These schemes are popular with entrepreneurs and investors alike and make a huge difference to the ability of earlier-stage enterprises to raise investment. They create a significant incentive for individuals with an entrepreneurial mindset to apply their risk capital to a startup or growing company in the UK.

The economy needs growth and innovation, and entrepreneurialism drives this, fed by investment. SEIS and EIS work. With growth forecasts below desired levels and the investment landscape still challenging, it is worth considering how the benefits of SEIS and EIS can be made even greater.

Startups and growing companies progress at significantly different rates and have very different requirements. The main constant is the appetite for investors to participate. Current EIS rules include time and cash limits which can be restrictive. I’m a fan and beneficiary of the schemes, here are some thoughts on how they could aid growth further.

SEIS cash limits

As of April 2023, the amount of SEIS investment companies could raise was increased from £150 to £250k. While there is no data available yet on the impact of this change, it enables startups to secure more initial funding to aid early-stage growth and development, which can only be helpful, more so with inflation and interest rates still running high. However, as of January 2024, the average seed funding round in the US was $3.5 million and the median pre-seed deal value reached nearly $1 million in Q1 2024. £250k is significantly below these figures.

While there are big benefits to running lean, and companies don’t have to raise the full amount allowed under SEIS, having the ability to raise larger amounts within the scheme in the very early days could be advantageous, attracting more investors and providing a more solid footing at this important stage of development.

EIS cash limits

A company is restricted to raising up to £5 million in total in any 12-month period from EIS and other venture capital schemes, with an overall lifetime limit of £12 million (or £10 million and £20 million respectively for Knowledge Intensive Companies (KIC)). And if more than 50% of the company's share capital is acquired by another entity within the three-year period, the company may lose its EIS qualifying status, and investors their ability to claim the related tax reliefs.

This means that if a company is very successful and breaks the rules, investors get penalised for it growing too fast. Extending the EIS cancellation period from three years to five years would allow more money to be raised, incentivise investors and not penalise fast growth.

Time limits

A company qualifies to receive investment under EIS if it’s within 7 years of its first commercial sale, but it can take time to build a profitable company that is established in the market. Removing the EIS incentive because a company has reached the time limit could be the deciding factor in where investors place their funds.

For many startups, the nature of the industries they are working in means that it takes longer periods for them to get up and running or to gain a solid client base. For example, when developing quantum computing tools or making enterprise sales, in which cycles can be considerably longer. Making EIS more flexible, over a time frame rather than a time period, would help startups that are raising funding to grow while still establishing themselves in the market or developing their offering.

Alternatively, in place of a time limit dictating EIS eligibility, a company's turnover could be the deciding factor, specifically, when it includes an element of profitability. This would mean the period of a company's growth when they need individual investors would not be curtailed by time.

Everybody wants growth

Growth is the aim, for the government, the economy, companies and investors. SEIS and EIS are already popular and successful in supporting entrepreneurship, innovation and growth. Looking at ways to enhance them could increase their impact.

Additionally, scaleup investment has long been an issue this side of the pond. Extending the time limit for eligibility under EIS or changing it to a time frame could be part of the solution to tackling this and help give companies more time to achieve higher valuations and future funding. The ability to invest under EIS slightly later, when companies are at a slightly maturer stage, would offer investors a theoretically less risk-based investment and would be helpful for startups of a certain size to enable their growth. Food for thought on finding food for growth.

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