AAB on how start-up companies can position themselves for investment
As London-based venture capital and private equity firms face increasing levels of competition for investment opportunities with regards to price and speed to invest, there has been a shift to look north to the high quality, young companies emerging from Scotland. For instance, Edinburgh-based Mark To Market’s recent £1.75 million investment round with participation from 24Haymarket, and ParsleyBox’s £3m investment with the involvement of Mobeus, outline the quality of opportunities emerging from Scotland.
With an increasing number of companies fighting for the attention of the same investors, standing out from the competition has never been so important. With the odds of successfully securing investment set low, businesses need to ensure they are presenting an opportunity that is difficult to turn down.
One top London-based, early-stage venture capital firm noted that, of the opportunities they see, only 0.2 per cent are offered terms. Interestingly, 32 per cent of opportunities they are presented with are rejected because they fail to differentiate their offering against what already exists.
Demonstrating that the business model is differentiated as a whole, rather than offering tweaks to existing solutions, will increase the odds of success when approaching funders.
Importantly, businesses need to show that their offering presents a significant market opportunity, with many being rejected if they are seen to be operating in small or overly competitive markets. Investors will be assessing opportunities with the level of potential returns in mind. Businesses operating in larger and proven markets will significantly increase the odds of an investment securing higher returns.
It will come as no surprise to many that surrounding yourself with a strong management team is essential when growing an early-stage business, ensuring your management teams are properly incentivised during the early stages is key to driving the business forward and delivering value.
While monetary incentives may not always be possible in the early stages, share-based incentive arrangements provide an attractive alternative and can come with tax breaks, particularly from HMRC-approved share schemes. These arrangements align the interests of the management team with the wider investor group, ensuring they buy in to delivering the strategy and creating value.
Weak founding teams are considered one of the most common reasons for funders to reject an opportunity. In the early stages of development, evidence of market traction can be low so the quality of a business’s management team may often be the key factor on which experienced investors will base their decision.
For businesses looking to raise growth capital, it has become increasingly complicated with a myriad of funding sources available. Being able to identify the right type of funder suitable to your business’s focus area and stage of development will save you from spending considerable time and effort trying to speak to the wrong people. An easy place to start is to take a look at investors’ websites as they will typically outline their investment criteria and how to get in touch.
Also, looking at their investment portfolio is a quick way to understand whether an investor has a track record of supporting businesses operating in a similar sector or with a similar business model. With funders experiencing high levels of deal-flow, being able to go through a trusted referral partner can often increase the chances of getting that first meeting.
Generous tax incentives available for individuals making investments in early stage high growth business, such as Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), have seen a significant move away from the traditional sources of funding to raise growth capital.
Under SEIS, investors are attracted to the 50 per cent Income Tax Relief but need to consider this benefit along with the risks of investing in an early stage company. Both the company and investors require to meet qualifying criteria at the point of investment and throughout the three-year qualifying period in order to benefit from the full tax reliefs available.
EIS is more open to established companies. It gives people with more to invest access to generous tax relief. The incentives for investors are significant, with an Income Tax reduction available based on 30 per cent of the amount invested. Also, any gains on disposal of the qualifying EIS shares are free of Capital Gains Tax (CGT). What’s more, there is loss relief if an EIS investment fails, leaving investors to face a loss of only 38.5p for every pound invested, or even less if you’re a Scottish taxpayer.
Qualifying SEIS and EIS investments can be a tax-efficient solution for high net-worth individuals seeking to make investments, reduce their income tax bills, defer CGT liabilities and benefit from their investment growing tax-free. SEIS and EIS investments also benefit from Inheritance Tax (IHT) reliefs, reducing IHT liabilities.
These generous reliefs reduce the net cost of an investment, helping to mitigate some of the risk of investing in high growth companies whose performance can often be volatile during the early stages. This comes at a time where we are seeing lower pension limits, rising asset prices and more estates than ever caught in the IHT net. It is no surprise that there is a growing interest in tax-efficient investments.
These types of investments not only offer tax incentives for investors but also provide businesses with the opportunity to access knowledge and expertise from experienced investors which can be invaluable support for early stage businesses to assist in achieving the next stage in their development.
With expert advice, investors can secure Advance Assurance from HM Revenue & Customs. This means that investors can be sure that the investment opportunity meets the conditions for SEIS or EIS, offering certainty that these valuable tax reliefs are available.
AAB’s experts offer years of practical experience of SEIS and EIS investments. We can guide investors and fundraising companies through the complexities of these tax reliefs.
Amanda Ollason is tax senior manager, and Philip McGrath the fundraising manager at Anderson Anderson & Brown.
This article first appeared in the Vision supplement in the Scotsman – see it in full here.