Following a call from Minister for Finance Michael Noonan for public submissions on ways the Government could help ignite and support entrepreneurial activity, a new organisation called the Startup Leaders Group put in a suggestion that demands serious consideration.

Formed in February at the behest of Dublin commissioner for start-ups Niamh Bushnell, the group comprises about 40 individuals, who are all involved with start-ups. Some are entrepreneurs and some investors, while others come from a wide range of industry groups, accelerators, incubators, policy organisations and so on.

The group acknowledges a need for the State to look at long-standing issues such as better capital gains relief for entrepreneurs and more flexible stock option policies – issues that have been raised over the years by industry groups as well as a succession of government advisory groups on innovation.

But the Startup Leaders Group highlights the need for better availability of early-stage angel funding.

Angels are generally thought of as high-net-worth individuals, often successful entrepreneurs in their own right, who give significant sums that get many young companies on to their feet before they go in search of venture funding.

As head of the National Digital Research Centre (NDRC), Gary Leyden notes in the submission that this tends to be the first €100,000 to €200,000 that finances a very young company.

However, a broader range of people have become increasingly interested in this type of risky, but potentially lucrative, investment through schemes where smaller investments of €5,000 to €10,000 are pooled.

To encourage this type of investor as well as traditional angels, the Startup Leaders Group is asking the Government to consider implementing a scheme similar to the UK’s highly successful Seed Enterprise Investment Scheme (SEIS).

Investors

Since it was established in 2012, the SEIS has provided£240 million (€340 million) to more than 2,800 start-ups, with the amount almost doubling year on year, showing its attractiveness to investors.

According to the Irish Venture Capital Association, an impressive €120 million went to Irish companies in the first quarter of this year, but – worryingly – the proportion representing seed capital was only 10 per cent, down from 17 per cent in 2014.

The IVCA has noted that seed capital funds need to be replenished for strong growth to be maintained.

That’s precisely why an Irish SEIS makes sense.

In the UK, 58 per cent of angel investors in the scheme said in a Deloitte survey that they would have invested fewer funds, or not at all, if the SEIS did not exist.

The UK scheme was considered so successful it was made a part of financial policy by UK chancellor George Osborne in his budget statement last December.

How does it work? It offers tax relief at 50 per cent for amounts up to £100,000 in a tax year; allows exemption from capital gains tax on earnings where the sale proceeds are reinvested in SEIS companies for up to half the amount initially invested; facilitates capital gains tax-free disposal; and provides income tax or capital gains tax relief for losses on disposal.

To meet EU rules, it is classified as state aid and is limited to a maximum of £150,000 per company in a three-year period.

Net cost

Someone investing a sum of €100,000 in Ireland under the existing Employment and Investment Incentive and Seed Capital Scheme (EIIS) makes a net cost of investment of €60,000 after current tax reliefs are taken into account, while under the SEIS scheme, it is a net investment cost of £36,000 out of £100,000.

Critically, SEIS tax relief on the investment amount and also the ability to take some relief on any losses removes a significant level of risk out of such investments for smaller investors, making angel investing far more attractive.

The submission from the Startup Leaders Group notes that this small investor category urgently needs to be opened up in Ireland through a similar incentive, not least as many people have funds sitting idly in accounts.

The payback of an investment-led scheme that boosts company growth, the group says, is tangible, because high-growth companies create the largest numbers of jobs. In the UK, just 6 per cent of high-growth companies were credited by a Citi study with creating 50 per cent of the UK’s job growth between 2002 and 2008.

The group argues the best-funded companies will do best at attracting the best global talent which increases the likelihood of success.

One graph in the submission is a telling indication that the existing EIIS scheme is no longer fit for purpose. It shows that since 2010, the level of uptake for investment schemes has hit rock bottom here but skyrocketed in the UK. We need an alternative to EIIS, and the SEIS is a good template for a new approach.