Start-ups Siphon Cash Other Firms Need To Thrive

Sowing seed funding for start-up businesses is reaping rewards for entrepreneurs and investors, but is sucking cash away from more established firms that need extra financial stimulus, according to a new report.

More than 650 new, fast-growing companies collected £1.5 billion in investment in 2013 – an increase of more than a third on the year before, according to business analysts Beauhurst.

The study cites two main reasons for the spurt in funding for new start businesses –

  • The increasing popularity of crowdfunding platforms like Crowdcube and Funding Circle
  • The investment tax breaks offered by the government’s Seed enterprise Investment Scheme (SEIS), which started in April 2012.

Beauhurst figures a combination of these schemes and a higher profile for investing in start-ups boosted the amount of many available for new firms by eight times, compared to the year before.

Follow-up finance fears

But the company warned this money was not all new money, and a lot was coming from funds previously available to later stage investments.

“These firms are losing market share and one of the reasons is the tax breaks available through SEIS are much better than those offered by the Enterprise Investment Scheme or Venture Capital Trusts,” said Dr Stephen Bence, chairman and co-founder of Beauhurst.

He also expressed concern that falling follow-on finance could stop the growth of seed companies in their tracks and called for the government to look at how to encourage investors to fund later-stage businesses as well.

“£1.5 billion is not a lot of investment for a giant corporation but for start-up and growing companies, funding on that scale is the difference between getting the next Mark Zuckerberg, the founder of Facebook, out of his student rooms and onto the road to the FTSE 100.

SEIS tax breaks

“But while early-stage and late-stage investment is strong, it’s the middle-stage companies that are losing ground – and that’s what successful start-ups become. This is the traditional preserve of venture capital investors who are retreating to larger investments and leaving a significant equity gap in the market.

“Government tax incentives have hugely helped stimulating investment in start-ups, but the Chancellor needs to move on to mid-stage business funding otherwise new firms risk hitting a financial wall before they mature.”

SEIS provides investors with tax breaks at the start and end of a three-year investment that considerably reduce the risks of investment in new businesses.

The incentives include a 50% income tax reduction on investments of up to £100,000 and capital gains tax reliefs and exemptions.

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