For many new companies, access to capital is one of the critical factors that can mean the difference between success and failure as the business grows.
Asa result, investment by individuals (commonly known as business angels) in exchange for equity in the business has become one of the key sources of funding in many innovative firms. In fact, it is estimated that business angels collectively invest an estimated £1.5 billion per annum and are the UK’s largest source of investment for start-ups and early-stage businesses seeking to grow.
To encourage greater levels of investment by such individuals, the UK Government has created two incentives for investors.
The first - the Enterprise Investment Scheme (EIS) - offers tax relief on new shares in small companies and individuals can invest up to £1,000,000 in any tax year and receive 30 per cent tax relief.
The second – the Seed Enterprise Investment Scheme (SEIS) - was introduced in April 2012 to encourage investment in early stage companies. Investors (including directors) can receive initial tax relief of 50 per cent on investments up to £100,000 and Capital Gains Tax (CGT) exemption for any gains on the SEIS shares.
Whilst both are examples of direct government policy to encourage a more entrepreneurial economy in the UK, they are also proxies for business angel funding activity and enable us to understand where such investments are being made across the country.
According to the latest data, 2,130 companies in the UK were financed to the tune of £174 million under SEIS during the period 2013-16, with two thirds of this investment and activity based within two regions namely London and the South East of England. Wales had 135 companies supported through £10.6m of investment which is equivalent to only two per cent of the UK total.
More worryingly, there had been no change in the number of Welsh EIS deals between 2013-14 and 2015-16 and a decline of 36 per cent in the value of those deals. This compares to an increase of 12 per cent in the number of UK deals and 5 per cent in their value over the same period. The average SEIS investment in each Welsh firm has reduced from £90,000 in 2013-14 to £57,500 in 2015-16 and is now the lowest of all UK regions.
In terms of EIS which supports large investments in companies, 2,845 UK firms were supported with £1.59 billion of funding and again, two thirds of the investment and activity were to be found in the same two prosperous regions of the UK.
Wales had 185 companies funded by £66.9m of investment, which was equivalent to 1.9 per cent of the total number of UK companies supported but only 1.2 per cent of the funding.
Again, whilst the number of UK firms supported and the amount invested had increased by 24 per cent and 19 per cent respectively, there had been a decline in Wales of 8 per cent in businesses supported and 10 per cent in funding. In addition, the average amount invested in EIS firms in Wales over the period 2013-16 was £361,622 as compared to £558,288.
Therefore, this data shows that Wales has less business angel activity than it should
expect given the size of the business sector and this approximates to around £90m of lost investment every year. In addition, the deals in Wales are also smaller than those for the rest of the UK - in terms of seed capital, Welsh firms were only attracting 75 per cent of the average UK SEIS investment and 62 per cent of the average UK EIS investment.
So how can we change this trend so that more funding is attracted into early stage Welsh firms and Wales develops a strong structure to support future angel investment?
One positive step is the decision by the Development Bank of Wales to launch a new platform - Angels Invest Wales - which will match opportunities from its investment activity across all sectors and business sizes thus maximising private sector investment into new deals. With fifty eight new investors signed up, this promises to be a long overdue innovation es and will hopefully address the poor record of its predecessor xenos in supporting funding within early stage firms in Wales.
However, the Welsh Government could go even further and examine if, under its new devolved taxation powers, higher levels of incentives could be granted to investors in Welsh firms under the SEIS or EIS schemes.
For example, if the tax write-off could be increased under either scheme, then that could not only make potential investments into Wales more appealing but also act as a magnet for attracting those technology-intensive start-ups from across the border that are looking for funding.
Whether this is actually possible certainly needs to be explored further but given that Wales has not done well in terms of attracting early stage business angel funding into businesses over the last few years, anything positive that we can do can only help the entrepreneurial talent we know exists across Wales to grow their businesses.