UK founders are being urged to think twice before accepting checks from investors lured by tax breaks after new analysis found that companies relying on the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are overwhelmingly unable to scale.
Antler, the Singapore-based early-stage venture capital firm, has analyzed the figures from more than 40,000 funding rounds in the UK over the last decade and concluded that the schemes, long seen by successive chancellors as the crown jewels of UK start-up funding, are doing the opposite of what was intended.
According to research by Antler, only 12 percent of UK companies raise follow-on capital after their first round. For those supported solely by EIS or SEIS funds, the picture is even bleaker, with just 3.7 per cent ever securing further investment.
Adam French, partner at Antler and a well-known face in the UK venture scene, didn’t mince his words. He argued that the plans prioritize “quantity over quality” and do not provide founders with the strategic support they need to grow into companies that truly lead the way.
“If you have invested in a SEIS fund, the main thing you are happy about is the fact that you will get 30 to 50 per cent of your investment back as a tax benefit on your tax return, and you are not that concerned about the outcome of the company you are investing in,” Mr French said.
The contrast to conventionally funded start-ups is great. When a company gained at least one institutional co-investor or active angel in its opening round, the proportion that raised additional capital rose to 25.7 percent, nearly seven times higher than the cohort that only received tax breaks.
“The only way to do good work in venture capital is to find the companies that are going to be outliers, and the tax-advantaged funds don’t have that mandate,” Mr. French added. “They don’t want to take crazy risks because that’s ultimately what you have to do to make a lot of money.”
The SEIS was introduced in 2012 by then Chancellor George Osborne to accelerate the flow of capital into Britain’s young start-ups. It is based on the older EIS from 1994. Both provide generous relief to compensate investors for the significant risk involved in backing untested companies.
Under current rules, investors can invest up to £1 million per tax year, and even £2 million for so-called knowledge-intensive companies that invest resources in research and development. Hold the shares for at least two years and any losses can be offset against income tax. This arrangement allows the Treasury to cover a significant portion of the losses.
For more than a decade, the plans have funneled billions of pounds into the UK’s innovation economy, and they have many supporters in Whitehall and the City. But Antler’s findings will reignite a long-simmering debate about whether tax-driven investments are truly building the next generation of British scale-ups or are simply creating a cottage industry of tax-efficient portfolios that are quietly failing.
Antler’s analysis found that companies that raised $1 million or more in their opening round were more likely to receive further support, suggesting that check size remains a powerful signal. But Mr. French was emphatic that the caliber of the investor on the capitalization table was more important than the headline number.
His message to founders is blunt. “My advice to founders is to be very selective about who you take money from,” he said. “Don’t choose the first capital that lands on your table, make sure you choose the right capital.”
The warning comes at a delicate time for Britain’s army of startup entrepreneurs. With venture funding still well below 2021 highs and the cost of capital high across the board, the temptation to snap up whatever money is on offer has rarely been greater. Antler’s data suggests that succumbing to this temptation may be the surest route to a dead end.
