Totally right, Alex. It's one example of how the UK government has (over time) constructed a startup ecosystem that seems designed to generate far too many low or zero outturns. There are others too - IUK grant competitions, heavy R&D tax credits, poor targeting of nations & regions funding to fee-driven 'venture' funds....
Strong agree on this - short-term incentives on EIS should be binned IMO. They should invest that money in stuff that will actually create more valuable startups & economic growth, like reforming planning regulation, better salaries for civil servants and frontier research.
The cap gains treatment is good and is a smart incentive for people interested in playing long-term games of value creation.
However, separate point - I'd be curious to see how performance of many institutional VCs in Europe matches up against this. Often not any better, I would wager. The ecosystem has a similar problem as a whole, very much subsidised by the government and not delivering the value it should.
Re: institutional performance, my first piece was on the overuse of government subsidy, so I'm sympathetic. At the same time, when you look at the few benchmarks that do exist, EIS funds and VCTs underperform the median non-US VC fund.
This is really against the grain of opinion in the VC community - not saying that’s a bad thing at all, good to see some challenge to the consensus. I would query one minor point - you say you disagree with view that VC is inaccessible if you’re not based in London and there’s is empirical evidence on that. Can you point to that? I would say there’s fairly good qual + quant evidence that it is meaningfully harder to raise funding outside London/SE, partly due to thin pools of human and financial capital. See also https://www.gov.uk/government/publications/business-equity-finance-and-the-uk-regions
It’s less against the grain than you might think! One of the reasons I wrote this was that I was fed up of hearing people in VC grumble about EIS/VCT but not have the conviction to put pen to paper.
On your specific q. I’m not disputing that there may be imbalances outside London, but that ‘inaccessible’ is overstating it. Geography matters, but I would argue that in the era of Zoom/remote work, it matters a lot less than it used to. I’ve met plenty of entrepreneurs outside the capital who’ve done very well - including one of the founders I spoke to for this piece.
I’ve seen a few of these govt. reviews on regional imbalances before, but I’ve rarely found them hugely persuasive for a couple of reasons:
Firstly, they often bulk out their citations with wildly out-of-date studies from when the UK VC ecosystem was a fraction of its current size. The ecosystem has matured so quickly in the past few years that data from 7/8 years ago probably shouldn’t be given a tonne of weight. In the past 6 years, UK VC 'dry powder' has more than tripled.
Secondly, they don’t account for variations in number and quality of company by region. They often just add up the number of deals, their median size and put them side-by-side. In a country where top academic institutions and technical talent are not evenly distributed (we can debate the reasons for this, but it’s true) - this isn’t necessarily a very useful measure. It’s partly why govt. efforts to bolster the venture market in individual regions have often failed - they literally haven’t been able to find enough teams to give money to. I document this a bit in another post: https://chalmermagne.substack.com/p/a-bridge-fund-to-nowhere
I made a similar comment to M Jackson’s LinkedIn post of your article, but everything you describe in this post is exactly what I experienced; a fund more interested in fees than value (paid them more in fees than I did a team of 6 in the year), inhibiting us with tranches, and a shareholders agreement that a lawyer once described as “the worst shareholders agreement I have ever seen in my life”.
They even find loopholes to circumvent government demands for founders to maintain significant shareholder control by setting up a board that out numbered us and had rights to veto any decision made by the person of significant control).
Once I and my exec team left, they kept the company zombified for another 3 years to collect their tax relief.
I'm so sorry you went through this. This is definitely one of the more extreme cases I've heard about - and you should name and shame if you're in a position to. Unfortunately, it's an industry that thrives on a lack of transparency.
Boundary Capital is their name, and I still see them listed on many EIS fund recommended sites. Though they seem diminished over the years as their numbers have reduced (along with scrubbing my company off their portfolio history).
They are very much on the extreme case. I once had a founder who reached out to me after receiving an offer from the MD. After I gave her my recommendation, a few weeks later she revealed not only did he abuse her for not signing, she realised he had redacted pages from the shareholders agreement with the intent of putting them back in later after she signed.
Excellent piece. EIS / SEIS is clearly useful for SMEs as it is often the only source of funding for businesses that aren't tech - the world of pubs, light industry, transportation - businesses that aren't seen as hot simply because the multiples end up in a different place and growth/scalability slower. EIS reflects risk and while the upfront relief is the one that gets the attention, the negligible value relief (which applies to all non-listed shares) is probably the larger cost to the Exchequer. But without this relief it would make investing in small businesses arguably too risky for individual investors.
In my view, there's an open question about whether venture-style schemes (as opposed to some kind of loan guarantee scheme) are really the best way of supporting these kinds of businesses
Totally right, Alex. It's one example of how the UK government has (over time) constructed a startup ecosystem that seems designed to generate far too many low or zero outturns. There are others too - IUK grant competitions, heavy R&D tax credits, poor targeting of nations & regions funding to fee-driven 'venture' funds....
Thank you! I have a whole piece on some of these interventions: https://chalmermagne.substack.com/p/a-bridge-fund-to-nowhere
Strong agree on this - short-term incentives on EIS should be binned IMO. They should invest that money in stuff that will actually create more valuable startups & economic growth, like reforming planning regulation, better salaries for civil servants and frontier research.
The cap gains treatment is good and is a smart incentive for people interested in playing long-term games of value creation.
However, separate point - I'd be curious to see how performance of many institutional VCs in Europe matches up against this. Often not any better, I would wager. The ecosystem has a similar problem as a whole, very much subsidised by the government and not delivering the value it should.
Thanks - appreciate it!
Re: institutional performance, my first piece was on the overuse of government subsidy, so I'm sympathetic. At the same time, when you look at the few benchmarks that do exist, EIS funds and VCTs underperform the median non-US VC fund.
This is really against the grain of opinion in the VC community - not saying that’s a bad thing at all, good to see some challenge to the consensus. I would query one minor point - you say you disagree with view that VC is inaccessible if you’re not based in London and there’s is empirical evidence on that. Can you point to that? I would say there’s fairly good qual + quant evidence that it is meaningfully harder to raise funding outside London/SE, partly due to thin pools of human and financial capital. See also https://www.gov.uk/government/publications/business-equity-finance-and-the-uk-regions
It’s less against the grain than you might think! One of the reasons I wrote this was that I was fed up of hearing people in VC grumble about EIS/VCT but not have the conviction to put pen to paper.
On your specific q. I’m not disputing that there may be imbalances outside London, but that ‘inaccessible’ is overstating it. Geography matters, but I would argue that in the era of Zoom/remote work, it matters a lot less than it used to. I’ve met plenty of entrepreneurs outside the capital who’ve done very well - including one of the founders I spoke to for this piece.
I’ve seen a few of these govt. reviews on regional imbalances before, but I’ve rarely found them hugely persuasive for a couple of reasons:
Firstly, they often bulk out their citations with wildly out-of-date studies from when the UK VC ecosystem was a fraction of its current size. The ecosystem has matured so quickly in the past few years that data from 7/8 years ago probably shouldn’t be given a tonne of weight. In the past 6 years, UK VC 'dry powder' has more than tripled.
Secondly, they don’t account for variations in number and quality of company by region. They often just add up the number of deals, their median size and put them side-by-side. In a country where top academic institutions and technical talent are not evenly distributed (we can debate the reasons for this, but it’s true) - this isn’t necessarily a very useful measure. It’s partly why govt. efforts to bolster the venture market in individual regions have often failed - they literally haven’t been able to find enough teams to give money to. I document this a bit in another post: https://chalmermagne.substack.com/p/a-bridge-fund-to-nowhere
Reading this article gave me PTSD.
I made a similar comment to M Jackson’s LinkedIn post of your article, but everything you describe in this post is exactly what I experienced; a fund more interested in fees than value (paid them more in fees than I did a team of 6 in the year), inhibiting us with tranches, and a shareholders agreement that a lawyer once described as “the worst shareholders agreement I have ever seen in my life”.
They even find loopholes to circumvent government demands for founders to maintain significant shareholder control by setting up a board that out numbered us and had rights to veto any decision made by the person of significant control).
Once I and my exec team left, they kept the company zombified for another 3 years to collect their tax relief.
So tempted to name and shame them.
I'm so sorry you went through this. This is definitely one of the more extreme cases I've heard about - and you should name and shame if you're in a position to. Unfortunately, it's an industry that thrives on a lack of transparency.
Boundary Capital is their name, and I still see them listed on many EIS fund recommended sites. Though they seem diminished over the years as their numbers have reduced (along with scrubbing my company off their portfolio history).
They are very much on the extreme case. I once had a founder who reached out to me after receiving an offer from the MD. After I gave her my recommendation, a few weeks later she revealed not only did he abuse her for not signing, she realised he had redacted pages from the shareholders agreement with the intent of putting them back in later after she signed.
Excellent piece. EIS / SEIS is clearly useful for SMEs as it is often the only source of funding for businesses that aren't tech - the world of pubs, light industry, transportation - businesses that aren't seen as hot simply because the multiples end up in a different place and growth/scalability slower. EIS reflects risk and while the upfront relief is the one that gets the attention, the negligible value relief (which applies to all non-listed shares) is probably the larger cost to the Exchequer. But without this relief it would make investing in small businesses arguably too risky for individual investors.
In my view, there's an open question about whether venture-style schemes (as opposed to some kind of loan guarantee scheme) are really the best way of supporting these kinds of businesses
yes for my business - CBILs was incredibly helpful - we've taken on zero external investment (for good reason)