A new dawn for Britain’s early-stage investing market and an awakening to the power of SEIS funds
Listen in because here’s the big secret about SEIS: You won’t find a more generous and efficient programme anywhere.
What other investment vehicle or tax planning tool offers you 50% income tax relief, capital gains reinvestment relief, 0% inheritance tax liability and even gives loss relief protection at your marginal tax rate? All while you pay 0% capital gains on returns?
SEIS’s ability to entice investors into early-stage, innovation-led businesses helped pioneer Britain’s last decade of Startup success. It elevates new Startups during crucial development stages and has made Britain dominant in key sectors of the future like disruptive technology and life sciences.
Why SEIS needed to change
Recently, though, something changed in the UK’s early-stage funding market: Record investment trends began to plateau. Why? Of course, the economic landscape has played its part, but rising inflation cannot be blamed alone.
The uncomfortable truth is that SEIS needed updating to stay relevant for Britain’s seed funding market. Investors who wanted to invest more couldn’t. Startups who could have raised more weren’t allowed to. And financial advisers, on the whole, questioned its convenience, and relevance, for their most valuable clients given the relatively low limits put on investors.
The market landscape in SEIS 2.0
But changes to the scheme from April 2023 have fundamentally altered the landscape of SEIS and shifted its risk profile for investors:
- Investors will be able to invest a maximum of £200,000 per year in SEIS (previously £100,000).
- Companies will be able to raise SEIS within three years of trading (previously 2 years).
- Companies will be able to raise £250,000 in SEIS (previously £150,000).
- Companies must have less than £350,000 in gross assets (previously £200,000).
Businesses will be more mature, and so will investors. It’s true that environmental factors may reduce the number of small SEIS investors who invest in single companies over the next 12 months. But allowing more mature companies to raise SEIS, and doubling the investor cap to £200,00 per year, is already establishing a new generation of larger investors being advised on SEIS funds for the first time. SFC Capital has Britain’s leading and largest SEIS fund so we know a thing or two about handling new investors, but even for us the demand from IFAs in recent weeks has been unprecedented.
This is SEIS 2.0. The start of a fresh revolution in Britain’s early-stage funding market. And a shift in influence from direct investors to SEIS fund management.
The importance of portfolio building
More influence from SEIS funds means a renewed focus on the importance of portfolio building. Especially now, with short-term headwinds impacting most markets, a portfolio of companies across a broad range of sectors helps to build resilience, spread risk and give you the best chance of delivering outsized returns.
In seed investing there will inevitably be failures along the way. In fact, Pareto’s 80-20 law of value means you should expect more failures than successes. But it’s not the failures by which you judge a portfolio. It’s the strength of returns from those that succeed which matter most. Building large portfolios is the best way to deliver success from your investment.
Take a recent example from SFC Capital. We exited our investment in a software company called Cognism with a 45x return. Accounting for the tax relief benefits, the return on investment was actually closer to 100x. A single event like this one is enough to deliver the 3x returns we conservatively target for an entire tranche of our fund, yet there would be 19 other businesses in the portfolio potentially delivering additional value. Had Cognism failed, others in the portfolio are there to pick up the slack and vice versa.
The importance of diversification
Simply building large portfolios is not enough, though. The mix of businesses and sectors can be just as important. SFC Capital is a seed stage specialist SEIS Fund, but we are sector agnostic because we firmly believe in investing across different growth sectors. It’s the best way to invest in the best of British innovation and to spread risk while capturing multiple growth-market potentials at once. We are the only Fund investing in every growth sector, from Life Science and MedTech, to ClimateTech, SpaceTech, Consumer Software and more.
This approach was made famous by the film Moneyball, starring Brad Pitt. It portrays the Oakland A Baseball team’s incredible success from adopting a player recruitment strategy designed around diverse skills that complemented one another to create an efficient, effective and resilient whole. They weren’t reliant on just one player not getting injured or performing badly. They had given themselves every chance of success by recruiting for different eventualities.
This same law applies to seed investing. A portfolio should be made up of companies that complement each other to create a powerful whole. For investors and advisers, portfolio size and diversification should be at the top of your priority list. This is the best and most sensible way to manage risk and give yourself every chance of success.
Welcome to SEIS 2.0: A new dawn for Britain’s early-stage investing market and an awakening to the power of SEIS funds.
Capital at risk. For professional investors only.
Tax benefits are subject to individual circumstances. Subject to changes.
Past performance is not indicative of future performance.
For more information on SEIS and EIS, please read SFC Capital’s article All you need to know about SEIS and EIS.
Further information:
Tax relief for investors using venture capital schemes - GOV.UK (www.gov.uk)
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