Jo Oliver, Manager of the Octopus Titan VCT, says the UK has a wealth of opportunities in billion-dollar tech
If you want to learn a new language, how can you start?
Well, you might spend a few hours in a classroom after work. And then more hours hunched over textbooks at the weekend.
Or you could do something more fun. Something that fits into your daily routine, rather than disrupting it.
That’s the idea behind Memrise, a UK start-up that combines technology and cognitive science in an app that fits round its customers’ lives. Memrise is a great example of a business entering a huge market with a radical new approach.
The e-learning market is worth around $165 billion a year globally. And it’s growing at a rapid rate, around 5% a year. So Memrise has a lot of potential to scale up.
Memrise is just one example of the exciting investment opportunities UK investors have on their doorstep. The entrepreneurial environment has thrived over the last decade.
Consider, for example, that in 2010 just one UK company founded since 2000 had reached the milestone valuation of $1 billion. By 2018, this had risen to 26. Across the Channel, continental Europe saw the number of start-ups reaching the $1 billion mark rise from one to 69 over the same period.
This shows the astonishing growth of European early-stage companies. But it also shows something else. The lion’s share of this growth story is happening right here on our shores. Indeed, in 2017 tech businesses in London saw three times the level of venture capital funding than Paris, the next best market. The UK has more billion-dollar-plus tech companies than any other European country, with a further 102 tech start-ups fast approaching that milestone.
So how can UK investors get involved?
A tax-efficient way for investors to tap into this growth story
One way investors can access early stage companies is through a VCT. VCTs invest in smaller companies that meet certain criteria set by government, and which are not listed on the main London Stock Exchange. These are companies that have the potential to grow to many times their current size.
A key feature of VCTs is that investors can claim income tax relief equivalent to 30% of the amount they invest (up to the first £200,000 invested). Dividends and capital gains are also free from tax. Note that investors must hold their VCT shares for at least five years, or else pay back any income tax relief claimed.
The reason the government offers these reliefs is to create an incentive for investors to take on the risks of backing smaller, less established companies.
What risks should investors be aware of?
VCTs are high risk investments and won’t be right for every investor. Not every company will succeed, so the value of a VCT investment, and any income from it, can fall as well as rise. Capital is at risk and investors may not get back the full amount they invest.
Regarding the tax reliefs VCTs offer, investors should note that tax treatment depends on individual circumstances and may change in the future. Tax reliefs also depend on the VCT maintaining its VCTqualifying status.
Investors should also be aware that a VCT’s share price can be volatile, and they may be harder to sell than shares listed on the main market of the London Stock Exchange.
What types of companies do VCTs invest in?
We’ve already touched on Memrise, the language learning app that’s breaking into the e-learning market. Memrise is one of around 67 companies in the portfolio of the UK’s largest VCT, Octopus Titan VCT.
Other examples from the portfolio includes Sofar Sounds, an organiser of one-off, intimate live music experiences, WaveOptics, which makes see-through displays for augmented reality wearables, and household names like Secret Escapes, the members only travel website.
As you can see, these are companies that operate across a diverse range of sectors. They’re also companies that are at various stages of their growth journey, from newer start-ups to more established businesses.
But while these businesses are very diverse, they all share three important ingredients for success.
Three ingredients that make a great early stage company
Those three ingredients are:
- Talented, entrepreneurial founders.
- An idea that can transform their industry.
- A huge market opportunity.
The founders of Memrise, for example, have a strong academic background in cognitive science. One of them is also a memory grandmaster, which means he can memorise a 1,000 digit number in just one hour.
Their idea is already making its mark on the eLearning industry, winning iPad App of the Year 2016 in several countries, and Best App of 2017 at the Google Play awards.
And the market opportunity is large and growing. That’s thanks to two very strong global trends: the growth in language learning, driven by population growth and greater geographical mobility, and the growth of online learning worldwide.
What makes a good VCT
Of course, not every company will succeed, even if it does have those three ingredients. Indeed, one of the advantages of investing through a VCT is investors can benefit from the expertise of its fund managers, as well as their access to investment opportunities.
Another advantage is investors get access to an established portfolio straight away. So they spread their investment across a broad range of companies.
But to be sure your clients maximise these advantages, you’ll want to do some digging. When considering a VCT, ask about the investment team. How big is it? How experienced are the people on the team? Crucially, do they have access to the best new investment deals?
Ask as well about the support they give companies after they invest in them. Good VCTs are not passive investors. They work with the entrepreneurs they back to help them succeed.
So ask VCT managers how they use their resources. Do they provide ongoing support throughout the companies growth, including through follow-on investments? Do they also provide practical support, like introducing founders to valuable new contacts?
Taking the next step
Octopus, the UK’s largest VCT manager, has a wealth of information to help explain VCTs, including a userfriendly guide to VCTs that explains the asset class in more depth.
Note that VCTs have finite fundraising capacity, and the most popular ones can fill up quickly. You should start your planning sooner rather than later to make sure you can invest in your preferred VCT.