Risk, State and entrepreneurship: the case of the UK

Risk, State and entrepreneurship: the case of the UK

Innovation, disruptive business models, collaboration and entrepreneurship are concepts that are now a fundamental part of the discussion around economic development, because they make the economy and its sectors reinvent, evolve and become more efficient by implementing new paradigms business

Beyond a fashion, these issues – particularly entrepreneurship – should be a strategic focus of development for Bogotá and Colombia. But, given its high level of uncertainty and the risk involved in investing in new companies (start-ups), in our country there is little public and private funding for this. The government has made efforts through iNNpulsa and the Emprender Fund, while some private venture capital funds have recently emerged, boosting the issue. However, to give real impetus to entrepreneurship, much more is required. This is how the United Kingdom understood it, which is a success story that is worth analyzing.

Since the government of David Cameron, the United Kingdom made the decision to bet on technology-based and digital ventures as engines of development. According to Tech City UK, this bet has yielded great results: between 2012 and 2016, 37.8 trillion dollars were invested in this type of business in that country, of which 47 percent were located in London. In France, the closest competitor, 15.4 billion dollars were invested during the same period, that is, 60 percent less. In addition, it is estimated that in 2016 this sector grew 50 percent faster than the rest of the UK economy, generating sales of 255 billion dollars and 1.64 million jobs.

What were the strategic decisions that drove this growth? The government, as the standard bearer of the strategy, made bold decisions beyond just promoting the issue. In this case, the creation of a tax scheme to encourage investment in high-risk ventures: the so-called Seed Enterprise Investment Scheme (Six) was the key to success.

The scheme was designed so that the State ‘shares’ with private market agents the risk of investing in new companies. Three mechanisms achieve this effect:

1.For each peso invested in new high-risk companies, 50 percent returns to the investor via a tax discount on the income statement. That is, if in the first year a stake in a start-up for 20 million pesos is acquired, in the income statement of that fiscal year, via a tax discount, 10 million pesos will be credited. In the United Kingdom, this incentive is capped per investor, per year, of 100,000 pounds sterling, something close to 400 million Colombian pesos.

2. In the event that the investor sells his shares in the new company generating profit, it will be exempt from the occasional profit tax. Thus, if after three years from the initial investment, the business share is sold in 50 million pesos, the profit, that is 30 million pesos, will not pay that tax.

3. If the company receiving the investment does not prosper and, therefore, loses all its value in the market, the State assumes 45 percent of the capital that is at risk. The capital at risk equals the money initially invested, less the tax discount made by the State in point 1. In this example, the capital at risk equals 10 million pesos ($ 20 million – $ 10 million) of which 4.5 millions are paid as a tax discount in favor of the investor in his income tax return. This implies that of the 20 million initially invested by the individual, if the company goes bankrupt, its real loss will only be 5.5 million pesos.

Of course, these are just examples. Each of these mechanisms should be subject to specific conditions appropriate for a country such as Colombia. What is clear is that, given the inherent risk of investments in undertakings, the State can and should play an active role to incentivize them. Although there is a fiscal cost, these tax schemes are an effective, viable and proven option that must be considered by the candidates for the Presidency of the Republic in 2018, since the very capacity of the economy to reinvent itself and generate greater economic development. Let’s stop the fear: it is time to decisively promote entrepreneurship and therefore the future of our economy.