We need to treat our entrepreneurs better

25 Feb 2019

Image: © Farknot Architect/Stock.adobe.com

Entrepreneurs are the future of the Irish economy. The time to reform taxes to recognise and support these risk-takers is now, writes John Kennedy.

When people ask me to recommend a start-up or entrepreneur I admire, my brain often freezes. There are too many. Realistically, I know many will not actually make it to the big multimillion-euro exits. It is a risk, after all. But I console myself by thinking that the experience won’t necessarily break them and perhaps even will be the making of them.

But when people ask me what it is I like about start-ups and entrepreneurs, I usually reply that I am jealous of the courage it takes to start something and follow a conviction or a hunch. This means taking a less-travelled road, leaving job security and the comfort zone behind, hiring people and convincing them to believe in you, taking on the stress of making payroll, and winning customers and maybe investors. And I know that, contrary to the glamour associated with the term ‘entrepreneur’ today, it is really a long and often lonely road.

‘We need to ensure that the tax system supports and encourages risk-takers’

It makes my blood boil that less inventive or courageous people sitting in ivory towers are handsomely rewarded for consistently failing to help our entrepreneurs.

Reward the risk-takers

You see, the term entrepreneur wasn’t always quite as sexy in this part of the world as it is today. Entrepreneurs would often be dismissed with suspicion by safe, pensioned, conservative types – whose biggest risk in life is to cross the road to buy a newspaper on a Saturday morning – as chancers or ne’er-do-wells.

In the past 20 years – the majority of my working life – that perception has shifted in the opposite direction, and anyone with a pulse should know that the future of the Irish economy relies on people taking risks and building something that will create jobs.

Earlier this month, I sat in the audience at the Enterprise Ireland Start-up Showcase and listened to the Enterprise Ireland divisional manager of high-potential start-ups, Joe Healy, tell it like it really is.

“There are still challenges around retaining and attracting talent, and we need to ensure that the tax system supports and encourages risk-takers. We have 132 of our brightest and best in this room, and an important role is to be an advocate for a tax regime that is needed,” Healy urged.

“Not only changes to reward the real heroes of the economy but the tax system must be internationally competitive. It is about the future economic engine of this country and enhancing Ireland’s reputation as a start-up hub, but also inoculating against Brexit, trade wars and other unforeseen events.

“The taxation environment is critically important for starting and scaling companies. It is a key factor in the overall competitiveness in Ireland.”

There is a significance in Healy’s words as it is the first time that I have seen Enterprise Ireland – the State agency whose job it is to invest in promising companies and open up global markets for them – get vocal on a subject that has been festering for some time.

The lamentable truth is that Irish tax rules in their present form exist to punish rather than support entrepreneurs, the very people who we need to create jobs into the future.

And I don’t just mean tech entrepreneurs. I am talking about ordinary owner-managers of small and medium companies who are penalised for the temerity of daring to generate more taxpayers. Tax-wise, they are treated even differently than their own employees.

It is an unavoidable truth that many young tech companies are looking at more progressive tax schemes in the UK. Why? Because they have been sorely let down by an Irish State that has consistently failed to overhaul Capital Gains Tax or the outmoded Employment Incentive and Investment Scheme (EIIS), successor to the Business Expansion Scheme (BES). The 2017 Key Employee Engagement Programme (KEEP) aimed at enabling firms to reward workers with share options has also been a policy failure with very little take-up.

And it appears to have flown under the radar for many that an amendment to the Finance Act in 2017 prevents friends and families from participating in the BES-EIIS rounds, often the only source of seed funding for Irish start-ups. The new rules mean that friends and family can only invest in funds, not directly in companies they want to support.

A reckoning

Not only are entrepreneurs left to fight with one arm tied behind their back in the war for talent, but venture capital funding in Ireland has also hit a steep downward curve.

It is no accident that although a Europe-wide study by NimbleFins ranked Ireland third in Europe for supporting start-ups, the country was still found to be the worst in the Europe top 12 in terms of access to venture capital.

The Irish Venture Capital Association last week reported that venture capital funding into Irish technology firms fell by 25pc to €739m in 2018.

The only reason this decline was not by 40pc was because two venture capital deals worth more than €100m each last year buoyed up the figures somewhat.

Put mildly, this is a bloodbath. And it is only going to get worse.

Why does this matter? Hundreds of thousands of jobs will need to be generated by entrepreneurs in the coming years and yet our tax code treats risk-takers as second-class citizens.

I draw solace from Minister for Business, Enterprise and Innovation Heather Humphreys, TD, revealing that €175m has been allocated towards seed funding out to 2024.

I draw solace from the emergence of new capital routes for young companies such as equity platform Spark Crowdfunding, which has helped several young companies gather much-needed investment.

And I draw solace from the emergence of young companies such as Andrea Reynolds’ Swoop Finance, which is helping other young companies connect with more progressive funding mechanisms in the UK, having been sorely let down by the Irish tax code.

Our entrepreneurs and risk-takers hold the key to the future. We need to treat them better and reward their risk, not draw blood.

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John Kennedy is a journalist who served as editor of Silicon Republic for 17 years