Research and analysis

Seed Enterprise Investment Scheme Evaluation (2022) - executive summary

Published 22 November 2023

Seed Enterprise Investment Scheme Evaluation (SEIS) – Executive Summary.

HM Revenue and Customs (HMRC) research report number: 738.

Research conducted by Ipsos in 2022.

Disclaimer: The views in this report are the author’s own and do not necessarily reflect those of HMRC.

1. Key findings from the evaluation

The evaluation found that: 

• the SEIS provides a mechanism to encourage the distribution of investment funding toward small start-ups, which was favoured by investors for reducing the risk of investments, and by businesses that may otherwise have struggled to attain external funding 

• there is evidence that early-stage businesses experienced a funding gap between the amount of finance they sought and raised, and findings suggest that the SEIS goes some way to addressing this market failure 

• the SEIS was seen to be appropriately designed to mobilise additional investment in early start-ups from private investors and provides early-stage businesses with valuable funding for essential business development and innovation that would otherwise be difficult to find from other sources, including the Enterprise Investment Scheme (EIS). The support and expertise of investors tended to provide businesses was seen as an advantage of equity funding 

• while survey evidence showed that many investees were able to raise finance outside of SEIS in the last 3 years, survey and qualitative evidence also suggest that the SEIS was crucial in attaining the first round of funding, which itself enabled further investment. This supports the qualitative evidence that raising the SEIS limit could increase the amount raised in the first round of funding for some investee businesses

• receiving SEIS investment had clear impact on business growth and performance. Findings from econometric analysis suggest that SEIS has a positive impact on investees’ growth. Businesses using SEIS experienced larger increases in turnover, employment and assets than the control group. Using SEIS was associated with 23% higher turnover, 245% more assets and 12% higher employment relative to the control group

• investee businesses also reported positive effects on their productivity and expansion. Benefits of the scheme spanned across regions and sectors 

• SEIS investment could positively affect businesses’ ability to raise further finance such as non-equity funding as it allowed them to acquire start-up capital for proving the viability of their product and help attract further investment 

• businesses felt that increasing the maximum amount that can be raised through SEIS could help better fulfil its objectives of encouraging investment and supporting growth. This was supported by investors and fund managers. The tax reliefs to incentivise investors were seen as fit for purpose 

• for both investors and businesses, the experience and process of investing and receiving investment through the SEIS was positive 

2. Evaluation background 

HMRC commissioned Ipsos, in partnership with London Economics, to conduct an evaluation of the Seed Enterprise Investment Scheme (SEIS). The SEIS was set up with the aim of encouraging additional investment in early start-up UK businesses from private investors, whilst supporting growth and improved company performance. This evaluation is part of an ongoing programme of systematic evaluation that HMRC is undertaking for all UK tax reliefs. 

More specifically, the evaluation’s objectives were to: 

• assess to what extent the SEIS is achieving its objectives 

• investigate why companies and investors opt into the scheme 

• appraise whether conditions of the scheme are proportionate to needs 

• understand the extent the SEIS is the most appropriate mechanism by which to achieve its aims 

To answer the research objectives, the team based its evaluation on both primary and secondary data analysis using quantitative surveys, qualitative in-depth interviews, and econometric analysis. 

Four groups of research participants were identified to input into the evaluation: investee businesses, non-investee businesses, investors, and fund managers. 

3. Profile 

Investors tended to be either High-Net-Worth Investors (HNWI) (66%) or Sophisticated Investors (SI) (61%) and were often experienced businesspeople, involved in investing for many years. Both businesses and investors reported that they heard of the SEIS through word of mouth and felt that it was not officially promoted enough. 

4. Appropriateness 

The SEIS goes some way to addressing the market failure of accessing finance for early-stage businesses. The tax relief was a preferred mechanism among investors. Equity investment was well-liked by investee businesses and seen as a crucial first step towards gaining more finance. However, the SEIS did not fully close the finance gap. Investees were not always able to raise the amounts they sought through the SEIS and were initially seeking more finance overall than the SEIS limit (average £367,000). Most (57%) investee businesses were seeking more than £150,000 overall from any source, with 50% managing to raise more than £150,000. Investee businesses sought on average £106,000 via the SEIS (median £138,000) and raised an average of £72,000 (median £55,000). Over half of investees (52%) were seeking more funding via the SEIS than they raised through it, though over half (55%) also said that receiving SEIS funding made raising further funding easier. 

Investee businesses interviewed reported that the SEIS was the only source of finance available that they felt able to access at amounts approaching the levels they required. They also appreciated the fact that SEIS investors brought their skills and knowledge to the business. For their part, investors felt that the tax reliefs of the scheme compensated them sufficiently for the perceived risk of investing in early-stage companies. 

5. Impact 

Use of SEIS was associated with higher turnover (23%), employment (12%), and assets (245%) relative to the control group who did not participate in SEIS. It was found that using SEIS had a broadly positive impact on business outcomes across regions and sectors and for businesses raising different amounts through SEIS. While these positive outcomes were noted for companies with SEIS investment, analysis of business survival showed that participation in the SEIS is associated with an increased probability of ceasing to trade. 

A challenge of the analysis is that companies self-select into the SEIS, and therefore that there may be unobserved differences between businesses participating in SEIS and the control group. For example, it is possible that businesses participating in SEIS may be higher-risk businesses that also have greater growth potential. The control group was carefully constructed to minimize such differences based on observables. This was done by restricting the control group to businesses likely to be eligible for SEIS and with an ambition to grow, as well as through Propensity Score Matching. However, there may remain certain unobservable differences between SEIS investees and the control group. 

This report also considers the factors associated with ‘graduation’ of SEIS firms to EIS (i.e. raising funds through EIS after raising funds through SEIS). The value of SEIS share capital issued is by far the most important predictor of graduation to EIS: SEIS investment approaching the £150k cap is the strongest predictor of graduation from SEIS to EIS. 

6. Proportionality 

Overall, there was broad agreement among investees that they would prefer the £150,000 limit to SEIS to be increased in order to make more funding available for early-stage businesses. Over two-thirds (69%) said they would have sought more finance via SEIS if the limit was £300,000. Qualitative interviews showed that start-up costs, product development and salaries alone can easily exceed this very quickly, and a consistent theme was that the limit had not been increased since the scheme began, so had not kept pace with inflation. 

Investors indicated both qualitatively and, in the survey, that the tax reliefs they could claim were high enough to make investing in SEIS eligible companies worthwhile Survey evidence suggested that small increases and decreases in the level of tax relief would have incrementally changed the amounts invested. If income tax relief was 5% higher, 55% would have invested the same, and 42% would have invested more, split as 36% investing up to 49% more and 4% between 50 and 100% more. This was similar for lowering the relief by 5%- 60% would have invested the same, 32% would have invested less. However, removing the tax relief entirely would discourage close to half of investors (46%) from making these investments in what are perceived as high-risk businesses. Around a third (34%) of investors would have invested less and only 18% would have invested the same amount, suggesting that the SEIS encourages investment in SEIS eligible businesses. 

7. Process of using the scheme 

Investee businesses were very positive about their experience of using the SEIS overall, with almost three-quarters very satisfied (73%). Very few experienced any problems with the scheme, although some qualitative respondents reported experiencing slower than expected processing of claims. Most businesses had already used all of their SEIS funding. 

Findings for investors mirrored this, with most having a very positive experience of the SEIS scheme.