Should VCs pay higher tax on carried interest?

Good morning there,

We started the week looking at what France’s tech community thought of their nation's snap election; today it’s the UK’s turn. The country will go to the polls on July 4, and today we’re getting into how some of the main parties’ policies are likely to affect the startup sector.

Also in this issue: 

• French social media company BeReal has been acquired
• Neobanks test out GenAI chatbots 
• Startup dealmaking data for May

Fill your boots!

— Tim Smith, news editor

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Should VCs pay higher tax on carried interest?

This week the UK’s main political parties are releasing their manifestos, outlining their key proposals before the country goes to the polls on July 4. Yesterday, the incumbent Conservative party laid out its policy platform, which we’ve summarised here.

Tomorrow, the UK’s Labour party will release its manifesto — and the nation’s VCs will be looking for details on one proposed policy change in particular: Labour’s pledge to reform the taxation of “carried interest” (known as “carry”). Carry is essentially a bonus that investment teams receive if their fund performs well. It’s typically 20% of the profits of the fund (after LPs are repaid their original investment) and is usually split between the fund’s general partners and — depending on how generous they are — some or all of the other members of the team.

In the UK it is taxed in the same way as capital gains (profits made on investments) at 28%, rather than in the same way as income tax, which is taxed at 45%.

So far, Labour’s messaging on the policy has centred more around private equity funds, and some VCs are hopeful that earlier stage firms — which can argue they make riskier bets on frontier tech that could spur future economic growth — may not be affected by the changes.

But should they be? Here are the two sides of the argument.

No capital at risk

Some VCs have long argued that they should be paying more tax on carry. New York-based VC Fred Wilson wrote in 2018 that given VCs are not risking their own capital, it doesn’t make sense that they are taxed on the upside in the same way as capital gains tax.

“If you are being paid a fee for managing other people’s money and have no capital at risk on the carried interest, I don’t understand how it can be considered a capital gain,” he wrote. “Capital gains tax rates should only be available to those who put their own capital at risk.”

Wilson adds that the returns on the personal capital VCs invest into funds — known as ‘GP commit’ and usually around 2% of the total fund size — should be treated separately, as capital gains.

Some on X say carry should be taxed in the same way as bonuses, which are taxed at a higher rate than capital gains in the UK. In France and Germany, carry is also taxed at a lower rate than income tax. 

Taking risk

But in the UK, local VCs are sounding alarm bells and suggesting the proposed taxation change could negatively impact Europe’s biggest VC ecosystem.

“The UK has benefitted hugely by attracting $100Bs in venture capital over the last decade,” tweeted James Wise, partner at London-based VC firm Balderton.

“If Labour wants to be pro-growth, making the UK among the most expensive places in the world to invest patient capital into high-tech companies seems pretty counterproductive.”

Others have pointed out that — so far — it’s unclear if VC funds will be affected and some say restricting PE gains could be good for startup backers.

TechCrunch editor at large Mike Butcher says clamping down on PE (and not VC) might see tech scaleups list on public markets sooner if there is less private capital available.

“[It's] a policy about largely Private Equity funds who have benefitted from loopholes, NOT Venture Capital. In fact, constraining Big PE might encourage tech scaleups to IPO to raise capital, something London needs. Some PE may leave the UK, but it's unlikely to affect innovation/risk investing,” he says.

What’s your view on taxing carried interest? Drop me a line — and if you’d like to write an opinion piece on the subject, email editor Amy Lewin. 

— Tim Smith, news editor

💰 Popular Gen Z social media app BeReal has been acquired by French mobile game and apps publisher Voodoo for €500m in a cash and earnout deal — meaning that part of the funding will be paid once the company has achieved pre-defined financial targets.

• The two companies say the acquisition will let BeReal develop new features thanks to continued investment from Voodoo, enabling the social media app to kick-start its growth again. 
• Paris-based BeReal, which is backed by global investors Accel, Andreessen Horowitz and DST Global, is a photo-sharing app that pitches itself as a more authentic social media platform than many others. It gained significant popularity in 2022 but has since seen user growth largely stagnate.

🇫🇮 Equilibrium Ventures (EQV), a new Finnish seed-stage crypto fund set up by former Bain and Molten Ventures investors, has hit the first close of a targeted €30m fund. It tells Sifted that roughly 20% (€6m) has been committed. 

🇩🇪 Munich-based Vsquared Ventures has closed its second fund, of €214m, to invest in early-stage, deeptech startups. The firm will write cheques of between €500k-€5m into roughly 25 companies. Two-thirds of the fund is saved for follow-on investments.

🛋️ Vintage furniture marketplace Vinterior has raised £3m in media for equity from 4 Ventures, the venture arm of British broadcaster Channel 4. It’s also in talks to raise an additional £2m in equity.

💼 The UK Conservative Party’s election manifesto doesn’t mention the word ‘startup’ once — so what should UK techies be paying attention to?

💬 Klarna kicked off fintech’s GenAI love affair when it launched its customer service AI assistant earlier this year, which the Swedish buy now, pay later giant says can handle the role of 700 customer service agents. But it’s not the only fintech getting in on the action — 18 months since ChatGPT’s debut, a small group of European challenger banks are also using AI for customer service. Will it pay off?

📈 Early-stage startup funding is on the up. Dealmaking activity was higher in May than April, with VCs investing €1.7bn across 407 pre-seed, seed and Series A rounds, according to Sifted data. That’s compared to April’s €1.4bn across 307 rounds.

• France took the early-stage crown for the most funding in Europe, Germany was second and the UK slipped to third after coming out on top in April.
• The three sectors that brought in the most early-stage funding were climate tech (€478m), deeptech (€377m) and healthtech (€352m). Innovate UK, Speedinvest and Carbon13 were the three most active investors last month.
• We picked out 12 early-stage deals that caught our eye last month.

Finance teams: How to tackle turnover

Whether it’s revenue or staff, turnovers are part of any company’s outlook. However, the latter is proving trickier to curb, especially for startup CFOs and their budding teams. Join us today at 12:00PM (BST) to learn how to build your finance team from the ground up. 

June 12 | Online. Fintech reporter Tom Matsuda is bringing together a panel of experts from Omio, Eight Roads and Tipalti today at noon BST for our next Sifted Talks to look at how to build, nurture and maintain an airtight finance team to improve your bottom line. RSVP.  

June 13 | London. Editor Amy Lewin and editorial director John Thornhill will be at Founders Forum Global tomorrow. If you'll be there too, email Amy.

June 25 | Online. Join us for a showcase of the ultimate list of B2B SaaS startups featured on Sifted's upcoming Rising 100 report, sponsored by Sapphire Ventures, at our next Conference Call — exclusively for Pro subscribers. RSVP. 

July 3 | Online. News editor Tim Smith will be moderating an upcoming Sifted Talks with industry experts to find out how budding CTOs can effectively harness the power of AI and machine learning for a better bottom line. RSVP. 

Düsseldorf, Germany-based Cognigy, which is developing AI agents for customer service, raised $100m in Series C funding. Eurazeo led the round and was joined by investors including Insight Partners, DTCP and DN Capital. 

Paris-based YesWeHack, which connects organisations to ethical hackers who uncover and patch vulnerabilities in their digital infrastructure, raised €26m in Series C funding. Wendel led the round and was joined by investors including Adelie, Seventure Partners, Bpifrance, Open CNP* and Eiffel Investment Group.

Berlin-based Cardino, an online marketplace for used EVs, raised €4m in seed funding. Point Nine led the round and was joined by investors including Rosberg Ventures.

London-based WorkL, an employee engagement platform, raised £2m in Series A funding. Calculus Capital led the round and was joined by investors including Mountside Ventures.

Tampere, Finland-based CeLLife Technologies, which specialises in diagnostics and quality control for the battery industry, raised €2m in seed funding. Ventech led the round and was joined by investors including Grid.VC.

Harwell, UK-based Mirico, a laser-based sensing and data analytics platform which finds and eliminates methane leaks, raised $2m in funding from investors including Shell Ventures, New Climate Ventures and the UK Innovation and Science Seed Fund.

London-based Dataform Lab, which helps integrate the adoption of automation in offsite construction, raised £1.1m in seed funding. Marathon Venture Capital led the round.

Amsterdam-based Haaven, a homebuilding platform that matches customers with builders, engineers and architects, raised €1.1m in pre-seed funding. Speedinvest led the round and was joined by investors including Golden Egg Check.

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