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In itself, the Enterprise Investment Scheme (EIS) offers a range of benefits to investors, such as loss relief. Yet simply qualifying for EIS funding does not automatically make a given company worthwhile for an investor. Other criteria are also needed to judge its suitability.
Below, we explore some of the key features of a typical “good” EIS investment to help investors make wiser decisions about which early-stage opportunities to include in their portfolios.
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Addressable market & go-to strategy
The bigger the market facing the startup, the more growth potential it has. Yet simply having a large market is not enough. An EIS company must have a strong “go-to” market GTM) strategy as well. This details how the startup’s product/service will reach its target customers.
For instance, if a UK-based EV startup (electric vehicles) wants to expand in the UK, it potentially faces a large addressable market. 9.2 million cars were bought in 2021 and there were 810,000 fully electric cars on UK roads in June 2023, showing clear consumer interest.
How can the EV startup bring its vehicle product(s) to market and drive demand? Two common strategies are the funnel and the flywheel. The former stresses getting new leads and nurturing them into sales. The latter focuses more on building long-term customer relationships.
A good EIS investment will typically have founders who have a clear understanding of the target market and a compelling go-to strategy
Go-to-market (GTM) strategy and marketing strategy are related concepts, but they are not the same thing. The first specifies which concrete steps and considerations will be needed to introduce the product to market.
The second details the long-term plan of the business (e.g. covering many years) to move it towards its marketing objectives.
An EIS investor should look out for signs that decision-makers in an EIS company not only understand this distinction, but also have a compelling marketing strategy.
For instance, a good marketing strategy will have a clear target audience (with specified “buyer personas”) and clear positioning. In the EV case above, does the company intend to position itself as luxury or economy? What about family or 2-seater? Are the positioning choices justified in light of the target audience?
The strategy should also specify competitors in the marketplace and the potential for new entrants to join. What is the sustainable competitive advantage (SCA) of the EIS company in light of current and potential rivals?
One option is to try and compete on price – i.e. be the cheapest in the market. However, this is difficult to sustain and puts downward pressure on long-term profit growth, since it can encourage a “race to the bottom”.
Instead, investors might want to look out for other CSR signposts in an EIS company such as locked-up supply, location, intellectual property (IP) and network effect.
As an investor, you likely want to focus on EIS companies which excite you and suit your specific needs (e.g. geography, growth stage, amount of capital needed etc.).
Naturally, EIS investors may wish to focus on industries/sectors that they are familiar with. Yet care should be taken to not neglect opportunities outside of your comfort zone.
This is where being part of an investor network can be beneficial. Others, with different preferences, can introduce you to more of these opportunities and allow for mutual education.
The most important thing is that your investment strategy and preferences integrate appropriately. For example, if your heart is in the tech space, it would likely be unwise to purely focus your portfolio on tech companies (which could create a diversification risk).
A winning team
Without great leaders – and a competent, motivated team supporting them – a startup is set to struggle and even fail. Whilst founders do not need to be experienced entrepreneurs, they should show strategic thinking, enthusiasm, a willingness to listen to investors and realistic goals.
A good sign is a positive workplace culture which continues to grow with the EIS company. A business which loses its vision or “value mooring” is likely to eventually drift off course and suffer from declining team morale.
Knowledge and skills are very important. Tech companies need great programmers and EV manufacturers need brilliant engineers. Yet a shared sense of passion and collective vision are equally important. These are the factors that help motivate workers to go the extra mile.
No single person in an EIS company can perform every role to its top level. Therefore, investors should keep a lookout for different team members who can perform one (or two) of these effectively – e.g. the brainiac, the hard worker, the financial expert and the crisis solver.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group?
Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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