Losing money is an integral part of the capitalist system, which brings with it both innovation and human progress. As highlighted by Luke Johnson in last weekend’s Sunday Times, a famous pioneer in early-stage tech investing has claimed to have made more failed investments than anyone else in England! The key point is that in among the losers there have been some winners and if you approach early-stage investment on a spread portfolio basis, you stand a good chance of ending up ahead even after allowing for the complete write-off of some of the investments. Further, if you take advantage of the SEIS (Seed Enterprise Investment Scheme) you can dramatically limit your losses.
George Osborne launched SEIS in 2012 towards the end of the worst recession in living memory. The scheme specifically targets start-ups and the amount of money which can be raised for a company via SEIS is capped at £150,000. But above this level a company can of course continue to raise funds through the Enterprise Investment Scheme (EIS), which provides 30% income tax relief compared with 50% via SEIS. Then there’s loss relief available on your losing investments, but any profits you make on your winning investments are free from CGT, so the benefits are definitely tilted in the investor’s favour.
Approaching £500m has been raised for SEIS to date for some 5,000 companies (i.e. an average of about £100,000 per company). The jury is still out on how SEIS has performed, i.e. it is too early to tell, but early reports from managers sound positive, with as yet few failures. We will probably get a better sense of overall performance about three or four years from now.
In the meantime, a small investment in SEIS is definitely worth considering. The only sensible way to approach investing in the SEIS is through a fund structure, which is effectively a spread portfolio where the investment choices are being made by an experienced start-up manager. Both generalist funds and sector specific funds are available.
This year we are continuing to work with Startup Funding Club, who have an outstanding reputation in this sector, but are embarking on something which has not been done before: a food and drink fund called “Epicure”. Food & Drink is a vast industry worth around £95 billion a year in the UK and growing at a relentless 3% to 4% a year. A combination of changing tastes, greater knowledge of foreign products and a rapid rise in dietary and allergy concerns is driving the demand for novelty and innovation.
Startup Funding Club are highly experienced managers, having invested in well over 85 SEIS companies since 2013, 15% of which have been food and drink companies. Last year they were voted Lead Angel Syndicate of the Year at the prestigious UK British Angels Association Awards. They provide a full nurturing service to their investee companies and have been able to recruit the support of two major organisations for the new fund: Tesco’s, who support new product by trialling them in selected stores; and JC Decaux, who are offering free advertising space.
I will be hosting a webinar on investing via the SEIS in March, for which you can register your interest here.
Your capital is at risk and tax treatment of the investments depends on the individual circumstances of each investor and may be subject to change in future. The availability of tax reliefs depends on the Company invested in maintaining its qualifying status. Enterprise Investment Partners does not provide tax advice. We recommend you seek independent advice before investing.
Martin Sherwood, Partner
Martin Sherwood has many years’ experience of small company fundraising and in particular the tax-efficient investment market, specialising in the Hospitality & Leisure Sectors. Martin is currently chairman of the four British Country Inns companies and of Halcyon Hotels and Resorts plc, which is in joint venture with Luxury Family Hotels, which he helped launch 20 years ago. He was founder and head of Tax Efficient Solutions, first at Teather & Greenwood (1997-2004) and subsequently at Smith & Williamson (2004-2010), which he left to found Enterprise.
Martin has been closely involved in both Venture Capital Trusts and Enterprise Investment Schemes (EIS) since their inception, and is a founder director of the EIS Association, the official trade association of the EIS industry.
Martin works very closely with a wide range of Hospitality & Leisure entrepreneurs and has a significant network of investors and professional contacts as well as being a serial investor in his own right.