Potential UK unicorns given boost for the year ahead

Even UK unicorns have to start somewhere.

With investment in UK tech start-ups reaching a record high last year, the conditions for growth in the sector have never been better. Now, some changes to popular tax breaks, which are designed to encourage long-term investment in high-risk businesses, are set to bring further improvements.

The latest report by Dealroom and Tech Nation has confirmed that £10 billion was invested in tech-led start-ups in the UK in 2019, with 45% of this money coming from Asian and US investors. Among the sectors attracting the biggest share of this investment were financial services and food tech start-ups — businesses such as fintech company, Revolut, and the food delivery business, Taster.

Further evidence of the strong performance of UK tech-led start-ups last year was the creation of eight new unicorn companies, with an estimated value of more than $1 billion. This brings the total number of UK unicorns to 77, double the number in Germany and three times as many as in France.

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) continue to play an important role in attracting venture capital investment for high-risk start-ups — businesses that require investment in R&D to bring their proposition to market, which might typically find it difficult to access debt finance. In 2017/18, a record £1.9 billion was invested in UK companies under these schemes and investor interest in the sector has remained high.

Some changes introduced to the EIS and SEIS schemes last year as part of the Patient Capital Review are helping to ensure that this investment is used to support long-term growth, leading to the creation of sustainable employment and delivering maximum benefit to the UK economy.

Among the changes, the level of investment that can be made in Knowledge Intensive Companies under the schemes has doubled to £10 million per year and individuals are able to invest up to £2 million per year.

In addition, a further £2.5 billion has been allocated to the British Business Bank as part of the British Patient Capital initiative. At the same time, the Government has tightened the rules around capital preservation, which will help to ensure funds are put to good use by supporting the sustainable growth of innovative businesses.

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Building on the findings of the Patient Capital Review and the subsequent public consultation, the Government is intending to set out a strategy to ensure Knowledge Intensive Companies continue to attract venture capital investment to support their growth plans. While no timescale has been set for this, it is possible that further news about the strategy could coincide with the forthcoming Budget on 11 March 2020.

To ensure they are attractive to investors, tech start-ups should ensure they have the right structure in place and the business is well managed. Those with a robust business plan, that have tested market demand and are preparing the way to market, will be more attractive to potential investors than those that haven’t got the fundamentals right.

To attract investment under the EIS or SEIS, businesses should ensure they meet the relevant qualifying criteria. For example, to qualify for investment under the EIS they must have an operational presence in the UK. They must also be controlled by individuals and the investment being made in the business must be new money, not generated by converting loans into shares.

With the right headwinds from a Government that is keen to back small businesses and support economic growth after Brexit, start-ups in the sector are well placed to grow strongly in the year ahead. Achieving unicorn status doesn’t have to be a pipe dream and those that adhere to business management best practice, while ensuring they are structured with investors in mind, will increase their chances of success.

Written by Stephen Hemmings, tax partner and technology sector specialist at accountancy firm, Menzies LLP

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