SEIS - A beautiful way to lose money and think you are winning

15-09-17
SEIS EIS Jonathan Pfahl Is SEIS a way to lose money Seed Enterprise Investment Scheme tax breaks for UK Investors Tax incentives for investors Investment Initiatives SEIS can be bad news SEIS does not help business failure rates

Is SEIS a good thing or is it a beautiful way to lose money?

I call it David Cameron's legacy.... love him or loathe him... or like me - used to love him before he gambled the future of our country and punted on a referendum that would surely never lead to Brexit! - But all that aside - when he inherited the UK economy suffering its worst recession in modern history, he understood it was small businesses that were going to be the main driver of economic growth and more importantly - employment growth.

He began a number of initiatives to assist the private sector in getting new businesses started and existing small businesses growing. Start-up loans began as a very successful program, Growth Accelerator too - one is a shadow of its former self and the other was struck off over a year ago - but the one thing he created which has proven a great stimulant for a reversing economy were the updates to the SEIS and EIS schemes.

The Seed Enterprise Investment Scheme and the Enterprise Investment Scheme create tax incentives - for those with money  - to increase their risk profiles and begin to back (invest) in early stage companies.

The results were fantastic! Now if I was a professional journalist I would issue all the stats on how many additional hundreds of millions came flooding in and how the tax breaks assisted many investors by reducing their risk by XYZ % etc.

I'm not a professional journalist nor will I ever be so I'm not going to research facts - you can do that if you wish then come back to me!

What I can say is that, as an investor myself who backed a number of companies in the recent past - only to see most fail - and to now continually speak to, and bring in investors to our growing portfolio of young businesses, the model has caused a degree of stupidity in the market place.

Firstly, don't get me wrong - I am a BIG FAN of SEIS & EIS - they are great - but the stupidity has now come from investors focusing on their tax deductions (not caring if they are backing a loser), instead of what they should be doing which is backing a winner! And then get tax deductions as a result!

It seems to me that since these two programs were introduced, the amount of capital invested into early stage businesses has increased substantially - but the percentage of those businesses that succeed hasn't increased at all... the last time I heard (and again find a stat if you want the exact figure) 78% of SEIS backed businesses still go bust within their first two years.... As an investor... what is the point!?

The answer most investors give you is "the tax break reduces my risk and allows me to punt on early stage companies that could deliver the highest returns in my portfolio..." or usual BS along those lines....

I'm not here to plug my business and structure (if you want to learn more click on my profile) but the downfall of SEIS (end even possibly EIS) is that it seems to do nothing to positively affect the rate of business failures. (And some of the tax relief is backed by EU funding allowances) - This tax break, in my humble opinion, is about to cease.... and it could cease overnight!! Policies can change that quickly as you know....

Therefore, investors should start to get back to backing companies that actually have a chance to make them money!! The tax breaks should be seen as an added benefit! Not the main focus!

If you do click on my profile you will see I own a large resource bank of business service companies. The reason I own them is so when I back Companies from an investment perspective, I don't (anymore at least) hand over cash, get a small, non-controlling equity stake, cross my fingers and hope the 27 yr old MD doesn't screw it up! We own the resource bank - meaning sales, marketing, access to big name mentors / advisors, office solutions, app development, cap raising, PR, client entertainment etc etc BECAUSE when we back a disruptive tech business we ensure that all the above key features needed by a company to grow are managed by us in-house and charged at next to nothing....

So we focus on making the highest sales margins possible across our portfolio whilst keeping operations costs as low as possible!

I could harp on for another few hundred words - as I love what I do and I know a thing or two about it... But to leave on a positive note, back what you know is real! Tax breaks are secondary in this field... and back the deals that are lean and mean and leverage off contacts and relationships to generate the highest sales margins in the most cost effective ways....

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About the author

Jonathan Pfahl

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My passion is helping business owners and entrepreneurs succeed.

I have always loved helping great companies grow quickly. It seems a long time ago since Rockstar was first launched by me in 2007, and it has certainly been a  fun ride of ups and downs.

However, throughout this time I have never lost sight of the key objective! - To help create success and enduring wealth for the entrepreneurs behind the businesses we support.

If you want to have an exploratory conversation, please get in touch.

I look forward to connecting with you.

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