Why Sunak's startup package could deliver the goods for impact enterprises

Last week the UK Chancellor, Rishi Sunak, announced a package of £1.25bn for high growth venture-backed businesses in the UK. This package creates two pots of cash. The first, to be distributed through the British Business Bank, will be a £500m programme called the Future Fund and will match new money going into early growth companies in the UK. The second pot of £750m will be distributed via the innovation agency Innovate UK, which will make grants and loans to companies involved in intensive research and development.

While Swiss and German initiatives have been effective and efficient in getting money out, the British programme has been mired in bureaucracy

Details of this programme are still forthcoming, and only time will tell this and the Treasury’s other initiatives (including the CBILS) will be successful in salvaging the UK economy. These programmes have not lacked for boldness but have been, according to reports, abysmal at delivery. While Swiss and German initiatives have been effective and efficient in getting money out to industry, by contrast, the British programme has been mired in bureaucracy. My suspicion is that it is fearful of negative tabloid headlines if the programme is abused – an obsessive focus of this government. By contrast, the Swiss and German programmes err on the side of overstimulation, which in this environment is probably no bad thing.

Focus on the enterprise, not the investor

Having said that, there is one way in which this recent proposal is laudable and marks an encouraging break from past practice. Both parts of the programme announced last week direct the incentive, which is an explicit government subsidy, to the enterprise. By focusing on the enterprise rather than the investor, the subsidy is much more effectively targeted, and I believe can achieve significantly higher impact.

Historically incentives to support UK industry have, in my opinion, been excessively generous to investors. Consider venture capital trusts, the EIS and SEIS schemes, and even social investment tax relief (targeting impactful enterprises), all of which incentivise investors.  In my view, this diminishes their impact but also raises serious questions of fairness, as most UK households have hardly any savings, as we are learning painfully in these days. The EIS scheme, for example, permits up to £1m of investment in qualifying businesses each year – but this is of little consequence to the median UK household, with savings of around £3,000. 

This recent proposal is laudable and marks an encouraging break from past practice

The latest Sunak proposal offers a convertible loan of between £125,000 and £5m to fast-growing companies. The fact that this cash and its terms must be matched by third-party investors amplifies the government’s loan and also helps to ensure the transaction takes place on market terms. I see this as a leveraged way to support sectors the government deems important, based upon its view that these areas are vital for future British economic prosperity. Whether one agrees that these sectors warrant subsidy is a separate question, but politicians have a responsibility for making such decisions on our behalf.

Targeted tax credits 

At ClearlySo, which is exclusively involved in helping impact-oriented enterprises and funds raise capital, we wish the government would go much further in this regard. For over a decade we have called for what we call “Fiscal Tilting”. This involves a series of targeted tax credits focused on enterprises that generate positive impacts or externalities. It would be up to the government to decide which industries and sectors or which impacts it chose to incentivise. As a way of ensuring this proposal would be fiscally neutral, we would envision an equivalent set of penalties/taxes for those firms generating negative impacts or externalities. The existing landfill tax is an example of this.

Our contention is that eventually these would actually be revenue positive for the government because penalising polluters and subsidising impactful businesses would decrease demands on government spending. This would be further amplified by capital markets which would respond to these signals and adjust costs of capital for different firms which benefit or suffer from Fiscal Tilting. 

The latest Sunak proposal is a step in the direction which ClearlySo has been calling for over many years. We see it as superior in form to the massive business loan scheme which protects banks first and foremost and is therefore more typical of the old direction of travel. Can we imagine what might have happened if the government bailed out mortgage holders instead of the banks during the 2008 financial crisis? I think the cost would have been lower, the economic impact more positive and the moral hazard less substantial.

• Rodney Schwartz is the founder and CEO of London-based impact investment bank ClearlySo.

At Pioneers Post we're working hard to provide the most up-to-date news and resources to help social businesses and impact investors share their experiences and get through the Covid-19 crisis. But we need your support to continue. As a social enterprise ourselves, Pioneers Post relies on paid subscriptions and partnerships to sustain our purpose-led journalism – so if you think it's worth having an independent, mission-driven, specialist media platform for the impact movement, please click here to subscribe.

Header photo: Sustainable vegetable delivery company Oddbox, which recently raised £3m investment to expand, with help from ClearlySo.