British founders are being urged to think twice before accepting cheques from investors lured by tax breaks, after fresh analysis revealed that companies relying on the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are overwhelmingly failing to scale.
Antler, the Singapore-headquartered early-stage venture capital firm, has crunched the numbers on more than 40,000 UK funding rounds over the past decade and concluded that the schemes, long held up by successive chancellors as the jewels in the crown of British start-up finance, are doing the opposite of what was intended.
Just 12 per cent of all UK companies raise follow-on capital after their initial round, according to Antler’s research. For those backed exclusively by EIS or SEIS money, the picture is bleaker still: a mere 3.7 per cent ever go on to secure further investment.
Adam French, partner at Antler and a familiar face on the British venture scene, did not mince his words. The schemes, he argued, prioritise “quantity over quality” and fail to provide founders with the strategic backing they need to grow into the kind of businesses that genuinely move the dial.
“If you were an investor in an SEIS fund, you’re primarily excited about the fact that you’re going to get 30 to 50 per cent of your investment back as a tax benefit in your tax return, and you don’t care as much about the outcome of the business that you’re investing in,” Mr French said.
The contrast with conventionally backed start-ups is stark. Where a company secured at least one institutional co-investor or an active angel in its opening round, the proportion going on to raise more capital leapt to 25.7 per cent, almost seven times the rate seen by the tax-relief-only cohort.
“The only way to do a good job in venture capital is to find the companies that go on to be outliers, and the tax-incentivised funds don’t have that mandate,” Mr French added. “They’re not looking to take insane amounts of risk because that’s ultimately what you have to do in venture to make a lot of money.”
The SEIS was introduced in 2012 by then-chancellor George Osborne to turbocharge the flow of capital into Britain’s fledgling start-ups, building on the older EIS, which dates back to 1994. Both offer generous reliefs designed to compensate investors for the considerable risk of backing unproven businesses.
Under current rules, investors can deploy up to £1 million per tax year, rising to £2 million for so-called knowledge-intensive companies that pour resources into research and development. Hold the shares for at least two years and any losses can be offset against income tax, an arrangement that, in effect, allows the Treasury to underwrite a significant chunk of the downside.
For more than a decade the schemes have channelled billions of pounds into the British innovation economy, and they have plenty of defenders in Whitehall and the City. But Antler’s findings will reignite a long-simmering debate about whether tax-led investment is genuinely building the next generation of British scale-ups, or merely creating a cottage industry of tax-efficient portfolios that quietly run aground.
Antler’s analysis did find that companies raising $1 million or more in their opening round were more likely to attract further backing, suggesting that cheque size remains a meaningful signal. But Mr French was emphatic that the calibre of the investor on the cap table mattered more than the headline figure.
His message to founders is blunt. “My advice to founders is to make sure you’re very selective about who you’re taking money from,” he said. “Don’t go for the first capital that lands on your table, make sure you go for the right capital.”
For Britain’s army of seed-stage entrepreneurs, the warning lands at a delicate moment. With venture funding still well below the highs of 2021 and the cost of capital biting across the board, the temptation to grab whatever money is on offer has rarely been greater. Antler’s data suggests that succumbing to that temptation may be the surest route to a dead end.