Generous tax breaks to encourage investors to back young companies proved insufficient to prevent a 15 per cent fall in the value of funding being committed last year under the government-backed Enterprise Investment Scheme (EIS).
HM Revenue & Customs figures released on Thursday showed the number of companies raising funding through the scheme fell from 4,480 to to 4,205 last year, raising just under £2 billion between them, down from a record £2.3 billion the previous year.
The investment scheme was established in 1994 and provides generous income and capital gains tax reliefs to investors to encourage them to risk capital in early stage businesses. Its sister programme, the Seed Enterprise Investment Scheme, specifically targets companies that are less than three years old.
HMRC said the decline was “most likely a result of rising interest rates and some natural reduction following the record-breaking year in 2021 to 2022”.
The only regions to have seen an increase in the amount of EIS investment raised were the East of England, which is home to the Cambridge science and technology hubs, and Northern Ireland, which saw a 57 per cent increase in the amount of investment raised.
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The overall fall mirrors declines in the total amount of venture capital (VC) investment into growing companies in the UK. Data compiled by Pitchbook, the research firm, found that UK investment fell to £16.1 billion in 2023, down from £28.9 billion the previous year.
Sarah Chapman, chief executive and co-founder of Glowb, a solar panel installer, said EIS investors were influenced by the same factors as institutional investors. “I suspect this is due to a more difficult fundraising environment in general.”
Chapman, 39, raised £1.8 million from four venture capital funds and seven angel investors last year. She previously co-founded and sold Faro Energy, a company selling solar energy to business customers in emerging markets.
Jacob James, chief executive of GrowTropicals, an online seller of exotic plants, raised £275,000 from two angel investors last year, but found it more challenging and time consuming than he expected.
“We finally raised money in July but we were looking to raise for nine to 12 months before that,” said James, 31.
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Admitting to being “a little clueless” to begin with, James said he originally pitched to venture capital firms but that “they weren’t interested in investing £250,000 — that was too small a cheque for them”.
“After a few months we realised we were going down the wrong path and decided to find an angel or a couple of angels who had more experience in either e-commerce or in plants or another kind of perishable goods,” said James.
James’s accountant eventually introduced to his main investor, who put in £250,000. Using EIS was not just his preference but a precondition of the deal, said James. “I didn’t know a lot about EIS but our investor wanted to invest through EIS so it was him driving it.”
Mitchell Fasanya, co-founder of Searchland, a planning and data platform for property developers, has raised £4.5 million from investors over the last 24 months using both SEIS and EIS. He previously co-founded Fanbytes, a social media marketing business, and says there are multiple factors involved in the decline in venture capital and EIS deals.
Fasanya, 27, agreed with James that institutional investors are “looking for unicorn-potential companies more and more. With the rise in AI a lot of businesses just don’t look sexy from a growth profile now.” He also suggested that some businesses are shying away from investment altogether. “Some businesses are opting for a bootstrapped approach. VC has been getting a bad rap in founder circles — mine included — where the pressures and expectations mean some people look elsewhere,” he said.
