Britain’s unicorn problem starts long before the stock market

‍James Cobb, founder and CEO of Crowd Connected, a UK technology company providing real-time location intelligence for venues, events and physical spaces, outlines why Britain needs to focus on creating the next generation of homegrown success stories, as well as keeping them here.

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Britain wants more successful companies to stay and scale here. First, we need people willing to build them here. By the time a British company is deciding whether to list in London or New York, it has already done something extraordinarily difficult. It has survived, grown and become valuable enough for anyone to care where it lists.

Last week, London Stock Exchange chief executive Dame Julia Hoggett warned that Britain needs stronger incentives to keep major companies, investment and listings in the UK. She is right. Once businesses reach serious scale, access to deep pools of capital matters enormously and the US is hard to compete with.

My concern is the other end of the pipeline. Most startups won’t become unicorns. A few will. If we want more billion-pound British companies to retain ten years from now, we need people willing to take the risk of starting them today.

Look at the whole pipeline

I have spent more than a decade building a UK technology business. I didn’t start with a grand plan to list on the London Stock Exchange. You start with an idea, a customer problem and an uncomfortable amount of uncertainty.

Those early years matter because founders are making decisions about where to build, hire and invest long before anyone starts talking about IPOs.

The UK already recognises that startups need incentives. Investors can receive valuable tax relief through SEIS and EIS. Companies can use EMI share options to give employees favourable tax treatment. These schemes exist for a good reason. Early-stage businesses are risky and we want capital and talented people to back them.

Then look at what has happened to the incentive available to the person who actually created the company. Entrepreneurs’ Relief, now Business Asset Disposal Relief, once allowed qualifying gains of up to £10 million to be taxed at 10%. At the time, the top rate of capital gains tax was 28%, meaning the relief could be worth as much as £1.8 million.

Today, Business Asset Disposal Relief has a £1 million lifetime limit and an 18% rate. With the main higher rate of CGT at 24%, the maximum saving is £60,000.

That is quite a change in the signal we send to founders.

Founders carry a different kind of risk

The economics of building a company are unusual. A founder may take a low salary for years because the cash is better spent hiring another developer or salesperson. Much of their wealth exists on paper and can disappear completely if the business fails. Meanwhile, that business is creating jobs. Employees are paying PAYE and National Insurance. The company is buying services, using suppliers and, if things go well, creating more taxable economic activity every year. Eventually, a founder might sell. That could come after ten or fifteen years of taking risk.

There is already speculation about further changes to capital gains tax ahead of the Budget, including calls to align it more closely with income tax. Any change needs to recognise the way founders actually build wealth. Receiving £5 million from selling a company after ten years of building it is a very different economic journey from earning £500,000 a year for ten years.

Both should be taxed. But the tax system should recognise the risk involved in creating the jobs and economic activity that produced that value. At the moment, it favours the highly paid consultant earning £500,00 per year, over the founder who exits after 10 years.

Give founders a reason to keep building here

My Budget ask is straightforward. I want a modern founders’ relief.

The old Entrepreneurs’ Relief was badly targeted. It could apply to someone who held 5% of a company and worked there for just two years, even if they had not delivered any business growth. That was a design problem and it could have been fixed. A modern version could be much more tightly defined around genuine founders: people who create businesses from scratch, employ people in the UK and build meaningful taxable economic activity here.

It could reward long-term ownership and make the relief more valuable the longer somebody spends building a company. The qualifying rules can be strict. They should be.

Founders should pay tax. But if Britain wants more people to spend a decade creating companies, employing people and taking the risk that comes with it, the incentive system needs to make sense.

By all means, make Britain more attractive to investors. Give our biggest businesses access to the capital they need to stay and scale here. But remember where those businesses come from.

We need to stop the leak at the end of the pipeline. We also need to keep filling it.

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