At one time, if you were to speak any angel investor in the UK, or someone who had put money into an EIS fund, within a few minutes of the conversation you’d invariably have covered the three big Rs that come as part and parcel of backing a startup in the UK: the Risk, the tax Relief, and the potential Returns. We’ve talked at length on these in the past, uncovering that the UK startup index grows on average at 25% per year, that there is minimal correlation between it and the public markets (-.02 to be exact), and that nearly £2bn is invested through EIS each year, creating a little over £500m in tax relief UK-wide.
However, there is more consider when trying to decide if it’s worth steering some of your tax efficient portfolio away from things like ISAs and pensions and making an investment into an EIS fund. Below we’ll examine a few of these factors and uncover if an investment into the startup economy pays back dividends in kind.
How many jobs does EIS create?
Let’s start with the jobs. In the UK, SMEs are the lifeblood of job creation. Here SMEs account for just over 16 million of the 27 million individuals in employment: that’s just over 60%. These SMEs account for over £2 trillion of turnover in the UK.
It’s not a stretch to say that investing in EIS over the last 25 years has played its part in building this SME market. From our research, which largely supports the findings of the EIS Association (EISA), we found that EIS investment in 2021 created over 26,000 jobs with over 60,000 further jobs supported or maintained by that investment. At the individual company level, each funding round we participate in goes on to create on average four jobs and to support or maintain another ten.
Then there’s the knock-on effect of investments in individual EIS companies on the economy as a whole. EIS companies cannot go into asset backed growth, and therefore it’s likely that most of the money they spend goes towards salaries, job creation and the acquisition of services, and not towards acquiring assets.
Going into what is likely to be a recession, the creation of highly skilled jobs is even more important than usual. However, it is not just the jobs that help the economy, investing in the startup ecosystem leads to innovations that improve productivity, health and to an increasing degree, the environment.
Many startups we and others have backed over the last decade have enabled a considerable shift in the way businesses now operate. For example, five to six years ago Slack and Zoom were relative unknowns that have since become integral parts of the way many of us conduct business.
Within our Access EIS portfolio we’ve backed over 150 startups. Some of them, including a recent investment into ScaleXP, are aiming to make workers more efficient and productive. ScaleXP’s software is helping businesses accelerate their financial reporting. Faster, more accurate financial reports and predictions help companies budget and resource better and ultimately drive profits. Companies like Syndi are working to offer personalised and effective digital health support within organisations, reducing the amount of time taken off sick, and increasing output, while Thalamos helps new businesses to network and form connections that will help them grow. As the ecosystem develops, new businesses within it develop to make the ecosystem as a whole more efficient and productive.
People are living longer, diseases are evolving, and the stress these and other pressures are putting on our healthcare infrastructure is immense. While the failures and frauds such as Theranos often make the headlines, there are a number of startups and scaleups that are having a positive impact on the healthcare industry and our own longevity.
From our Access EIS portfolio we’ve backed a number of companies tackling different healthcare challenges. While CareRooms is tackling the issue of providing longer term beds for individuals not yet ready to go back to their homes, Pharmenable is using AI and machine learning to increase the research and development phase of small molecule drugs.
Tackling climate issues
Tony Fadell, one of the individuals behind the iPod and later Nest, is a firm believer that the first trillion dollar valued startup will be a greentech. He is well aware of the rising cost of climate change and increasing need to tackle it. His FutureShape fund, as well as many others like it, are putting their money where their mouths are and backing greentech companies tackling all sorts of climate related problems. While our Access fund is not a purely climate tech focused fund, we have a number of green and clean tech startups in our portfolio, including Wild Hydrogen, which is working to create the first, and lowest cost negative emissions hydrogen in the world.
Nearly £75 billion is invested each year into ISAs, with almost £50 billion of it into Cash ISAs alone. In comparison, only around £1.8 billion is invested through the EIS scheme. Clearly the risk of an EIS investment weighs heavily but, while the money is fairly safe and earning a tiny amount of interest (when adjusted for inflation) in a cash ISA, it could be doing so much more for the economy whilst potentially achieving a significant return. Clearly one can do both, the minimum investment into some EIS funds, including our own Access EIS starts at just £5,000 and there may be benefit to doing just that.
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