Some Deep Tech Startups Face Collapse Due to UK’s EIS Limits, VC Warns

• Some UK deep tech startups face collapse without changes to the government’s investing scheme.
• Growth investor Parkwalk Advisors warned a number of its portfolio companies will run out of cash.
• Limitations of the state’s Enterprise Investment Scheme pose a threat to “hard science” firms, it said.

A British venture capital firm betting on the deep tech sector has warned a number of its portfolio companies face the threat of collapse after exhausting funds from a state-backed program.

Parkwalk Advisors, a London-based VC firm backing “hard science” startups spun out of some of Britain’s most elite universities, said that some of its companies “will not survive” without further state funding in written evidence to a government inquiry on the country’s venture capital industry.

A raft of startups in the UK rely on the state’s Enterprise Investment Scheme (EIS) to grow their businesses at an early stage. The program offers tax relief to investors who buy shares in relevant startups and enables companies to raise a maximum of £12 million ($15 million) in their lifetime.

Parkwalk, a growth EIS fund manager, has invested in over 150 companies spun out from the likes of the University of Oxford and Imperial College London and boasts almost $500 million of assets under management.

However, many deep tech startups, which spend years fine-tuning intellectual property in areas as wide-ranging as artificial intelligence to quantum computing, struggle to commercialize their technology and generate revenue in the timespan that other tech sectors do.

“We have a number of companies who have now exhausted, or will shortly exhaust, the EIS funding limits but they still require significant funding to continue their research and development in order to commercialize their products and become profitable,” Parkwalk said.

For founders leading teams focused on such research, which is often completely new, a lack of funding across the longer-term horizon of their development poses a serious challenge to their ambitions of building into mature businesses. 

Moray Wright, CEO and cofounder of Parkwalk Advisors, told Insider that the EIS had been “instrumental in allowing UK businesses to grow to a certain level.”

But he added that there was a need for investors who can deploy growth capital into frontier startups if the government was to meet its aim of creating “an environment where these companies can become self-sustaining and contribute to UK plc growth.” 

“For this to happen, we need a stronger, larger ecosystem of ‘growth’ investors who can support these companies at their later stage. Something that is very achievable if we make the right changes,” Wright said.

The comments come as the UK government prepared to hold the first hearing for its wide-ranging inquiry into the VC market on Monday.

The inquiry called on stakeholders in the UK’s VC market to offer views on key matters such as potential threats to startup growth amid an economic slowdown and tightening monetary policies as interest rates creep up, as well as ways of unlocking fresh capital to inject into tech startups.

Investors that rely on the EIS as a funding source for portfolio companies often seek “advance assurance before investments”, according to Parkwalk, but have faced “very significant delays” on applications in recent months, pushing back investments into opportunities in the process.

“At times, the delays have caused co-investors to raise concerns about investing alongside EIS funds, which is clearly very concerning,” Parkwalk said in its submission.