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Phil Teale

Why Cybersecurity is becoming a top choice for UK Investors

By | For Angel Investors | No Comments

The UK has made concerted efforts in recent years to attract, incubate and grow digital talent and innovation within the country. Consequently, we are witnessing a proliferation of new tech companies on a scale never seen before.

One aspect of this growth concerns cybersecurity. These startups are continuously breaking new ground in the sphere of online protection for consumers, companies and governments, Many of them have produced big returns for the investors who have funded them.

Here are just a few prominent examples…

 

#1 Darktrace

Recently valued at $1.65 billion and with the latest funding round raising $50 million, Darktrace has increased its valuation by 32% in the space of just four months.

Founded in 2003, Darktrace identifies and tackles cybersecurity threats as they appear using AI technology (artificial intelligence) and machine learning. The rapid expansion of the company has enabled it to increase its staff by 60% over 12 months, up to 750.

With prominent hacks in the recent news (e.g. the British Airways attack which compromised nearly 400,000 customer credit card details), investors should take note that the services of cybersecurity firms like Darktrace are likely to be in high demand for years to come.

 

#2 Garrison

The latest funding round for Garrison secured $30 million, one of the largest rounds by UK investors in 2018. It’s stated mission is to provide a secure web browsing experience for companies regardless of the content or links their staff click on.

Essentially, Garrison acts as a “gap” between web content and the company’s device, which the user is utilising to access the former. This means that malicious web content only comes into contact with the “gap”, rather than the company’s IT systems.

In the space of just 12 months, Garrison has almost doubled its staff numbers to over 50 people. It has now secured nearly £35 million in funding over the course of two rounds.

 

#3 Panaseer

This exciting and interesting UK cybersecurity business raised $10 million in its Series A funding in the middle of 2018, led by Evolution Equity Partners.

Founded in 2014, the Panaseer platform uses proprietary algorithms to “map out” a business’s various assets, and provide “cyber hygiene” by monitoring and cleaning the organisation’s digital estates. The system detects which aspects of the business’s technology are vulnerable to attack and provides software patches to address the threat.

 

#4 Hazy

A smaller story but a nonetheless impressive one, Hazy (formerly Anon AI and winner of “Best in Tech” at Elevator Pitch) raised $1.8 million in Seed Funding in the middle of 2018.

The business emerged from University College London about 2 years ago, with a ground-breaking AI system which can “hunt down” personal data buried away in datasets.

With the recent introduction of GDPR and the continual governmental concern and drive towards enhancing the protection of personal data, cybersecurity firms like Hazy have a promising future ahead of them.

 

LORCA & NCSC Cyber Accelerator

The UK government has recognised the vital role that cybersecurity will play within the UK economy over the coming decades. New technologies such as AI, quantum computing and blockchain are set to change the world whilst driving economic growth and innovation.

The inevitable rise of new technologies such as these, however, also poses new risks. One of these is the danger posed by hackers and online criminals. Indeed, if Britain’s digital economy hinges on the security of its systems then cybersecurity is arguably going to be indispensable for years to come.

In recognition of this, the government launched LORCA in June 2018 – the London Office for Rapid Cybersecurity advancement. This new initiative is designed to assist cybersecurity companies in the development of their business models.

This development should offer comfort to investors who are interested in cybersecurity startups. Initiatives such as these should help the latter refine their value proposition in order to grow into successful, profitable businesses.

The above isn’t the only initiative currently in operation, moreover. The government’s GCHQ Cyber Accelerator has also recently graduated 9 UK cybersecurity startups from its 9-month programme, which is designed to help such businesses refine their products and services in order to enhance UK national security.

 

Tips for investors interested in cybersecurity startups

Cybersecurity startups face many of the same opportunities and challenges as other firms when getting off the ground. That said, the examples cited above start to give an idea of the growth potential of fintech, cybersecurity and other SaaS startups.

Such firms are usually based around monthly/annual subscription models rather than one-time transactions with customers. As a result, many cybersecurity firms’ business models benefit from a higher degree of predictability and scalability compared to other startups.

Saas startups like these can be accessed anywhere from the cloud, even on mobile devices. They do not need to concern themselves with distribution, packaging or physical piracy. The software is also highly flexible, enabling cybersecurity startups to more quickly adapt to changes and threats in the market environment.

Moreover, as cybersecurity startups grow their cost per acquisition and cost per service for each customer tends to go down. This makes cash flow more predictable ad growth more secure – all reassurances for interested investors.

Finally, many cybersecurity companies offer the investor additional security through “economic moats”, which place high switching costs on the service subscriber. This gives these startups a more sustainable economic and competitive advantage once they have their foot in the door with a signed-on customer.

The above are just a handful of reasons to consider investing in SaaS companies such as cybersecurity startups. These are apart from the other tax benefits offered by such firms which qualify for EIS or SEIS status. For more information on this, please get in touch to speak with one of our specialists.

A Guide to Raising Funds with EIS / SEIS

By | For Business Founders | No Comments

As a business owner at a startup firm, you cannot afford to waste one of your most valuable resources – time. When it comes to fundraising for your business, it pays to know which fundraising routes are worth your while.

This article is all about fundraising through EIS (the Enterprise Investment Scheme) and SEIS (the Seed Enterprise Investment Scheme), which is certainly worth your time and attention if you are looking to raise valuable capital and get your venture off the ground.

 

Why EIS & SEIS matter

Unless you are one of the few startups which is profitable virtually from the start, you are going to need to fundraise. There are many ways you might do this, but EIS and SEIS are certainly routes you will want to consider.

One crucial advantage of these UK government-backed schemes is that they offer valuable tax breaks and risk mitigation mechanisms for potential investors into your business. That’s obviously great for you, because if you qualify under these schemes it means that investors are going to have more confidence giving you the funding you need.

For instance, under SEIS an investor can claim back up to 50% of the investment amount against their income tax via HMRC. So, all other things being equal, if an investor had to choose between two firms – one of which is SEIS qualified and the other not – they are almost certainly going to pick the former.

 

Meeting the criteria

Unfortunately, gaining EIS or SEIS status for your business isn’t as simple as just applying via the HMRC website. There are certain conditions you need to meet before you can be eligible.

First of all, your business must be based in the UK. It must also be less than 24 months old, and your startup must do business in an EIS/SEIS eligible trade. Another important requirement is that under SEIS you must have no more than 25 employees and assets not exceeding £200,000. Under EIS, you cannot have more than 250 employees and no more than £15m in assets.

One unfortunate part of the application process is that HMRC requires applicants to provide evidence that investors are currently investing in your business. That obviously presents you with a bit of a conundrum. Investors might not be willing to invest in your business until you have EIS/SEIS status, but you cannot achieve this without some investors already on board!

There are some ways around this, however. One approach would be to meet the other EIS / SEIS eligibility criteria, and then present this to potential investors. Make sure you tell them that this is your assessment, not the government’s.

Despite not having the relevant assurances from HMRC yet, this should be enough to nudge some investors across the line. You can let investors know, for instance, that HMRC has a nearly 90% acceptance rate for EIS / SEIS applications.

It helps to know that you can apply for funding via EIS (which allows you to raise up to £5m within your first 6 years) even if you have availed yourself of SEIS (which lets you raise up to £150,000 within your first 2 years).

 

Communicate EIS / SEIS benefits to investors

It might sound shocking, but lots of investors do not know about the advantages offered to them by SEIS and EIS. If you merely mention that you are eligible for these schemes but do not elaborate, for instance, then this will likely only catch the attention of some investors with past experience of the schemes.

For instance, investors would likely be interested to know that under EIS and SEIS their investment gains are exempt from inheritance tax. They are also free from Income Tax and Capital Gains Tax.

 

Read up on the tax claiming process

If you are serious about having strong, long-term relationships with investors under EIS or SEIS, then it pays dividends to know how to help them with this aspect of their tax returns.

When investors hand their tax returns to HMRC, they will need to declare their EIS and SEIS investments. This requires cooperation from you, as you will need to issue them the relevant SEIS3 or EIS3 forms, for instance.

If you know how to navigate this process and demonstrate that you are prepared to help your investors quickly and wholeheartedly with this, then it will give them far more confidence to take advantage of the benefits of the scheme by investing in your eligible startup.

By working with a company like Bure Valley, you can make this whole process a lot easier for yourself as our experienced team helps guide you through it. Feel free to speak with one of our team if you are interested.

 

Concluding thoughts

If you are interested in seeking investment via EIS or SEIS, then we recommend speaking with a tax specialist to help you navigate the process. We can also assist here at Bure Valley Group, since we have a strong network of EIS and SEIS qualified businesses here who have successfully received investment via our investment members.

Since EIS first arrived on the stage, nearly 30,000 UK businesses have successfully qualified. Many have gone on to receive funding and seen great success and growth. Just remember, it is easy for startups to flounder in their early years and it pays to rub shoulders with people who can help you navigate the pitfalls. If you would like to benefit from that experience here at Bure Valley, then we would love to hear from you.

Will Europe’s FinTech cities overtake London after Brexit?

By | For Angel Investors | No Comments

Regardless of your political leanings on the subject of Brexit, most people agree that there is considerable uncertainty looming over the possibility of the UK leaving the EU without a deal. What does this mean for UK fintech companies, however, and for people who have (or who are thinking about) investing in them?

These are complex questions and many answers are currently being thrown about. For instance, some media outlets are claiming that many UK startups are set to flee to other parts of the world, such as Eastern Europe, in order to escape or mitigate the risks posed to their business by Brexit uncertainty. Undeniably, the lower operational costs for companies in places such as Poland is a strong allure.

Yet it remains to be seen whether a mass exodus of UK fintech startups to the continent will occur. Arguably, London and other British cities are still likely to offer these companies a range of benefits which make staying in the UK a sensible, low-cost choice.

 

Assessing the competition

London has, so far, proven itself resilient to fears about the economy following the Brexit vote. However, many European cities are eager to supplant London (which houses 80% of the country’s 1600 fintech companies) as Europe’s leading fintech hub.

Currently, the European fintech market is comparatively small compared to its wider financial services industry. In 2018, for instance, the former was estimated at around £4.5 billion in value – with the UK holding an 80% share in the market.

Given the UK’s reputation as a global, leading financial services environment, the widespread use of the English language, common law and strong regulatory traditions, and the close proximity of many prestigious businesses in the city of London, it seems unlikely that investment into Britain’s fintech industry would disappear overnight after 29th March 2019.

The main issues at stake for fintech companies – and their investors – will be passporting rights and the access and retention of European talent. The UK government is still hoping to secure, at a minimum, an “equivalence” agreement with the EU over financial services similar to that used by Japan, Singapore and the USA. This is unlikely to be resolved soon.

The issue of talent is similarly still in development. Theresa May stated in October 2018 that EU migrants would not be given priority status following Brexit. However, the government has also said that high-skilled migrants will be given priority. Given the value of European skilled workers to the UK’s fintech industry, it seems plausible that such priority might be extended here in order to allow the industry to retain as much access as possible to this talent.

 

Current UK Trends

Over two years on from the 2016 Brexit vote, the British government has been keen to promote the UK as a fintech hub in order to attract more investment to the sector.

Earlier in 2018, for instance, Prime Minister Theresa May announced an initiative to create over 1,500 jobs in the technology industry in addition to over £2 billion of private investment.

It is hard to argue that the Brexit vote has put the brakes on the growth of the UK fintech industry. In 2017, for instance, the technology sector attracted about £1.8 billion in private investment – which is over 150% more than in 2016.

In addition, more than 50% of this inflow came from overseas VCs. Around a quarter of these came from North America and around 14% from Europe. So this suggests that Brexit has not stopped non-domiciled investors from confidently putting their money into this exciting sector.

There are conflicting signs that companies across various industries are considering opening offices to the continent. In March 2017, for instance, a Goldman Sachs executive said that moving jobs to other European countries would be good for the company. Around the same time, however, businesses such as PwC and Startupbootcamp claimed that Brexit would not considerably affect investment into the UK fintech sector.

Experts are still debating whether investment into the sector will slow down as the 29th March 2019 deadline approaches and eventually passes. Over 30% of the workers in this industry come from overseas, particularly from the EU. This is the area where there is possibly more worry at the moment, compared to industry passporting rights.

Nonetheless, there is considerable evidence to show that the UK is still a world leader in fintech. In 2017, around 224 deals were made in the UK industry – the highest number in the world outside of the United States. TransferWise and OakNorth, for instance, both raised rounds of $200+ million.

There is also an argument that Britain’s exit from the EU could possibly benefit the fintech sector. With the British pound now almost equivalent to the Euro, UK businesses could potentially use this situation to attract customers from the continent who are seeking quality services at a more competitive price.

 

Concluding thoughts

With the fintech industry employing over 60,000 people and contributing nearly £7 billion each year for the UK economy, the government is likely to continue developing policy and initiative to promote growth and attract investment.

Generally speaking, the success of fintech startups is largely determined by two factors: access to funding and a favourable legal, economic and political environment to operate in.

On the former, fintech funding has continued to grow over the years despite the uncertainty. The main question is over what the environment will look like post-Brexit. Much of this hangs on the political and legal agreements eventually made between the UK and the UK, prior to and after the 29th March.

 

Looking to Raise Business Funding? Read These 6 Essential Tips

By | For Business Founders | No Comments

Past performance is no guarantee of future results. Any historical returns or unrealized returns may not reflect actual returns or future performance. All securities involve risk and may result in loss, and startup investing is particularly risky and may result in total loss.

Startups do not need to already have brought in revenue in order to approach investors (although that can be a big help). The key thing is being able to demonstrate to them how you will monetise your company.

Moreover, you need to show how this will be sustainable and scalable, where your business is generating a healthy profit down the line. The message investors want to be convinced by is that your company will grow, and that they will benefit by investing in this growth.

 

#1 Know Your Capital Requirements

Before you approach a potential investor, you need to have a strong grasp of how much funding you require from them – as well as what you will do with it.

This, of course, requires that you do some forecasting. Something that is very difficult to do, and which investors are typically skeptical of. However, despite the unreliability of startup forecasts, investors will want to explore your thinking behind your own forecast.

Just be very careful to explore and ground your assumptions underlying your forecast.

For instance, are you assuming that the price of a key component of your product will remain constant? Given past trends and likely future developments in the market, is that thinking valid? What kind of stress test can your business model endure if the component price goes up?

If your business is currently pre-revenue, make sure you are able to outline a credible estimated time to revenue (i.e. how long it will be before you expect to start making money). Also be sure to project how much of your revenue is expected to be classed as “recurring”.

 

#2 Do Some Networking

Make sure you speak with investors where possible, prior to asking them for money.

Build relationships and have conversations with potential investors. This will help you hone your revenue model, strengthen your value proposition and solidify your startup against potential weaknesses and pitfalls which could undermine or even sink it.

 

#3 Do Some Economics Homework

When you present your funding pitch, will need to show investors how your business will make money, and how it will scale. As a startup business owner, you will must also be confident demonstrating your knowledge of unit economics to prospective investors.

For instance, what if your anticipated cost per acquisition (CPA), and customer lifetime value (LTV)? Do you expect the CPA and LTV to change as you grow?

Most of us will have squirmed watching a program like Dragons Den, where sometimes the business owners pitching do not understand these kinds of terms when asked about them by investors. Don’t let that happen to you.

Cover every angle of your business, and prepare as many angles as possible. Try and put yourself into the mind of an investor. What sorts of questions would you want answering prior to investing in your company?

 

#4 Write Down Some Expected Investor Questions

Following on from this point, it is usually a good idea to actually record the questions you expect prospective investors to ask you. For instance:

  • What is your current / expected cash burn?
  • If I/we granted the funding you’re asking for, how long would this stretch out to?
  • How much involvement, commitment or support do you expect from me/us as investors?
  • Which milestones do you expect to meet with the investment I/we give you?
  • What level of ownership in your company are you prepared to part with?

 

#5 Survey the Landscape

Your prospective investors will want to know that you have firm grasp of your market, and the competition your company and product face.

Make sure you make a comprehensive list of your competitors, and ensure you have a thorough grasp of each of them. At a minimum, do a SWOT analysis for each one.

You will also need an in-depth grasp of your market and sector. Which segment are you operating in, exactly? Which demographics are you going to be selling to, and why would they want your product over alternatives in the market?

 

#6 Prepare Your Pitch

This is the part of fundraising that lots of startup business owners tend to focus on. It’s unsurprising, as public speaking or presenting is one of the scariest things for most people.

Be brave. One of the biggest parts in overcoming your fear is to prepare. If you know what you’re going to say, and have anticipated investors’ questions properly, it’s safe to say that you’re over halfway there with delivering a successful pitch.

Try not to plan to be funny. Just be yourself and lay out what the investors will want to hear.

For instance, if you can demonstrate growth and traction already in your startup, make sure you mention that. Expound on your vision for the next 6-12 months, and outline your goals and milestones within that time-frame.

Make sure the bulk of your time talking about the product – the problems it solves for customers, and the pain points it addresses. After your product, your focus should be on your revenue model – how you will make money, and how long it will take for that to happen.

Going to the Five W’s isn’t a bad idea at all for your pitch:

  • What is your product, and how is it different? What does it cost?
  • Why is your product needed, and why at this moment?
  • Who is your team, and who is the product for?
  • How will you bring your product to market and grow the business? (How).

If it helps, consider taking a course on public speaking to brush up your presenting skills. Do some practice runs of your pitch with friendly investors who will give you honest feedback.

 

How to do Due Diligence when Investing in Startups

By | For Angel Investors | No Comments

Past performance is no guarantee of future results. Any historical returns or unrealized returns may not reflect actual returns or future performance. All securities involve risk and may result in loss, and startup investing is particularly risky and may result in total loss.

Due diligence in the world of investing is really another way of saying: “take reasonable care before committing your money”.

Given how often startups fail, it’s obviously crucially important that you do your due diligence prior to investing in them. After all, if you invest in a startup that emerges as a winner – then significant profits lie down the line.

At Bure Valley Group, we connect exciting, high-potential startups looking for funding with our exclusive network of investors – who are looking for the next big thing. These businesses must pass through a stringent set of criteria, tests and vetting before we present their proposal to our network. So it’s fair to say, we know a good thing or two about startup due diligence!

So in this guide, we’ll be sharing some tips with you from our experience, about how to do some of your own due diligence when looking to invest in startups:

 

#1 Check the Overall Presented Facts

When you speak with a startup seeking funding from you as an investor, it’s imperative that you never take anything at face value. Always check the claims and facts presented to you:

  • Size of team / number of employees
  • Background, skills and experience of the team members
  • Stories about the startup and employees in the news / social media
  • Trading record
  • Credibility of the sector

And more. These are just a handful of the claims and facts you must check by yourself. It’s in your interests to do so. After all, nobody wants to commit money based on inflated or inaccurate facts about an investment. Few things sting as much as losing money in this situation.

Doing due diligence actually helps the startup in question, as well. After all, this process might actually reveal something to the business that they’d not seen or thought about, which they can then correct in order to strengthen their position.

 

#2 Use Companies House, but Know its Limits

Most people know that if you want to access the accounts of a UK company, you do so through Companies House. The Beta gives you instant access, but there are some problems.

First, there’s the time lag. On Companies House, accounts for a 12-month trading period do not need to be filed until 9 months after this period. So, if a startup began trading in January 2018, then their accounts up to December 2018 do not need to be filed until September 2019. This obviously creates a problem for investors looking to do their account due diligence.

Second, businesses are able to shift their filing date – something you can trace through Companies House. If a startup’s director(s) do this, then you need to ask them what the reason is for changing the filing date. Are they hiding something, or is there a credible reason?

Third, many startups are not actually required to file accounts on Companies House. They can choose to do so, but alternatively they can submit an unaudited balance sheet  (provided the business meets certain qualifying criteria).

In short, you cannot rely on a balance sheet to determine a startup’s financial health. Make sure you get hold of the business’s full accounts, and be certain to check these against any accounts filed online. If you find any inaccuracies or inconsistencies, then you’d be wise to not invest.

 

#3 Check the Company Directors

If there’s one strong determinant of a startup’s prospects of success or failure, it would be its director(s). Yet it isn’t always straightforward doing due diligence on them.

For example, suppose you are interested in investing in a startup and the company director’s name is “John Philip Patrick Greene.” Checking the Company Register, you could use any combination of these names and initials, and it would throw the full name up.

What does this mean? It means that it is possible for one person to have multiple entries on the Company Register. They would just need to use different ways of writing their forenames or initials. It isn’t illegal, but it does leave the door open for people to use it illegally.

There are all sorts of horror stories out there. Startup company directors who have listed multiple versions of their name on the Company Register, some of which list liquidated companies. Yet the version of the name given in the funding pitch was different.

To ensure you do not miss this, make sure you do not just search the Company Register by name. Also use the person’s date of birth. This is much more likely to be entered correctly, as providing incorrect information here would be against the law.

LinkedIn is also a very useful source to check company directors, as is Google Search and Google News. Make sure you cross-check the person using multiple sources, and ask them directly about any inconsistencies you find.

 

#4 Check the Market

Startups occupy a distinct landscape within the market. Or at least, they are supposed to.

Make sure you do your own market analysis. Really drill down on the market segment, as looking too broadly will not give you enough information.

A good example is the car market. There are numerous segments involved here. It is largely irrelevant, for instance, to look at UK-wide car sales when the product you’re looking at is an electric car aimed at city-dwellers.

Ensure you also do your own research on the company’s competition. It’s completely conceivable that the startup might have missed some in their pitch.

Check the company’s scalability. They might well have had a first-year turnover of £100,000, and claim that there is enough of a market for that to become £1.5m in the next 12 months. Assuming that occurs, do they have the processes in place to handle that turnover?

Another area to consider is the M&A levels and behaviour in the startup’s sector. This can have a big impact on your profitability prospects as an investor. Check Google for a M&A report in the sector you’re looking at. In all likelihood, there will be a recent one out there. Just make sure you are certain of the figures and sources used before relying on it.

 

Summary

There is much more to startup due diligence than what we’ve outlined above, but hopefully this gives you some food for thought.

If you are an investor interested in accessing our latest, qualified funding proposals, or a business looking for funding, please get in touch.

 

An Easy Guide to SEIS Investing

By | For Angel Investors | No Comments

Past performance is no guarantee of future results. Any historical returns or unrealized returns may not reflect actual returns or future performance. All securities involve risk and may result in loss, and startup investing is particularly risky and may result in total loss.

 

At the time of writing, over 50,000 new businesses are started in the UK each month. The vast majority of these will be a failure. Yet some of them could be the next WhatsApp or Amazon.

If you are an investor, you therefore want to ask: “How can you tell which ones will be the next big thing? How do I get a piece of the action?”

The fact is, it isn’t always easy to tell which startups will become a huge success and earn you lots of profit. Inevitably, there will always be a high degree of risk involved with this kind of investment compared with other asset classes.

Yet in the same breath, with higher risk comes to possibility of higher return. Moreover, with government schemes such as SEIS, you can mitigate these risks by offsetting some of your losses against your Income Tax. (More on this below).

In light of the above, here are some principles you can use to make wiser investment choices when it comes to startup funding.

 

#1 Understand why Startups Fail

There have been many studies detailing the obituaries of different startups across the UK. Some details hundreds of reasons for startup failure, yet there are some very common ones.

Many prominent investors observe that startups with a single founder are very likely to fail. Steve Hogan of Tech-Rx, for instance, argues that having a co-founder can help startups address many of the causes of early failure, such as poor recruitment and marketing choices.

After that, some other important reasons startups flounder include the absence of market need. If no-one needs the product or service they’re offering, then the company will not sell.

Other causes of startup failure include running out of money, having the wrong team, conflict between this team and the investors, and being outperformed by a competitor.

At Bure Valley Group, we “stress test” all of the startups who want to approach our investor network for funding. We comb over each of the above – and more – to ensure the proposal is as robust as possible prior to presenting their proposal to our Angels and Consortiums.

Although this does not eliminate the risk of investing in startups, it does increase the chances of you getting a return on your investment.

By focusing on SEIS-eligible UK startups as well, this adds an additional layer of protection for your investment, since you can offset some of your losses against your Income Tax. Yet we’re jumping ahead slightly – we’ll cover that in a bit more depth shortly!

 

#2 Only Invest What You Can Tolerate to Lose

Since investing in startups is inherently risky, you should never commit more money than you can afford to lose.

Yes, you could win big if the company you invest in becomes huge. Yet you could also lose most or all of it. For ordinary folk in the UK, therefore, you should only ever invest a small amount of your investment funds into startup funding.

For Sophisticated Investors, the situation is slightly different. These are people with significant sums to invest, who can afford to take more risks with their money, and who can demonstrate they are aware of the risks in startup investing.

 

#3 Diversify Your Investments

Advice you almost certainly will have hear before as an investor, but it always holds true.

Try and spread your money out wisely amongst a range of “stress tested” startups, rather than putting all of your eggs in one basket.

It helps mitigate your risks. If one of your investments fail, and one or more of the others succeed, then the former will sting a lot less.

 

#4 Take Advantage of Tax Reliefs

One of the little-known tax reliefs offered by the UK government is SEIS – the Seed Enterprise Investment Scheme. This offers a great way for people to invest in startups, reducing your losses when you lose and improving your winnings when you succeed.

Essentially, SEIS allows you to invest up to £100,000 in SEIS-eligible UK startups per financial year. You can then offset 50% of your investment against your income tax.

So, suppose you invest £1,000 in a SEIS-eligible startup. You’d actually be investing £500, because you will effectively be taxed £500 less.

You have to hold your shares in the company for at least 3 years. If at that time the company fails, then £500 is at risk. This is where your Income Tax bracket comes into play.

If your tax band is 45%, then you could get back 45% of that £500 (£225). So, even though you invested £1000 you do not lose it all if the company fails. You lose about a quarter of it.

Yet this is the worst-case scenario. Suppose the company doubles in value after 3 years. What happens then?

Well, invested £1000 so you get £2000 back. Under SEIS this is not subject to Income Tax, and neither is it subject to Capital Gains Tax. So this is £1000 of pure profit.

Yet remember, the initial £1000 you invested was offset against your Income Tax by 50% – that is, £500. So actually, you’ve made £1500; a 150% return on your investment!

 

How SEIS plays out as an Investment: 3 Examples

By | For Angel Investors | No Comments

Past performance is no guarantee of future results. Any historical returns or unrealized returns may not reflect actual returns or future performance. All securities involve risk and may result in loss, and startup investing is particularly risky and may result in total loss.

Introduced in 2012 by the UK government, SEIS (the Small Enterprise Investment Scheme) was intended to incentivise individuals to invest in startups, by offering tax relief.

In short, provided a company meets certain qualifying criteria for SEIS, then you can invest up to £100,000 per financial year into these companies and be entitled to 50% Income Tax relief.

In addition to the Income Tax relief, you also receive exemption from Capital Gains Tax on shares you earn from the SEIS you invest in. This exemption applies even if you reinvest the profits from your shares back into the SEIS company.

Company directors can even invest into their own company through under SEIS, provided their company is SEIS-approved. However, you only hold up to 30% of the company shares.

To take advantage of the above tax reliefs, you must hold your shares in the SEIS company for a minimum of 3 years.

However, if you are worried that would potentially expose you to large investment losses, then HMRC offers a nice cushion under the scheme. If the company you invested in fails, then you can offset the loss amount against your Income Tax.

You have a few options when it comes to how you invest. For instance, you can invest directly into a SEIS company, or you might choose to invest in several through a SEIS fund.

So how does this all work in practice? Let’s imagine three scenarios, where an investor puts their money into a company via SEIS:

 

Scenario 1: Company Failure

Suppose you approach Bure Valley Group and you invest £10,000 into a company in our network, which is SEIS-qualified. Imagine that shortly down the line, this company collapses and you receive nothing in the liquidation.

Let’s also suppose that your UK Income Tax bracket is 45%, and your Capital Gains tax is 28%. What happens to your money?

Well, you initially invested £10,000 and are entitled to 50% Income Tax relief. So you get £5,000 back straight away.

So you really have £5,000 exposed to the loss, not £10,000. In this case, because your Income Tax is 45%, this is the level of tax relief you get on the £5,000. That amounts to £2,250.

So your actual loss is £2,750.

 

Scenario 2: Company Breaks Even

Again, let’s assume you fit the same tax situation described in the first scenario. You invest £10,000 in a SEIS company, and this time the company has the same value after 3 years.

In this situation, what happens? If the company exists, you have £5000 profit and you will also receive a 50% tax reduction (£5000). So effectively, you get your money back (minus inflation).

 

Scenario 3: Company Value Doubles

We’re coming at this scenario with you in the same tax situation as above. This time, you invest £10,000 into a SEIS business which goes on to double in value after 3 years.

Again, the initial investment gets 50% Income Tax relief – so you really have invested £5,000. If you sold your shares at this point, you’d have a £10,000 profit which is not subject to tax.

This sum is also not subject to Capital Gains Tax either, because you held your shares for 3 years. So, the total tax-free amount you get back is £15,000.

 

Which Companies Qualify for SEIS?

A business can apply for SEIS status if they have under £200,000 worth of assets, and have been trading for less than 24 months. The total amount of SEIS investment they can receive under these circumstances is £150,000.

There are some other criteria which must be met by the business as well, to qualify for SEIS. First of all, it must be UK-based and not trading on a stock exchange recognised by HMRC, such as the London Stock Exchange, Boston Stock Exchange or Toronto Stock Exchange.

The company in question also cannot control any other company, unless it meets “qualifying subsidiary” status. In addition, the company cannot be controlled by another one, and it must not be a partnership (the same applied for any qualifying subsidiaries).

The total number of employees in the company also cannot exceed 25 – including any employees in any qualifying subsidiaries.

Finally, the company applying for SEIS also cannot be from a venture capital trust (VCT), and it will be prohibited from SEIS status if the company has received any funds through the Enterprise Investment Scheme (EIS).

 

Which SEIS Companies Should I Invest in?

Of course, SEIS is ultimately about investing in startups – something that’s generally seen as quite risky. So even if a company qualifies for SEIS status, that doesn’t mean you should necessarily invest in it.

At Bure Valley Group, a huge part of what we do is “stress testing” SEIS companies, prior to presenting them as investment opportunities to our network of investors and consortiums.

In other words, we ensure that SEIS companies have the highest possible chance of success prior to recommending them to our investor network. This significantly increases the chances that you will get a high return on your investment.

We also advise investors on how to diversify their investments in the companies we present. That way, if one company you invest in fails and others succeed, you further minimise your exposure to losses and increase your chances of a solid profit.

Interested in becoming a part of our investor network, and gaining access to our exclusive list of SEIS opportunities? Get in touch today using the contact form on our website!