An article kindly contributed by Faisal Sheikh, Co-founder and MD of Monmouth Capital.
Notwithstanding a record-breaking 2020 for IPOs, high growth, high value start-ups tend to stay private for longer than they used to. Today’s equivalent of Amazon would probably not have turned to the public markets for capital at a $400m valuation as it did in 1997 a year after an $8m Series A, but instead raised an alphabet soup of private follow-on rounds as is increasingly common.
Private investors who want to access high growth (and high risk) businesses early in their development can no longer do it easily through public markets. This is a shame as in our view the UK start-up environment has never been more exciting. Our combination of capital, governance and intellectual property is matched only in a few places in the world.
With high quality businesses remaining private for longer, investors need some way of accessing deals in private markets. In practice, this used to mean access to individual companies or to tightly-held venture capital funds – largely dependent on one’s network.
UK High Net Worth investors have a secret weapon: EIS funds. This scheme is probably the most generously subsidised way of accessing venture capital in the world. Executed correctly, investors gain access to early stage, high growth / high risk companies but with significant tax breaks that effectively limit downside risk to just 38.5% instead of 100%; while, crucially, the upside remains unlimited and tax-free.
One of the charges made in the past against EIS fund managers is that they are not “proper” VCs:
- Lack access to the best deals (dealflow being among the most prized of VC assets);
- Lower quality and pedigree of fund managers;
- Often muscled out of larger rounds;
- Can’t provide follow-on funding to back winners and exploit the VC ‘power law’
Today, these charges don’t stick. EIS managers are increasingly featured in some of the most notable venture deals in the UK, such as Graphcore, Oxbotica and Gousto – often having backed the same companies at an earlier stage – alongside the biggest names in VC.
There’s no question anymore, either, about the calibre of investment managers at leading EIS firms with the mix of investment expertise and entrepreneurial track record that you find at many of the top traditional VC firms. At the same time, scale is falling away as a barrier for the best EIS funds.
High Net Worth investors with a willingness to put capital at risk, to have it inaccessible for at least 5 years, with high levels of UK income and with sufficient cash reserves should give serious consideration to EIS.
With companies remaining private for longer, private venture capital may be the only way to catch the next Amazon – and through EIS funds you have the chance of doing this tax-free while limiting your downside.