale and how they make decisions, the better you’ll do in attracting cash to your venture. This means researching what you can about a potential investor. Are they professional (i.e. invest for a living, as part of a structured firm, maybe investing other people’s cash) or amateur (an angel investor, either alongside their day job or having retired)? Where does the cash come from? What is their investment rationale? What else is in their portfolio? How much do they like to get involved?
There’s one aspect that drives many investors in the start-up space and one reason that equity investment for start-ups is more available in the UK than in many other countries. The government have for years been encouraging investors with generous tax reliefs, in recognition of the highly speculative nature of seed investing.
The Enterprise Investment Scheme (EIS) was set up in 1994 and continued to be supported through Labour governments and was made more attractive during the coalition government in 2011. It was further modified a couple of years ago, bringing it back to its original intent, to encourage investment into innovative start-ups (a necessary re-set after too many financial services spivs managed to create products for investors with the tax reliefs but without the risks). In the 2018/19 tax year, around 4,000 businesses raise circa. £1.8 billion qualifying for EIS reliefs (source: HMRC).
The Seed Enterprise Investment Scheme (SEIS), established in 2012, is an extension of EIS and offers even more generous reliefs as an incentive for investors in very early stage businesses. In the 2018/19 tax year, 1,985 companies raised £163 million through SEIS.
The tax advantages for investors in an SEIS qualifying business are significant. An individual investor can make multiple SEIS investments up to £100,000 per annum and qualify for:
You can see that these are significant for an investor paying income tax. And even more so if they have a capital gains tax liability and/or are contemplating their own mortality. Therefore for any start-up looking to raise equity investment, it is very difficult if they do not qualify for SEIS or do not understand it.
Luckily, the rules are pretty inclusive. You should do your own research or ask an accountant to help, but broadly the criteria are:
The process with HMRC is pretty simple and is now digital. Most investors will want certainty about SEIS qualification before they invest. Once your first investor is interested – i.e. you have a term sheet or something else that describes the deal, an application for ‘advanced assurance’ can be submitted to HMRC approval. All it takes is a simple business plan and answering a few other questions. They are looking to make sure it is a proper business investment where ‘capital is at risk’. Applications are normally processed in around 2 to 3 weeks, but sometimes there are delays or further questions. Then after the investment is made, the business applies to HMRC for a specific certificate for each investor – that they then use to claim their tax reliefs.
The maximum raise under SEIS is £150,000. This is considered enough to get a business up and running and able to create some proof points before needing to raise again.
Beyond this the business can raise their next funds, up to £5 million (or in some cases £12 million), under the EIS scheme. The tax reliefs have a similar structure, but are less generous – e.g. 30% income tax relief – to reflect a slightly less risky investment.
HMRC has a guide to SEIS and a helpline – 0300 123 1083. Both are easier and more useful than you might expect.
Are you interested in equity investment? The Startup Series, hosted by smallbusiness.co.uk, gives company the chance to secure equity investment of £150,000 to £250,000 every month. To enter visit startupseries.uk.