Special Report on Venture Capital: Business angels wooed by new regulations: Alison Eadie assesses proposals for start-up schemes which have been welcomed as an enormous boost for the sector

Click to follow
The Independent Online
NOVEMBER'S Budget was just the encouragement for 'business angels' that the venture capital industry wanted.

Angels typically invest amounts up to pounds 100,000 in start-up or early stage businesses. Venture capitalists step in when the businesses have grown sufficiently to interest them.

The Chancellor's proposals for an Enterprise Investment Scheme to replace the Business Expansion Scheme were hailed as offering 'an enormous boost for the small business sector and providing real rewards for risk-taking', according to Ron Hollidge, chairman of the British Venture Capital Association (BVCA).

The new scheme allows investors to put in up to pounds 100,000 a year from 1994/5 and companies to raise up to pounds 1m a year. Income tax relief up-front for investing in unquoted trading companies is limited to 20 per cent against 40 per cent in the old BES. Relief for a loss on disposal can be set against either income or capital gains tax and there is no CGT on profitable disposals. Directors can now be paid, allowing business angels to contribute expertise as well as money.

The Chancellor also outlined a new type of investment trust - the venture capital trust - to invest in unquoted companies. The VCT will allow investors to receive dividends tax-free and will not attract capital gains tax.

The Association of Investment Trust Companies has asked the Inland Revenue to allow rollover relief from CGT on the sale of unquoted companies to extend to investment in VCTs. It believes the added risk of investing in unquoted equity should qualify it for greater tax breaks than those already applying to Personal Equity Plans. The Inland Revenue's consultation paper on VCTs is due this month.

The BVCA is keen to encourage angels as the first step in the chain of unquoted investment. A BVCA survey showed that 23 per cent of venture backed firms previously had some form of informal investment capital such as funds from business angels.

Baronsmead, an independent venture capital house, jumped in ahead of the Chancellor and in the next couple of months will launch a scheme to tap into private investor enthusiasm for unquoted investment. Individuals investing a minimum of pounds 100,000 can share in the fortunes of small to medium sized venture capital investments picked by Baronsmead. An administration fee will be charged as investments are made rather than up front. Baronsmead's reward will be 20 per cent of income and capital gain, the remainder divided among investing individuals.

Putting entrepreneurs in touch with business angels has always been tricky, because no one knows the extent of the angels market or quite where to find them. Lucius Cary started his Venture Capital Report in 1978 for entrepreneurs seeking risk capital to tout for investors. Published monthly in Henley, each issue contains five to 10 articles about entrepreneurs seeking funds.

Recent initiatives have swelled the ranks of financial marriage bureaux. LINC (Local Investment Networking Company) was formed in 1987 and is now sponsored by 13 enterprise agencies, Lloyds Bank, BP and Levy Gee. In 1991 the Department of Employment funded five pilot schemes to stimulate local business angel clubs based on Training and Enterprise Councils. The BVCA has recently published its Directory of Business Introduction Services, listing organisations throughout the UK which put angels in touch with entrepreneurs.