Financing growth in innovative firms – can intervention plug the funding gap for technology businesses?

With its consultation on financing growth in innovative firms having closed on 22 September, the Government is now considering the responses received on the subject of how it can help improve access to capital for financing growth in innovative firms, those firms that increase productivity by introducing new ideas into markets.

It is acknowledged that the UK provides a fertile ground for world-leading innovation, but a lack of effective supply of ‘patient capital’ continues to hold some UK firms back from commercialising their innovations successfully. The Government defines patient capital as “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”.

While patient capital is used by firms across different sectors, it is particularly important for younger firms that invest heavily in research and development (R&D) where the market for capital to scale up effectively remains challenging.

A review into the current arrangements, first announced by the Chancellor in last year’s Autumn Statement, is to be conducted by a panel of industry experts, with the businessman Sir Damon Buffini to chair proceedings. The panel will consider the availability of long term finance and the potential obstacles for entrepreneurs and start-ups looking to access patient capital for growth, having identified a £4 billion funding gap that exists between American firms and British firms.

As part of the process, the panel will consider the performance of current investment programmes, as well as tax schemes and reliefs such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCT), Social Investment Tax Relief (SITR), Entrepreneurs’ Relief, Investors’ Relief and Business Property Relief (BPR).

A number of organisations have now published their responses:

David Petrie, the ICAEW’s head of corporate finance, said:

“The UK has a serious systematic problem finding funding for innovative companies that need cash up-front. We are very good at finding money where companies are already profitable, or the technology is proven, but when it comes to developing exciting new technology – whether that’s pioneering medicines or ground-breaking engineering – there is a serious gap”.

“This consultation is a genuine attempt by the government to fix the problem, which is great news. Recognising that there is a problem is half the battle won, and it looks like they are prepared to support some fairly radical ideas”.

“Whatever the solutions may be, they must be the best solutions for British companies and crucially their finance directors and founders must be prepared to use these new sources of funding. Tax relief alone will not be sufficient to support firms.”

The Royal Society said that the UK was known for its innovation, but the present system posed a number of challenges:

“Our Fellows have informed us that there remain issues that prevent the full translation of the UK’s research strength into new technologies and companies that maximise its benefit to the UK economy and society.”

“These include barriers that slow down and inhibit investment into early stage companies, such as University spin-outs; a lack of patient capital to help science and technology companies grow into “unicorns” with market valuations of at least £1billion, and a shortage of credible management teams in the UK, particularly for leading scale-up companies.”

The Chartered Institute of Taxation (CIOT) has made a number of recommendations in relation to individual reliefs, noting, for instance, that BPR had remained largely unchanged for 25 years and that there were pitfalls in the qualifying conditions of both EIS and SEIS.

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