Whether it’s in dry cleaning or life sciences, we must tempt investors to back start-ups
In the alchemy of starting a business, a vital ingredient is required before idea, debt and sweat combine to produce profit from thin air: capital. It is the oxygen that breathes life into every new venture.
The UK’s wealth is built on the inventions, hard work and capital of our scientific and mercantile ancestors, but we are (perhaps foolishly) exporting it fast. From Rolls-Royce Motors to Cadbury to ICI, our 18th and 19th-century conglomerates have been auctioned off to the highest bidder. It’s a business, I suppose, but only sustainable if you keep planting acorns. Sadly we aren’t. While we are still brimming with ideas and aren’t short of capital, the two are just not combining to sow those seeds in the volume we need.
Two things have changed. First, the venture capitalists worked out that there was easier money to be made. Second, the spectacular returns from digital start-ups such as Facebook set a new standard for investment “success”.
This has meant traditional venture capital has withered. Since 2008 the number of venture capital trusts has fallen from 120 to 105, and investment companies from 322 to 289. The amount of money in the entire investment industry has hardly changed over this period; indeed, so little private capital is seeding new companies that for investments under £2 million the Government actually has 60 per cent of the market.
This is having a serious effect on vital parts of our economy. The search for a new drug, for instance, can take more than a decade, consuming enormous amounts of capital with no less risk of failure. For the modern venture capitalist this is anathema. As a result, hundreds of promising molecules are gathering dust on the shelves of our universities.
At least life science has the exciting smack of innovation about it. If you want to start a more mundane business, such as a chain of dry cleaners or a small manufacturing company, it is now virtually impossible to get private start-up or expansion capital.
Successive governments have tried to spur activity with myriad schemes. In essence they all rely on you finding an already highly taxed wealthy stranger (families, ridiculously, are often excluded) willing to engage an accountant and lawyer to fill in forms and submit themselves to the Revenue for approval prior to investing a restricted amount, in return for restricted tax relief, and possible further future tax relief on disposal, which may or may not materialise.
It sounds complicated because it is. The Government’s latest attempt, the Seed Enterprise Investment Scheme, is so complex that the tax publisher Tolley’s issued a 29-page digest on how to navigate the regulations. Not surprisingly uptake has been dismal.
Some of the industries that desperately thirst for capital are approaching the Treasury with their own ideas. The UK BioIndustry Association is frantically pushing “citizens’ innovation funds” — like ISAs but invested in tech and drug discovery — and the Stock Exchange is asking for stamp duty to be abolished on small, high-growth stocks. Both make sense but are far too polite for my taste. People with something to sell have shouted about reducing capital gains tax. This is a distraction; as someone who has been involved in several start-ups, I know that CGT on exit is the last thing on your mind when you’re trying to get an idea off the ground.
Frankly, given the urgency, it’s time to stop being polite and take the gloves off. First, we need to remember that companies are tax collectors, not payers. Businesses gather money from their customers in exchange for goods and services and then divide that cash between their staff, suppliers, shareholders and the Government. The State takes its share in VAT, PAYE, national insurance, business rates and corporation tax. More investment in new businesses means more money in the system, more growth, more jobs and more tax collected, whether those outfits make a profit or not.
Second, we know that complexity and uncertainty kill economic activity and especially investment, so let’s keep it simple, predictable and generous.
Third, the lack of investment, especially in new inventions, is fast becoming a national emergency, so this is urgent. The cash is there, but investors need a defibrillator to get the blood pumping again.
So in the Budget this month, the Government should declare a 24-month emergency investment window. Any investment, of any size, in any trading SME, by anyone, should attract 100 per cent tax relief with no form-filling and no pre-approval. We can prevent total heart failure at the Revenue by adopting the usual exclusion for property and finance-related businesses. That’s it: simple, generous and wildly effective.
By sweeping away all the painful regulation and rewarding risk-taking up front, the Chancellor would instantly transform the risk-reward equation and see a legion of exciting and useful new businesses spring up. As they all dutifully gather tax for him, thereby repaying the tax relief, and create jobs many of them would in time develop the world-beating products and conglomerates that will form the foundation of this country’s wealth for generations to come.