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Even unicorns have to start somewhere

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Stephen Hemmings - Menzies Accountant

Stephen Hemmings – Tech Sector Specialist

Conditions for growth in the UK tech start-up have never been better as investment hit a record high last year. Further improvements are on the horizon as there have been some changes to popular tax breaks, designed to encourage long-term investment in high-risk businesses.

A report by Tech Nation and Dealroom has confirmed that £10bn was pumped into tech-led start-ups in 2019 in the UK, 45 per cent of this money received from US and Asian investors. Financial services and food tech start-ups (Fintech company, Revolut and Taster) are amongst the sectors attracting the largest share of this investment.

Strength in numbers

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The creation of eight new unicorn companies last year, further demonstrated the strong performance of UK tech led start-ups, with an estimated value of more than $1bn. This has brought the total to 77 which is double the number in Germany and three time as more than in France.

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) have continued to play a pivotal role in luring venture capital investment for start-ups that are high risk – businesses that need investment in research and development to bring their proposition to market, which normally might find it harder to access debt finance. In 2017/18, a record of 1.9bn was invested in UK companies in compliance with these schemes and investor interest in the sector has remained high.

Changes to the EIS and the SEIS schemes last year per the Patient Capital Review are helping to ensure that this investment is used to support long-term growth, which leads to delivering maximum benefit to the economy and the making of sustainable employment. Other changes are the amount of investment that can be made in Knowledge Intensive Companies. The level of investment has doubled to £10m per year and now individuals can also invest up to £2m per year. Furthermore, £2.5bn has been allocated to the British Business Bank as part of the British Patient Capital initiative. Meanwhile, to ensure funds are put to good use by supporting the sustainable growth of innovative business, the Government has tightened the rules around capital preservation.

Upon the discoveries of the Patient Capital Review and public consultation, the Government plans to set out a strategy to ensure Knowledge Intensive Companies continue to attract venture capital investment to support their growth plans. Whilst a timescale has not been set for this, it’s possible that further news about the strategy could overlap with the forthcoming budget on 11th March.

What can tech start-ups do?

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To make sure that they are attractive to investors, tech start-ups should ensure that they have the optimal structure in place and that the business is well managed. Those start-ups that have tested market demand, have a strong business plan and are preparing their way to market, will catch the eyes of possible investors rather than those who haven’t got the fundamental rights. To attract investment under the EIS or SEIS, businesses must make sure they meet the relevant qualifying criteria. To qualify for investment under the EIS they must have an operational presence in the UK. They must also be controlled by individuals and investment being made in the business must be new money and not money that has been generated by converting loans in to shares.

With momentum from a government that is keen to support small businesses and economic growth post Brexit, start-ups in the sector are in a great position to grow strongly in the year approaching. To achieve unicorn status, start-ups that keep to business management best practice, while ensuring they are structured and also keep investors in mind, will boost their chances of success.

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Stephen Hemmings - FCA

Partner

Stephen Hemmings is a Menzies Tax Partner in our London office specialising in business tax planning. He also heads up the Technology sector team