How EIS motivates business angels.
Cytocell was founded by Bruce Savage in 1991 to develop genetic tests for deficiencies in unborn babies (including Down's syndrome) using FISH technology (Fluorescent In Situ Hybridisation). Cytocell has all the hallmarks of a typical bio-tech company: exciting technology, potentially large market, and potentially large failure risk in the difficult translation of research technology to the commercial world.
It is in situations such as these that the Enterprise Investment Scheme (EIS) can have a motivating effect on so-called business angels - those entrepreneurial individuals who are prepared to back high-risk start-ups before they are secure enough or big enough to attract investment from venture capital companies.
The EIS, set up by the government in 1994 to encourage individuals to invest in unquoted trading companies, allows 20% tax rebate on any funds invested in a trading unquoted company. If, for example, I invest £100,000 in Cytocell, I am entitled to reclaim £20,000 of this in tax rebate. Moreover, if I lose that money, I am entitled to write off the loss of my £80,000 against tax. If I make a capital gain, I defer capital gains tax if I invest that money in an unquoted company. And finally, if, after five years, I make an enormous gain, I pay no capital gains on my returns.
Savage strongly supports the scheme. 'It has been great for us. A lot of our early stage capital came through individuals - the venture capital companies were only prepared to come in at a later stage. The EIS offered them (the individuals) a mixed bag of tax incentives for doing so. Without this type of capital, we wouldn't have been able to develop in the way that we have.'
Sarah Gracie is a senior writer at Venture Capital Report.