In 2010 Rainmaking decided to open an office in London. The purpose was to get better access to funding, talent and ideas. 26 months later it is time to compare the Danish and UK market for angel investments, which is how we fund most of our startups at the seed stage.
The overriding conclusion is that UK by far outperform Denmark (and most of Europe) when it comes to access to early stage funding. There seems to be a number of reasons for that:
- There are more rich people in UK. So simple. Bigger population and more cash rich people. Both old money and high paid bankers (who said their high compensation is only bad)
- Mentality is different. There is a larger willingness to take risk and look at getting the big upside compared to minimizing risk and only invest once things are validated. It is still not US, but it is the nearest we get in Europe to having risk willing early stage investors
- The most important is, however, probably the very attractive investment schemes the UK government has put in place under which angel investors can get between 30-50% of their investment straight back from the government. AND there is no tax on capital gains from such investments (the so called SEIS and EIS schemes). This massively incentives angels to make risky investments and still leaves the investment decisions to the market. In comparison a Danish angel investing in a startup will not get any tax credit and will instead pay 67% on all capital gains if the investor upon the exit time owns less than 10% of the shares, which most angel investors will do at that point of time due to dilution throughout successive funding rounds.
Startup raises € 100K from an angel in return for 10%. Later the startup raises another 500K and all shareholders are diluted with 50%, so the investor now holds 5% of the equity. Finally the company gets sold for € 10m.
If the investor is a Danish angel then the profit looks like this: 5% of € 10m = € 500 in exit proceeds less 100K invested and less € 268K (= 67% tax on capital gains of 400K) = € 132K in net profit on the cash investment of € 100K
If the investor is an UK angel then the profit looks like this: 5% of € 10m = € 500 in exit proceeds less 50K invested (because 50% of the investment is paid back by the government under the SEIS scheme) and less € 0 in capital gains = € 450K in net profit on the cash investment of € 50K
So on a comparable basis then the UK investor would get 9 times his investment back, whereas the Danish investor would get the investment back 1.3 times.
It is no big surprise that we are happy we made the move to London and started getting our startups funded there.
And the above is also the reason we encourage most teams in Startupbootcamp to get their companies registered in UK and apply for EIS or SEIS to be able to attract UK angel investors.
p.s. the Danes agree with us, at least the entrepreneurs who are campaigning against the so called “entrepreneur’s tax”.
- Carsten Kølbek