A Treasury Committee review of the UK’s venture capital industry has highlighted that a shockingly low amount of funding goes to female and BAME-founded businesses.  But what did the report actually consider, and why is the Treasury getting involved?

The venture capital industry aims to support new start-ups by effectively matching businesses that have funding requirements to investors with cash.  Such businesses are considered to be high risk from an investment perspective, and in reality many will fail. For this reason the government incentivises investors in the form of tax reliefs through the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT).

According to the latest statistics (see here), almost £30 billion has now been invested into more than 53,000 companies through EIS and SEIS since the schemes were created, and HMRC recently confirmed to the Treasury Committee that annual usage had reached its highest level since EIS was launched in 1994. On the face of it, therefore, one might argue that the schemes have been hugely successful in supporting new business ventures over the past couple of decades.

There are specific requirements to be met by the companies in order to qualify for the schemes and it is up to HMRC to review each application and approve or deny access to the scheme accordingly. This is why the Treasury takes an interest in reviewing the amount of relief being claimed, and the diversity (or otherwise) of the companies benefitting: do these schemes represent value for money for the taxpayer, are they achieving what they are designed to, and is the relief accessible to the various companies and founders in way that is representative of society?

Based on the findings of the Treasury Committee’s research, the headline is that there is a significant lack of diversity in the founders of the businesses receiving funding through these schemes, and the Committee has suggested ways in which this should be improved though changes in policy. The key recommendations aim to increase the transparency and accessibility of the venture capital industry as a whole.

The venture capital industry is unquestionably male-dominated (85% of general partners across Europe are male according to European Women in Venture Capital), and a recent survey by Pink Salt Ventures, a UK venture capital firm focused on funding female founders, reported that 83% of their clients cite the lack of female decision-makers as the largest barrier to funding.

This issue was brought into sharp relief by The Times in a telling recent interview with Lucy Goff, the founder of beauty device company Lyma. Goff spent two years pitching to venture capital firms but eventually gave up in favour of self-funding after she was continually turned down. After self-funding the first 10,000 units and a sell-out first week, one wonders how she would describe her experience of the venture capital industry (Goff subsequently secured £2 million from a single venture capital fund).

The tax reliefs provided by the government are intended to support the growth of small entrepreneurial businesses and frequently plug a gap in the venture capital market for founders whose businesses are too embryonic to attract private equity investment, or don’t yet have the scale to float. However it is critical that access to the schemes is granted on a fair and consistent basis. The Treasury Committee’s report suggests that there is a huge amount of work to be done on that front.

Looking ahead, there is currently a ‘sunset clause’ in the EIS/SEIS legislation, meaning that – unless renewed or updated – companies and investors will no longer have access to these schemes from April 2025.  It will hopefully be a priority for any government after the next general election to use the findings of the Treasury Committee report, together with other significant publications such as the Rose Review and the important efforts of groups like the Wealthiher network, to take these schemes and make them, and the investment landscape more generally, better for all founders; not just those who walk and talk like those on the investor panels.