This article is part of Morningstar's "Perspectives", written by third-party contributors. Here Polat Hassan, CEO of AppBox Media, a UK-based app developer which has successfully raised over £2 million through an EIS, considers the important of investment on tech innovation.
The UK is a world leader in technological innovation and is now considered the biggest tech hub in Europe and the second most important after the US.
Experts forecast increasing investment through VCTs once the recent pension reforms bed in
Digital technology is also the fastest growing sector in Britain. According to some estimates, the UK’s digital economy will expand at a rate of 11% a year until 2016, ultimately creating a sector worth £221 billion.
Particular sub-sectors which have experienced phenomenal growth recently include app development, cloud computing, financial technology and gaming.
The quality of the UK’s early stage tech companies has not gone unnoticed by international venture capitalists who are turning their attention away from Silicon Valley and towards London.
London & Partners, the Mayor’s official promotional body representing the capital’s interests, pointed to recent data highlighting a record level of investment into the UK’s technology sector through venture capital.
The industry attracted $1.5 billion (£962 million) of new investment in the first six months of 2015. Of all the funds raised through venture capital firms, the capital’s technology companies secured more than 80% of total funding and 70% of all deals.
The fact that so many deals are being done with private equity firms shows how tough it has become for young companies to raise money via the traditional route of the capital markets. Appetite for IPOs in 2014 triggered a listing frenzy which saw many firms’ share offers hugely oversubscribed, regardless of the quality of their businesses. This hype has died down and the heat has come out of the IPO market, leaving firms searching for alternative ways to raise capital.
EIS and Venture Capital Trusts (VCTs) have stepped in to help plug this funding gap, as the UK’s high net worth investors look for tax-efficient ways to tap into the domestic technology boom.
The Enterprise Investment Scheme offers a way for unlisted businesses to secure medium-term funding from investors who benefit from generous tax breaks.
Venture Capital Trusts operate in a similar way, but invest in several early stage companies through a listed investment vehicle which must usually be held for five years to take full advantage of tax reliefs.
Figures from HMRC show VCTs issued £440 million of shares in 2013-14, a 10% increase on the previous year.
Investment in EIS is also climbing - in 2013-2014, almost 1,900 companies received investment through EIS, and over £155 million of funds were raised. This compares to more than 1,100 companies raising £80 million in 2012-2013.
Industry experts forecast increasing investment through these vehicles once the recent pension reforms bed in and investors who have used their annual ISA and pensions allowances look for new investment strategies as part of their tax planning. The stratospheric growth of the UK’s technology and creative industries shows no sign of slowing, so it will be all the more important for tech start-ups to woo investors to ensure they gain the funding they need to thrive.
EIS and VCTs could be vital to the development of an exciting industry which is already at the core of the UK economy, if potential investors are willing to take a chance.
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