26 September 2022

The mini-Budget had plenty for tech startups – but we hope there’s a lot more to come

By Camilla de Coverly-Veale

For a ‘mini-Budget’, the Chancellor’s Growth Plan had a surprisingly large number of policies that tech startups can get seriously excited about.
Startups are Britain’s economic success story of the last decade, and we at Coadec have long argued that they will be integral to getting the growth rate up. Our Tech Startup Manifesto, published earlier this year, argues that the twin challenges of a turbulent macroeconomic environment and a startup funding crisis are inextricably linked – create an economy where entrepreneurs can turn £5bn companies into £50bn companies and the UK’s prospects will be transformed.
And it seems the new Chancellor has listened. His statement sent a strong signal, both that growth is the Government’s overriding objective, and that we’ll only get growth going by empowering our tech startups.
Seeds of change
The most immediately significant announcements for startups are the upgrades to the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), with long-term commitments to keeping both schemes and raising the caps on SEIS. For the uninitiated, the SEIS and EIS schemes offer targeted help to de-risk early stage investments, which is vital to keeping the startup ecosystem going.
Both schemes have been phenomenally successful, and are one of the reasons Britain’s tech startup ecosystem is considered second only to Silicon Valley. They also contribute to making Britain an attractive destination for the brightest entrepreneurs from all over the world.  Unfortunately, both schemes have failed to keep pace with the success of the UK’s startup scene and have needed modernising for a while.
If the cap doesn’t fit…
Another key ask in our manifesto was reform of the pension charge cap to help unlock institutional funds. This may sounds rather technical, but it’s an absolutely vital area of policy for both startups and savers.
As it stands, our cap on pension fees effectively excludes venture capital fees, which are much higher than passive asset classes due to the cost of managing an unlisted portfolio of companies – so UK pension funds are effectively barred from allocating any portfolio into more innovative opportunities The result is that the UK lags the international competition; while US pension funds contribute 65% of venture capital funding, here in Britain it’s just 12%.
That means savers have fewer choices over where to put their money, and they also miss out on the potential for outsize returns: some studies estimate retirement savings for an average 22-year-old could be increased by as much as 7-12%, the average 45-year-old could see an increase of 6-7%. Startups also end up needlessly locked out of a potential funding stream.
The Chancellor’s commitment to accelerating reforms is welcome news: assets in UK pensions schemes are expected to exceed £1tn by 2029: diverting just 5% of that into VCs would equate to a £50bn funding boost for startups while also, according to the British Business Bank, appropriately balancing risk.
A share of the action
Another big issue facing small startups is attracting and keeping staff when they are competing with companies with bigger resources. An important tool in the startup arsenal is the Enterprise Management Incentive (EMI), which enables high-growth companies to offer share options – so though salaries might be lower at startups, the pay-off down the line could be very considerable indeed.
The problem is that the criteria for EMI were set way back in 2000, before the UK startup scene had really got going, and Silicon Roundabout was still plain old Old Street. The speed at which UK startups now grow means they fall out of the scheme too quickly. Indeed, when we polled startups in 2019, some 75% said they had lost staff to large companies because they couldn’t access the scheme.
In March, the previous government decided not to update the EMI, opting instead to reform the Company Share Ownership Plan (CSOP). Kwasi Kwarteng’s commitment to tinkering with CSOP to bring it more into line with EMI is welcome, but it’s no match for the efficiency of an updated EMI scheme. (The main issue with CSOP is that it’s over-complex and usually only suitable for senior employees.) Our international rivals have been swift to take advantage of the UK’s policy change, making their own stock-option schemes more competitive over the last 12 months to try and lure tech talent away from the UK.
So, while there was much to welcome in Friday’s statement, there is plenty more the new government can do to really give startups the leg-up they need. Plenty, indeed, for the new Chancellor to include in his ‘maxi-Budget’ in a few months’ time.

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Camilla de Coverly-Veale is Policy Director at The Coalition for a Digital Economy (Coadec).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.