Back when Alan Greenspan was head of the US Federal Reserve he offered a job description for his job in controlling US monetary policy; i.e. "To take away the punch bowl, just as the party gets going". Some would say that it's a pity he didn't follow his own advice and maybe we might have been spared some of the worst consequences of the 2008 world credit bust and the Great Recession (hangover) that followed.

However there are now some parallels beginning to appear on a much smaller stage; i.e. EIS and SEIS - tax driven vehicles designed to encourage the allocation of money by private individuals to small start-up (often tech) businesses. Just to be clear, I believe these are both excellent schemes and are having an increasingly positive effect in securing funds for a vital part of the UK economy. However there are signs that this attractiveness is creating a short term bubble in valuations which should generally concern everybody, but might specifically concern HMRC or Government.

So, are we in danger of the punch bowl being taken away from the SEIS party?

I'm sure that everybody would agree that start-up and early stage businesses in the UK need all the help (and specifically funding) that they can find. Certainly I do. In the 30 years or so I have spent in the early stage tech sector I can't recall a single period (with the possible exception of 2000 - 02) when there was too much money going into early stage deals. I also don't buy the proposition that somehow the UK can't build major businesses from a stone cold start, as per Silicon Valley. The UK can and does build major businesses, but it could do so much more with more funding particularly at the early stage. EIS and SEIS are an important part of that strategy.

No, my reservation about the current early stage market, and SEIS specifically, is that the highly attractive tax incentives are being spread across too few deals and as a consequence current valuations and more importantly future expectations are being driven to unrealistic levels which in the long term will serve nobody's interest; entrepreneurs, investors and even government.

Current statistics are patchy and we will only know the true picture with the benefit of hindsight. From my helicopter view of the early stage investment market, at the moment I see some deals being done at valuations that look unrealistic in the longer term.

There will be those who believe that this just sounds like carping from a VC who objects to paying too much for deals (which I do!). However I would argue as follows. Starting and growing a long term successful business is not a sprint. It is not a 'fast-buck' business; I wish it were. No, the reality is that the very best businesses are built over the long term and for the long term. And critical to this growth is that valuations should realistically reflect the progress that a company has made and can make in the short to medium term. High valuations and rapid growth in valuations make everybody feel good in the short term but they are actually counter-productive if they can't be sustained when reality bites.

I appreciate that this may be difficult to hear when an investor can secure an almost immediate return of 50% of his / her investment, along with other associated tax reliefs (CGT, IHT). Further many entrepreneurs might argue "why are you worried about the high valuation; just feel the tax break". It's also difficult for an individual SEIS investor in a single company. How do you know that the valuation is too high and even if you can, so what? If that's the price of doing a deal in a company you like, either get on with it or get off the pot!

 However there are many examples where a sole focus on valuations has ended in tears. For instance we observe it regularly on the AIM market where companies are listed at totally unrealistic valuations. Such deals are effectively born to fail, and as a consequence the AIM market continues to hold more than its fair share of zombie companies. We really need to avoid this for EIS / SEIS.

Of course an investor looking to make an SEIS investment can work through a fund, run by one of the many quality managers in the market and get the benefit of both portfolio spread and of an active fund manager in both the pre and post investment stage. This approach doesn't eradicate the over-valuation risk, but it can help mitigate it and provide a better chance of ensuring that the investors secures both the short term effect of a major tax break and long term growth in one of the UK's future successes.

In summary, the EIS and SEIS schemes are excellent vehicles for encouraging much needed money into the start-up sector and long may they remain and prosper. Further Government should be congratulated on getting this one right. However I hope that every supporter of these schemes and the companies they support would join me in encouraging more care and a longer term perspective.

Perhaps one less glass of punch before the floor starts to spin!.

Ernie Richardson is a highly experienced long term venture capitalist and is Chairman of Boundary Capital, a manager of EIS and SEIS Funds.