Small business start-ups are not so much about the money but want the expertise and contacts of business angel investors to take them to another level.
Entrepreneurs have changed tack with the advent of the Seed Enterprise Investment Scheme (SEIS) and crowdfunding.
They are looking for cheap exposure and PR more than the money – but if they get an investment then that’s a bonus.
The mood swing among entrepreneurs explains a recent flow of businesses going before the multimillionaires on TV’s Dragons Den.
Listening to pitch after unsuccessful pitch, it’s obvious the entrepreneurs want to swap equity for access to the dragons’ contact books and a quick way to market.
Recent years have seen several business opportunities rejected by the dragons only to resurface on crowdfunding platforms to win full funding and an army of fans and customers.
SEIS and EIS tax breaks
But many seem to miss a trick by not gaining SEIS or Enterprise Investment Scheme (EIS) pre-approval for their pitches from HM Revenue & Customs (HMRC) before going before the dragons.
All the usual questions come out, like cash projections, market size and margins, but none of the dragons ever asks about the tax benefits of opting into a SEIS or EIS deal.
Admittedly, SEIS has an annual investment threshold of £100,000, which would soon be eaten up by a serious investor, but EIS limits are much higher.
Coupling a SEIS or EIS with a dragon or angel’s expertise would seem the ideal for an entrepreneur to aim at.
Investment group Angel’s Den has reported that more than three-quarters of entrepreneurs would turn down an offer of funding in favour of pairing up with the right investor who could take their business to the next level.
Adding a new dimension
When pushed, only 12% said the money was more important than the investor.
Angel’s Den director Bill Morrow said: “Securing funding from an angel that can offer the best business advice is often the difference that separates a great business from an average one.
“Mentoring is an important part of being involved with an entrepreneur and can impacts on the return at the end of an investment.”
That mix of mentoring and tax breaks pays dividends for investors.
SEIS offers a 50% income tax reduction and a 50% exemption on capital gains tax due on any assets sold to raise cash directly for the SEIS. EIS benefits are not quite so good – a 30% income tax reduction and no CGT exemption.
