Co-founder of Worth Capital Matthew Cushen discusses deal flow and deployment for IFA’s considering S/EIS investment in the coming weeks.
Our approach to EIS & SEIS investing is different to other investors. It’s been very deliberately designed by my business partner Paul Soanes and I, based on insight from 14 years of angel investing together and our experience from entrepreneurial, corporate and consulting careers in brand, marketing, retail and innovation.
We landed the insight, on a napkin in a pub, from considering where we have been successful in our investing, as well as challenging the reasoning behind backing a couple of turkeys. The insight might have been scribbled down roughly, but the innovation that we created on the back of it took several experiments and a couple of years to iterate.
It’s ended up in the creation of an EIS and SEIS fund that we too invest into, managed by experienced early stage venture capital fund managers, Amersham Investment Management. We use our experience to make the commercial recommendations for the Fund’s investments. Our deal flow comes from a monthly competition that is promoted by www.startups.co.uk and generally gives us over 100 businesses a month to consider, and a different deal flow to that our competitors are sharing.
After the competition closes our distillation process typically takes six weeks and culminates in us spending half a day with each of three, or four entrepreneurs to dig deep into the market, proposition, strategy, team, business model, communications plan and the valuation. Sometimes no business makes the grade, sometimes one or two will emerge. If the Fund invests, either Paul or myself will become Investor Director – giving oversight for investors in the Fund, and helping the businesses to mitigate risks and accelerate their growth.
It’s an approach deliberately designed for early stage investing and different to how other funds approach deal flow, distillation and growth. So far we are delighted with the businesses it’s unearthed, the valuations we negotiate and the progress being made.
However, years of helping large businesses to innovate has taught me that sometimes some valuable parts of a proposition can arrive serendipitously. We’ve ended up with 3 elements of our offer that we didn’t originally set out to achieve. But now financial advisors, wealth managers and direct investors are telling us these are very important to them. Particularly, but by no means only, at this time when we approach the end of the tax year.
1. Inevitably, February and March see a flurry of late commitments being made by investors, to benefit from EIS and SEIS tax reliefs in the current tax year (or taking advantage carry back against the previous year tax bill). The unintended consequence of this? Fund managers scrabbling around for deal flow to satisfy the cash coming their way. Last year we heard from an entrepreneur being offered cash after one phone conversation, on 03 April, as long as she sat with the solicitor the following day to conclude the deal. Making a mockery in that case of claims of commercial & technical due diligence.
We have come to appreciate that our process – the monthly competition and a set distillation process – saves us from the temptation to cut corners. As I write at the end of February, we are making our final commercial recommendations for the fund manager to review for completions planned by the end of March. These are based on our competitions starting in November, December and January and the regimented process of commercial & technical due diligence set off from them.
2. It frustrates us that more investors do not appreciate the benefits of EIS and SEIS investing. Not just the tax reliefs or the potential high returns (both based on the high risk), but also the satisfaction of seeing the real difference their money makes to a growing business, and to our economy’s wider ability to innovate and compete globally.
Too many IFAs and Wealth Managers have become reticent to recommend the asset class as they have subscribed their client’s cash to a fund but then that has not been invested and put to work quickly. We have an investor that has just committed to our fund. He’s withdrawn his cash from elsewhere. He’d questioned why it had not yet been invested six months after investing and was told it couldn’t after all be guaranteed to even be deployed in this tax year.
Again, the process we designed has an unintended consequence – the constant rhythm of a monthly competition gives us reliable and consistent high-quality deal flow, helping us be confident of creating mini-portfolios of qualified investments that put investors’ cash to work quickly in closings of the fund anticipated three, or four times during the year.
3. Our personal approach to investing has always been to recycle the tax reliefs into further EIS and SEIS investments – so leveraging the benefits. Therefore we’ve always been pleased to receive the EIS3 and SEIS3 certificates that mean we can claim the reliefs. We also hear that chasing tax certificates has often been a bugbear for IFAs and Wealth Mangers.
As part of working closely with our entrepreneurs, we take on the burden of funding activities where it is unproductive to have them to learn about and administer as a one-off activity. So we take the responsibility in our office for dealing with HMRC on behalf of the companies. It’s taken a little while to streamline our operation, but recently we’ve managed turnaround times of 30 days between investment and sending certificates to investors.
Whilst we’d love to claim we deliberately designed all aspects of our proposition, sometimes serendipity plays its part. In these 3 examples, we’re pleased it has.
Matthew Cushen is an innovation consultant, entrepreneur and successful angel investor.
The Start-Up Series Fund, conceived by Worth Capital and managed by Amersham Investment Management (authorised and regulated by FCA) invests in qualified winners of the Start-Up Series. Capital at risk. Tax benefits depend on personal circumstances and are subject to change. The minimum investment is £10,000.