Co-authored by Martijn de Wever and Theo Osborne, Managing Partners of Force Over Mass Capital
Have you experienced a Demo Day in Tech City? If so, you will know what we mean when we say that the excitement is palpable and contagious. Entrepreneurs showcase their latest innovations and user experience design triumphs while gossiping about the scene's latest fundraising conquests. A table showcasing revolutionary vertical farming software buzzes alongside a virtual reality sports fan game, which sits across from a group of e-commerce evangelists. Everyone wonders who will be the next Candy Crush? Dropbox? Hailo? It is, ultimately, a race against time.
While it is true that the UK has always been at the forefront of innovation - we are now amidst a second technology wave, wherein people should be able to participate in the wealth creation which results from it. For example, we are now seeing more technology start-ups than ever before migrate to our shores. The tech sector accounts for approx. 8.5% of the UK GDP and is expected to grow to approx. 12.5% by 2016. So although it is not as big as several of our other output sectors -- it is a sizeable amount, and growing.
Moreover, London has recently finished 1st in Pwc's 2014 Cities of Opportunity report - in terms of technology readiness, economic clout, and city gateway - beating New York City for the first time. This is all to say, the UK has increasingly become a viable tech hub and it is unsurprising that the number of professional investors looking to participate in the explosive growth of these companies is rising. The difficulty people are having, though, is how to get involved in a smart, diversified and tax efficient way.
Until now, access to the startup scene has only been available to Venture Capitalists, the ultra-wealthy or through crowd funding websites. However, for individual investors who don't fit into any of these categories, investing in technology startups has traditionally proven too risky a bet. For this more sophisticated investor: concentrated exposure to a limited number of companies, the significant upfront investment required and the need for deep operational and risk management expertise -- are major road blocks when considering tech start-up allocations.
How does one navigate these obstacles? Enter the UK Government's Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). With EIS/SEIS, the Government has made it easier for start-ups to get their ideas off the ground by creating highly attractive tax breaks for investors willing to finance disruptive ideas. This creates a win-win scenario - allowing investors to generate attractive returns in a low-yield environment while helping to kick-start the UK economy through supporting entrepreneurs with innovative, high-growth potential.
The programs provide investors the security to invest in innovation, while enabling tax reliefs of up to 64% of the capital invested. Entrepreneurs understand the benefits of SEIS/EIS schemes and their importance to investors - which is why many startups have chosen to relocate to the UK. Relocation, in turn, means that we are attracting the best intellectual capital in the world and that many more disruptive ideas are coming out of the UK as a result.
Besides participating in SEIS/ EIS schemes, sophisticated investors should look for businesses with a clear investment strategy. Given the risk inherent in this sector, a highly analytical investment approach that calculates performance evaluation, risk management, market potential and team strength - and that spreads risk over multiple investments - is crucial for success.
To finally be able to invest in innovation you have to be innovative and break the status quo. Tailoring to the needs of both the investor and the start-up will unleash a huge potential and sow the seeds for our future technological landscape.