Innovating out of a crisis – further action is needed to support early-stage startups

James Badgett, co-founder of Angel Investment Network, explores the further measures that Government should consider to support Britain’s early-stage startups

The Treasury certainly can’t be accused of dragging its feet in its response to the global pandemic. There has been generous support and action to help many firms and their employees crippled by the ceasing of so much economic activity. However, despite the headline-grabbing measures, many of Britain’s early-stage startups face a truly existential threat and the Government should consider further measures as the crisis deepens.

Economic success story

Over the past ten years, the UK’s thriving startup ecosystem has been a great economic success story. A large part of the credit for this needs to go to a previous custodian of the Treasury, George Osborne whose action after the last recession made a big difference to the fortunes of the sector. The development of targeted tax relief to encourage private investment meant an explosion of interest in early-stage businesses that have been the engine of growth in the country.

Back in the year 2000, the overall number of private sector businesses in the UK stood at 3.5 million. In 2019 there were 5.9 million meaning the country has since experienced an increase of 69%. We have seen the UK become a world leader in areas like software and tech, food and entertainment, with several nascent businesses even going on to become $1 bn valued unicorns. However, this is all now at risk. A recent British Chamber of Commerce survey revealed 62% of startups warned they had no more than three months of cash left to cover running costs.

Existential threat to early-stage startups

Of course, the nature of running a startup is inherently risky and most will fail. Luckily entrepreneurs have the mindset to dust themselves down and try again, but the incentives have to exist. However, the situation we currently find ourselves in means we could snuff out too many of these dreams and the hopes of the swift recovery we all need. It won’t be based on any flaws with the businesses or plans, but simply the unprecedented nature of the crisis.

The Government has of course taken a series of eye-catching measures to shore up the economic situation. This includes the furlough scheme, Government-backed loans and the coronavirus Future Fund. However these measures, although helpful, still won’t help many early-stage businesses. Many of whom can go on to become viable businesses but whose chances are now very much hanging by a thread.

Ineligible for support

The Future Fund’s requirement of companies having raised £250k in the past five years excludes the vast majority of early-stage startups. We have conducted a sample study of more than 100 startups across our network and found 70% wouldn’t be eligible for this support. 76% of these companies have been negatively impacted by coronavirus and 44% were involved in a fundraiser when corona struck with 68% seeing investors pull out.

In our survey, we also found that many were cutting costs with 25% pulling back from R&D and innovation. This could be a hammer blow to Britain’s hopes of catching up with the rest of Europe in investment in innovation, often led by startups.

The positive news is that the Government is clearly listening to the views of industry and adapting its measures as the situation evolves. So what further measures might the Government consider giving these businesses a fighting chance?

• Lower the threshold for matched funding

The figure of £250k having been previously raised to qualify for the Future Fund simply rules out too many potentially viable businesses and sets the bar too high for the more than 90% of startup businesses. Of course, the Government cannot support businesses that have shown no traction, but lowering the bar and potentially the matched funding amount requirement of £125k would help many fledgeling companies at an earlier stage. This time-limited support could support the ecosystem and companies, rather than the needs of venture capital.

• Boost SEIS and EIS tax relief to encourage investors

While Government intervention in the form of loans and matched funding is a short term solution, private investment will ultimately supercharge the return to health for the economy. Angel investors are a key source of early-stage business funding and have made a dramatic impact in their support for startups over the past 10 years. The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer generous tax relief to risk-taking investors, willing to put their faith and money into these ambitious companies. With everyone’s portfolios under threat and investors retreating to safer bets, the Government could send a signal now by going further and faster with the tax relief on offer for both schemes, as well as providing easier access to EIS funding. Spurring investors into action by potentially doubling relief and simplifying the system could be a great way to get liquidity back into the system.

• Increase the level of R&D relief for smaller firms

The Government also has a scheme in place for R&D tax relief, which has really helped incentivize small firms to innovate. They recently made it more generous for large companies in the recent Budget. They should act now to offer far more generous incentives for initially loss-making small companies as part of the SME version of the scheme. They could also move these payments forward and potentially backdate them. This could help provide vital liquidity for the sort of companies the economy will need when we emerge from coronavirus.

The industry and innovation of entrepreneurs will be one of the fastest ways the UK can return to economic growth after this crisis subsides. Any investment the Government makes now to help these fragile early-stage businesses will be richly rewarded.