The Enterprise Investment Scheme (EIS) plays a critical role in the UK economy by providing funding to innovative and high-growth potential startups that may need access to traditional sources of finance. EIS investments have supported the growth of numerous innovative startups, including Amino, Skyfarer, and Wine&Something.
According to HM Revenue & Customs, approximately £24 billion has been invested through EIS since its inception in 1994, with over 32,000 companies benefitting from EIS funding.
This article aims to provide insights into the future of EIS and identify key predictions and trends that will likely shape the EIS landscape in the coming years.
We will analyse the current state of EIS investments, including the impact of COVID-19 on EIS investments, and identify emerging investment sectors and changes in EIS regulations and eligibility criteria. We will also explore EIS’s future trends, including technological advancements, climate change, and demographic shifts.
Finally, we will discuss the challenges and opportunities for EIS and provide implications for investors and entrepreneurs.
Current State of EIS Investments
Impact of COVID-19 on EIS Investments
The COVID-19 pandemic significantly impacted the UK economy, and the EIS market was not immune to this.
Between 2020 and 2021, the number of startups raising funds utilising the EIS scheme and the amount they generated declined. Much of this resulted from the COVID-19 pandemic, as many investors became cautious and held back on investment decisions during this time.
Number of Companies and Amount Raised Through the EIS Scheme (Image Source)
However, as the UK recovers, the world returns to normal and has funding for EIS startups. By the last quarter of the fiscal year of 2020 to 2021, the funds raised by startups using the EIS scheme rebounded to above pre-pandemic levels.
The pandemic has also highlighted the importance of investing in sectors such as healthcare and technology, which have seen significant EIS investment in recent years.
Analysis of EIS Investments by Sector and Region
EIS investments have been made across various sectors, including technology, healthcare, and renewable energy.
There has been a growing interest in sustainable investments, focusing on companies tackling climate change and promoting sustainability.
The renewable energy sector, in particular, has seen significant growth in EIS investments. Other industries, such as the Professional and Science and Technology sectors, have grown steadily.
Predictions for the Future of EIS Investments
Growth Potential of EIS Investments
According to the latest data from HMRC, over 20,000 companies have received investment through the EIS since its launch in 1994, with a total of £358 million invested in EIS startups between 2020 and 2021 alone.
Furthermore, EIS investments are expected to grow in the coming years as more investors recognise the scheme’s benefits, including the attractive tax incentives and the potential for high returns.
Emergence of New Investment Sectors
In addition to the traditional investment sectors of technology, healthcare, and renewable energy, new sectors attract EIS investment.
As such, there is growing interest in circular economy startups like Bandi App and YoungPlanet.
Similarly, a growing demand for investments in social enterprises and impact-focused businesses like Kanopi, the Other Saint, and Save that address significant social and environmental challenges.
Changes in EIS Regulations and Eligibility Criteria
Since the UK government launched the EIS initiative, it has been subject to regular reviews and updates by HMRC. As a result, several regulations and eligibility criteria changes have been implemented in recent years.
For example, the government introduced new rules that increased the tax relief claims investors can make towards “knowledge-intensive” startups.
Looking ahead, there are likely to be further changes to the EIS regulations and eligibility criteria as the government seeks to balance investment with effective regulation.
Trends Shaping the Future of EIS Investments
Technological Advancements and Innovation
The EIS market is likely to be significantly impacted by the ongoing technological advancements and innovations that are taking place across many sectors. In particular, the growth of fintech and digital startups like TradrLab, Collegia, and Cahootz provide new investment opportunities for EIS investors.
Furthermore, the increasing use of artificial intelligence and automation in various industries will likely lead to innovations that could attract EIS investment.
Climate Change and Sustainable Investments
There has been a growing focus on climate change and sustainability in recent years. This trend is expected to continue.
As a result, there is likely an increased demand for EIS startups that support sustainable and eco-friendly businesses.
This will lead to new investment sectors, such as renewable energy, sustainable transportation, and circular economy initiatives.
Demographic Shifts and Changing Consumer Preferences
Demographic shifts and changing consumer preferences are also likely to significantly impact the startups utilising EIS to raise the capital they need.
For example, Millennials and GenZ are increasingly interested in socially responsible investing and may be more likely to invest in EIS schemes that support sustainable and socially responsible businesses.
On the other side of the spectrum, the ageing population will likely lead to increased demand for healthcare-related startups like Blocksure and Longlive. In turn, these will create new opportunities for UK investors wanting to capitalise on the EIS investment scheme.
Challenges and Opportunities for EIS Investments
Impact of Brexit on EIS Investments
Brexit has significantly impacted the UK economy. Finance experts point out that investments towards EIS-certified startups and other opportunities are 23% lower than they would have been without Brexit.
Business Investments Among G7 Countries. (Image Source)
However, the EIS market has shown signs of stability and growth, with the UK fully separated from the EU. In 2022, the UK government introduced measures to boost investment in innovative firms. This includes an initiative to transform the UK into a global science and technology superpower by 2030.
Competition from Other Investment Opportunities
The Enterprise Investment Scheme faces competition from alternative investment vehicles such as venture capital and private equity.
Despite this, EIS investments remain an attractive option for startup investors. This is particularly true in light of the changes to the country’s tax landscape.
The emergence of new investment sectors, the impact of technology and innovation, and the increasing importance of sustainability and demographic shifts are among the key trends shaping the future of EIS investments.
Despite the decline observed during the COVID-19 pandemic, EIS continues to provide significant opportunities for investors and startup founders. This, along with the tax benefits you can get, EIS remains an attractive option for startup investors.
Overall, the future of EIS is bright. Those who can navigate the challenges and capitalise on the opportunities mentioned in this article will likely reap significant rewards in the coming years.