Article first posted on Business Live
Valuable article from our Chairman Prof Simon Gibson and his views on a 4 point plan to prevent meltdown of the UK’s vital start up sector “We must all recognise what is at risk as a result of this significant economic freeze”
Leading tech equity investor Simon Gibson has suggested a four-point plan to support the UK’s hard-pressed start-up sector.
While the UK and Welsh governments have provided emergency COVID-19 support packages running into hundreds of billions of pounds to support firms and staff, many early-stage companies – despite having high-growth potential – fall outside many of the measures. This is particularly true of start-ups less than two years old and those who are in the early development stage so are yet to be profitable.
However, Prof Gibson warned said the UK’s leading tech sector, underpinned by high potential start-ups from fintech to AI, faced wipe out with business casualties not seen on a scale, and potentially worse, since the dot com crash in 2000.
Prof Gibson is chief executive of tech-focused equity investment fund Wesley Clover and chairman and founder of the Newport-based graduate entrepreneurship Alacrity Foundation initiative, which has produced a conveyor belt of tech start-ups in Wales since its inception in 2012 and which has sister operations across the world.
His suggestions ( see below in full ) are based on enhancing tax breaks and using programmes that already exist for start-ups, like bringing forward future research and development tax credits, matching investments already secured, as well as providing up to 100% reliefs for those investing in start-ups.
Prof Gibson said tech start-ups were vital for creating not only well-paid and high-skilled employment, but in helping to boost UK productivity levels.
He added: “Government initiatives (UK and Welsh) are an unprecedented and understandable response and will save workers in many challenged sectors. To date, however, they have excluded start-ups, as most new companies are in incubators and therefore not in receipt of small business rate relief and are not able to furlough employees, which rules out recipients from working. The needs of innovative start-ups require much more nuanced thinking.
“We all must recognise what is at risk as a result of this significant economic freeze. Indeed, much more than the loss of short-term sales/revenues and temporary job losses. It is not overstating things to say that the self-sufficiency of the UK technology industry and our place in the global innovation supply chains post COVID-19 are under real threat as well.”
He said the existential threat to the sector has come after it had experienced a renaissance after several decades of decline.
He added: “Just a few weeks ago before any of us knew what COVID-19 was, it felt like the UK was on the verge of significant progress in data science, artificial intelligence, digital transformation, cybersecurity, cleantech and so on. Unfortunately, in two weeks, the previously bright future for many high potential UK companies has dimmed as both customers and investors press pause.
We know this first-hand, given that our active investment management company, Wesley Clover, backs dozens of companies whose fate is now tied to what comes next. Like any investor, we know times like these will mean some companies don’t make it.
“For reference, in the 2000 dot com crash more 50% of tech businesses worldwide were wiped out. The UK cannot afford the same today. To avoid this fate, we need a concentrated effort from Government and investors to both support the immediate cash flow needs of our innovative SMEs and help them continue to push forward and ensure they can continue to win global business.
“While efforts announced to-date to increase lending through our banks can be helpful, too often, they fail to engage with the high-potential SMEs and start-up companies that, while riskier, are a key to our nation’s future job growth and prosperity.
To address this, we should be doubling down now on the existing innovation support programmes that we know are effective in helping these innovative small firms develop and commercialise their products.
“We cannot afford to let our industrial and technology future slip through our fingers during this time of crisis. Luckily, the UK is equipped with the resources and the organisations to help ensure that we keep our tech sector successful if they are mobilised and aligned.”
His four suggestions:
Fast track R&D tax credit loans
Provide 100% R&D tax credit loans for all start-up tech companies based on their last years claims in the form of a loan up to £100,000 payable immediately. The tax credit can subsequently be offset against their 2021 claim.
In 2017-18, £835m was claimed under the SME scheme for claims of less than £100,000
Job Retention Scheme plus
Extend the Coronavirus Job Retention Scheme package offered to employers to start-ups but release the founders from the furlough working restriction.
Using 2018 data for new business births and assuming the same levels for 2019 (taking into account survival rates), it is estimated there are 342,000 start-ups that were set up in 2019 and would not be eligible for support under the Coronavirus Job Retention Scheme as they would not have any accounts to submit as evidence.
Assuming all start-ups take this up over the three- month period this would cost a maximum of £2.3bn.
Matching existing investments
Offer to match fund any existing debt or equity venture round term sheets up to the value of £500,000 with a loan note structure with a bullet payment which bears no interest for 24 months. The loan could incentivise early repayment.
According to the British Venture Capital Association, 176 companies received seed or start-up equity investment in 2018. This would mean that around £100m would need to be made available for this scheme for 2020.
Tax reliefs for investors into start-ups
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme( EIS are seen as having been vital tools in securing investment for high potential start-ups since the schemes were introduced.
However, it is likely that investors will be less willing given the economic circumstances caused by the COVID-19 pandemic to risk funding unless incentivised further.
It is therefore proposed that SEIS relief is increased to 100% and EIS to 60% for a period of 12 months. Using the estimates from 2017-18, this would cost an additional £673m in tax relief benefits to investors. This could be limited to only technology-based investments which would reduce the relief.