Funding entrepreneurs should be priority for government
Those who have made a significant capital gain should be encouraged to reinvest
Michael Carey says access to funding, and the related issue of perceived balance of risk and reward, is one of the major barriers for entrepreneurs. Photograph: Eric Luke
In the context of the uncertainty about Ireland’s political leadership, potential changes to policy on entrepreneurial activity should be closely watched. Government policy can help to establish an entrepreneurial friendly environment or, if flawed, can construct unsurmountable barriers that will halt the growth of business and employment creation.
Over the past 15 years I have been involved in entrepreneurial activity, working with others, seeking to build businesses with some mixed success. We established Jacob Fruitfield Food Group in 2002, sold it to Valeo Foods in 2011, and since then have pursued opportunities through The Company of Food, a specialist food sector investment business.
We retained a shareholding in Valeo; established a food sector share portfolio; made investments in other food-related businesses (backing other entrepreneurs); and started our own food businesses, most recently setting up East Coast Bakehouse, Ireland’s only commercial-scale biscuit manufacturer, in Drogheda.
During the past five years I’ve also held the role of chairman of Bord Bia and have acted as a judge on the highly successful EY Entrepreneur of the Year Awards. In these roles, I have had the opportunity to get to know some of the best of Ireland’s entrepreneurs, both in the food sector and in other areas, many of whom have had difficulty funding their ambitions.
High potentialThe are about 20,000 businesses started in Ireland every year. A few hundred of these start-ups each year are described by Enterprise Ireland as high potential start-ups (defined as likely to provide over 10 jobs and annual sales of €1 million in 3-5 years). Very few are “scale start-ups”, establishing from the outset as a business of real commercial scale.
I believe that one key barrier to increasing that level of entrepreneurial activity is access to funding and the related issue of perceived balance of risk and reward.My experience of raising funding for start-ups has been frustrating. The banks continue to be very cautious of start-ups, perceiving that this lending involves massively increased risk compared to supporting established businesses or lending to property asset-backed transactions. Many new business start-up proposals for bank funding, including some of our own projects, have been halted before they reach a formal credit review stage, resulting in misleading bank statistics on approval rates.
Personal guaranteesBank debt for start-ups in Ireland is too expensive and banks continue to force through demands for entrepreneurs’ personal guarantees. This banking environment is not a healthy one and is restricting the ambitions of entrepreneurs. The banks will not fix this problem without the encouragement of government policy, which needs to involve higher expectations on the banks to support enterprise start-ups.
One of the reasons potential entrepreneurs may not make the leap into the uncertainty of a start-up is a fear of failure, or even a fear that the rewards will not justify the risk being taken. Government should also consider how to address this.
On the ‘reward’ side of the equation, government policy should at least avoid unintended consequences. Much has been written about how entrepreneurs are at a disadvantage in terms of social services and assistance when a business fails. This situation is illogical and damaging, and a new government should just get on with addressing the issue. There has also been much talk about an ‘entrepreneur tax’ – a reduced CGT regime to reward successful entrepreneurs when they exit their business. Such CGT rates obviously need to be internationally competitive, and currently they are out of line with the UK and the US.
Capital gainsPersonally, I believe that entrepreneurs should pay their tax on capital gains. On a number of occasions we have been advised to consider aggressive tax-planning steps to reduce or eliminate a CGT liability on a sale of a business or shares. We have chosen to pay the taxes due.
Successful entrepreneurial activity should be a source of government revenue and should help fund necessary social services. However, I believe that there is an opportunity to encourage more and larger investment risk through a change in government policy. I suggest that entrepreneurs that have made a significant capital gain on the sale of a business be encouraged to invest those gains in other new ventures, either their own new start-ups or backing other entrepreneurs. This could be achieved though a very simple structure; in the case of an investment in a start-up business an entrepreneur/ investor could reclaim CGT paid on a previous transaction. That would allow the serial entrepreneur/investor to see the full benefit of her success, without the need for aggressive tax planning, and encourage new and larger investments.
A new government should take a few of these immediate steps that would improve the funding environment for entrepreneurial investment. The impact on exports, job creation and future funding for social services could be very significant.
Michael Carey is chairman and managing director of East Coast Bakehouse and chairman of Bord Bia