How the pandemic affected EIS investing

Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice. 

Lockdown now seems to be (thankfully) behind us. Yet the COVID-19 pandemic defined much of our lives for over 2 years and still affects us in 2022. Recently, HMRC released its annual report into the EIS sector (companies which qualify for the Enterprise Investment Scheme). It makes for interesting reading. Below, we summarise the main findings for our angel investor network – tying this into other notable trends going on in the sector.

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How COVID-19 affected EIS

Since its introduction in 1994, EIS has been a significant funding source for many early-stage businesses. Primarily, the financing goes into the seed and Series A stages. Few UK companies get off the ground without EIS (or its sister, SEIS – for startups near their birth). As such, finding out how EIS was affected by COVID-19 and government countermeasures since March 2020 is crucial to determining how the UK’s wider early-stage landscape was affected, as a whole.

Here are some of the highlights from HMRC’s latest report on EIS for the past three tax years:

  • EIS applications in 2021-22 returned to similar levels in 2019-20, after a decline in the adjoining tax year. This suggests that early-stage companies were generally quick to get back on their feet once vaccinations rolled out and lockdowns started to lift.
  • EIS funding went down after the March 2020 lockdown was enforced. In 2020-21, there was a 12% decline from the previous year. However, 3,755 startups continued to receive £1.66bn in funding – i.e. 3x the amount compared to 10 years earlier.
  • The value of EIS claims by investors went down. EIS investors can claim tax relief on EIS investments worth up to £1m each tax year. However, during the pandemic investors reduced the value of their claims. A 40% drop transpired for claims over £500,000, whilst amounts between £500 and £15,000 rose by 7%.
  • Various regions saw declines in the total amount of funding raised. Scotland and Wales, for instance, experienced a 20% fall. London was less hard hit (14% decline) and the East of England saw an 11% fall.
  • Specific sectors suffered more than others. Funding into “face-to-face” sectors like food and accommodation, naturally, got less funding (-54%) as investors hesitated to invest in sectors that could not thrive in a lockdown environment. EIS companies in the tech and scientific fields, however, saw almost no change in funding levels.

 

The situation in 2022, and looking ahead

2022 could be a promising year for EIS investors, although SMEs face many challenges in the present landscape. On the one hand, pandemic restrictions are now gone and early-stage companies across all sectors have more room to “breathe”. The Government has also offered support to early-stage companies through initiatives such as the ‘Help to Grow: Digital’ scheme, which grants a 50% discount on approved technology solutions (up to £5,000). Indeed, one “positive” outcome of the pandemic is that it has helped to drive Britain’s “digital revolution” – making many SMEs more flexible, cost-efficient and able to reach more customers (online).

However, the UK is currently blighted by very high inflation; 9.1% according to most recent figures, which is the highest in over 40 years. This presents higher input costs for businesses, hitting their bottom line. Rising inflation also brings the likelihood of higher interest rates to try and combat the former, leading to increased borrowing costs for businesses. There is also a labour shortage in many sectors at the moment – impeding a lot of commercial growth.

With that said, we at Bure Valley Group believe there are good reasons to remain optimistic about the startup outlook for the UK in 2022. SMEs comprise over 99% of the country’s overall business population, providing a valuable source of employment and taxation. The government will be wise, therefore, to build on schemes such as EIS, SEIS and other tax-efficient initiatives to incentivise investment. Overall, startups are now more resilient because of the pandemic – which proof-tested business models and led companies to develop their online infrastructure (helpful in any possible future return to lockdown!). 

SMEs are naturally agile and often better equipped than large, established corporations to navigate new challenges in the economy when they emerge (even if they suffer from a smaller “rainy day” fund). In 2022, one key development that all businesses will need to address is that consumers have, overall, changed what they value as a result of the pandemic. More people are keen to support local businesses over faraway, faceless corporations. Consumers have also shifted towards personal branding as lockdown highlighted our human need for relationships – something that SMEs are in a strong position to offer by sharing their stories and putting those of their employees’ front-and-centre. 

 

Invitation

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