Supporting a digital recovery

  • techUK techUK
    Friday31Jul 2020
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    Guest blog: James Lawson, partner at MHA MacIntyre Hudson, provides his view on the importance of greater state support for innovators in the digital, tech and...

It’s understandable in the current circumstances that the government would have an immediate focus on re-establishing consumer spending to enable businesses to return to normal. As a result, we’ve seen the most significant business-focused stimulus measures announced in the Chancellor’s Statement around targeted VAT reductions and investment in environmentally friendly upgrades to homes. This seems a carefully calculated call to Middle-England to loosen the tight grip on the household purse strings.

There has been, however, scant little to date to encourage entrepreneurialism, or indeed the technology sector specifically - an increasingly important part of the economy over recent years.

The importance of tech entrepreneurs

Entrepreneurs are the lifeblood of the UK economy. Across the technology, digital and software sectors there are new innovations and ideas coming to the fore all the time. In difficult economic situations, it can be these innovations and development opportunities that can shape a country’s recovery. Indeed, many of the most successful entrepreneurial businesses over recent years were borne out of the 2008 Financial Crisis. Thus far, however, we haven’t seen anything of note to help stimulate new venture creation for the post-Covid-19 future.

Specific funding needs

Technology and software companies often require intensive capital investment through a number of years of losses as they take time to ‘scale’, on the basis that the payback over the longer-term results from higher profit margins.

These characteristics have made funding hard to come by for many in the current environment. A number of technology businesses in the process of scaling up have been restricted from accessing the Coronavirus Business Interruption Loan Scheme (CBILS) funding. The Future Fund, operated by the BBB, will only match external money raised and comes with at least an 8% interest rate and a shorter-term maturation than CBILS offers to more mature businesses.

Many existing companies with large numbers of employees are therefore missing out on capital at a vital time in their development.

Solutions to consider

To address this situation, the treasury should consider a number of measures, including a temporary relaxation of the Venture Capital Trust (VCT) regulations. Since 2016 there has been a successive tightening of rules around use of VCT funds given the tax advantages offered to investors. Temporarily relaxing the rule, including on: qualification criteria to receive VCT funds; funding limits; and the use of funds, could be a much-needed shot in the arm for entrepreneurial businesses. While this would require an exemption to EU state aid rules, it will mean readily available ‘dry powder’ can be put to work to support job stabilisation and creation, as well as having a positive impact for existing VCT portfolio companies who no longer meet qualifying criteria.

Furthermore, an expansion of the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) limits and tax incentives for investors would likely have a positive impact on establishing and funding the businesses of tomorrow.

As government focus zooms in on those who have recently joined, or are just entering the jobs market - those disproportionately at risk of unemployment – there is recognition that apprenticeships and vocational training must present a real opportunity and a veritable alternative to university. There is a clear opportunity to extend this thinking to backing to young entrepreneurs through a vocational, skills-based approach to ‘venture creation training’. This might fuse tuition on entrepreneurialism and ‘lean startup’ methods with accelerator-style approaches to early proof-of-concept development, while grant funding could pave the way for new and innovative businesses to take their first steps.

In summary

The process of re-building the economy is now underway, so it’s a crucial time for the government and investors to look at future-facing opportunities - rather than simply returning to the pre-Covid-19 normal. Addressing the immediate threats to business and jobs is clearly critical, but supporting the software and technology sectors in their development, and capitalising on the long-term benefits they could unlock, should not be forgotten.

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