Government attempts to kick start funding for new technology businesses are stalling despite tax breaks to encourage investors.
The Seed Enterprise Investment Scheme (SEIS) is designed to stimulate equity investment for technology businesses, and has seen a lot of interest from companies and investors.
However, many investors are holding back on buying equity stakes in technology start-ups because several recent high-profile companies have failed to give any significant returns.
Although technology start-ups are blazing a trail in the US, like the recent flotation of Facebook and the upcoming Twitter offering, prospects of similar profits for investors are less bright in the UK and Europe.
Bedroom businesses
The leaders in Europe and the UK include:
- Spotify – the online music service raised £64 million in 2012 and is valued at £3 billion. However, the company has offered no signs of a flotation before 2015 at least
- Zoopla – The UK’s second most popular property portal has failed to knock Rightmove off the top despite mergers to consume market share
- Klama – a back-office online payment process for e-commerce web sites valued at around £1 billion
Technology start-ups are classic bedroom businesses, where an entrepreneur sets up a web site and then seeks backing to expand. Often the pitch is for less than £100,000, which brings the proposition to well within the realm of a SEIS.
The problem is investors are reluctant to part with any more money in the sector before they see a return on their cash from previous funding rounds.
That return means floating on the markets or a significant commercial success.
Not all technology start-ups are disappointing – take Rightmove, the UK’s top property web site and online clothing store Asos.
Ubuntu loses edge
Rightmove went to market in 2006 and is worth around £2.4 billion. Asos listed on the London AIM in 2001 and is valued at £4 billion.
Tax breaks for equity investors like SEIS, and more established opportunities, like the Enterprise Investment Scheme and Venture Capital Trusts, are siphoning finance into the technology sector.
SEIS offer investors little risk to secure equity stakes of up to £100,000 in a single tax year.
The most ambitious and recent public technology start-up failure was the recent Ubuntu Edge smartphone crowdfunding bid for $30 million that only managed to raise $12 million.
Even though that was a crowdfunding record and showed around 25,000 investors were prepared to back the project, the failure shows even big name projects with skilled and experienced backing are finding money hard to source in the current environment.
