Originally published in AngelNews
“The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”
Michael Portillo, Chief Secretary to the Treasury.
When the Enterprise Investment Scheme was launched in 1993, its intention was simple: enable SMEs to raise risk equity finance. In 2015, the Department for Business and Skills released data that 60% of all private sector employment was in SMEs. 99.3% of all businesses in the UK can be counted as SMEs. It’s easy to see, therefore, why the government was incentivised to create the scheme. But if you dig further into the data, you find something very interesting. While SMEs are obviously beneficial, there is a smaller group of companies punching well above their weight. These have been called the “Super SMEs”.
The Super SMEs are the high growth companies which, in 2015, created three times more jobs than the FTSE 100. A small group, compiled of 30,000 companies, has average growth rates of 20% year on year; its companies punch well above their weight. These are the companies which the EIS scheme was created for: high growth, high risk, but with the potential for high returns for their investors. And, ironically, these are the companies which struggle most to find funding. Funding for rounds of $5 million or more is hard to come by, and not easily found in Europe.
“The UK does a great job of backing small firms and cottage industries, but there’s little point getting a thousand seeds to sprout if they are then left to wither or transplanted overseas… If you don’t address this, then the UK will continue to be where inventions are born, but not bred for long-term success.”
Eric Schmidt, Executive Chairman of Alphabet.
The question, why the UK has not produced a Google has been often posed. If we look at the data, we can see some interesting insights. Last year, we saw approximately 3,700 deals in the US. Approximately half of these were seed rounds, and the other half were Series A, B and beyond. In Europe, by contrast, we still only see approximately 350 later stage deals across all industries. Only 43% of European startups now go on to do a growth round, compared to 85% of companies in the US. Growth capital is clearly a pain point for Europe.
This landscape is shifting, but not fast enough. Admittedly, there has been a 20% year on year increase of growth rounds in Europe. The EIS scheme could be better mobilised for this purpose. This was shown in 2014 when the government excluded solar panels and renewable energy projects from benefiting from both public subsidies and tax breaks. Investments into such projects should, clearly, be promoted by government. However, they were lower risk investments which went against the intention of the EIS; to promote investments into areas of deliberate risk. Investing in high growth SMEs is, we believe, the best way to take advantage of the scheme. As Sherry Coutu, a prominent Angel investor and entrepreneur so succinctly put it: “We need to help more UK start-ups become scale- ups.”
Perkbox is one of the UK’s fastest growing companies
Super SMEs are “super” because they find new ways of tackling old problems. Take the company Perkbox, for example. This is one of the UK’s fastest growing companies. It has built an impressive platform which enables SMEs to offer employees and customers over 200 perks: free phone insurance, cinema tickets, 2 for 1 meal deals as well as health related resources such as exercise videos. It has over 300,000 paying members and customers include Deliveroo, Worldpay, Le Pain Quotidian, Holland and Barrett, BlaBlaCar and so on. It has just announced it is opening a new office in Sheffield and aims to create another 100 jobs by the end of this year, almost doubling its headcount. In 2016 the company grew is revenues by 250%+. Why has it been able to access such growth? Using the latest technology, its platform allows smaller companies, who could never afford perks for their employees, to tap into their aggregated resources. It’s a great example of a company innovating on an old model and creating new value in the market.
Push Doctor is a fast growing online GP service.
Or even look at a company like Push Doctor, who tackle a problem most of us know well: it’s difficult and inconvenient to see a GP. Using the webcam technology on a connected device, at a time that’s convenient for you, you can see a qualified and vetted GP in 6 minutes. Private health is already a £1 billion market and Push Doctor’s mission is to make that more accessible to the masses. It currently has 7,000 GMC registered UK GPs and has serviced thousands of customers. The number of NHS GP appointments has been growing at 15% per annum. It’s clear that the NHS can’t add 15% more GPs each year. Push Doctor is a leading example of how technology can be harnessed to deliver a new solution to an age- old problem.
EIS money can not only provide new jobs and build new companies, it can also impact the way we gain access to healthcare, relate to one another and build the intelligent products of the future. This is what the scheme was set up to do; ensure that the UK harnesses the innovators that will not just provide jobs but change the way we live.