Business and Finance
How to get your start as a start-up investor
‘Better to be a pirate than join the navy’: the words of Apple founder Steve Jobs and an appropriate motto for an economy that has finally got the wind back in its sails. Today, Britain has the fastest-growing economy in the G7, jobs are being created at the fastest pace in over 40 years and the London IPO market has been at its busiest since 2007. Investors — to pursue the nautical metaphor — have a choice of seeking safety in the slow-moving convoy of familiar blue-chips or striking a bolder course in search of fast-growing new ventures.
This latter class of emerging companies demands close attention from anyone interested in wealth creation. It is often said that two-thirds of the businesses that will make up the US S&P500 index in a decade’s time do not yet exist. It’s no different in the UK: Eileen Burbidge, founding partner at one of London’s leading early-stage funds, Passion Capital, put it to me recently that most of the FTSE100 companies of 2024 have yet to be launched.
And there’s no shortage of new entrants for that eventual prize. Three years ago I co-founded StartUp Britain, a national campaign for early-stage enterprise. A record 526,446 new businesses were registered at Companies House in 2013, and that benchmark is set to be surpassed this year. Make no mistake, the UK has one of the world’s most vibrant start-up sectors.
Risk is high: one in three of these companies will not see their third birthday. But if you get it right you could be part of a start-up that hits the big time. According to a report from investment bank GP Bullhound, Europe has created 30 billion-dollar-plus tech firms since 2000, including games studio King Digital, property portal Zoopla and music service Spotify.
This trend is set to accelerate. As Warren Buffett once remarked: ‘The investor of today does not profit from yesterday’s growth.’ That’s also a pertinent observation for the familiar market names that make up many personal investment portfolios — and are currently failing to deliver growth. Broker Hargreaves Lansdown publishes a weekly list of the most traded shares among its clients: in the top ten are Tesco (down 48 per cent this year), Rolls-Royce (down 37 per cent) and GlaxoSmithKline (down 13 per cent). But in the search for tomorrow’s growth, opportunities abound. One such is the Seed Enterprise Investment Scheme, offering tax relief of 50 per cent on start-up investments of up to £100,000 in a given tax year.
And not only is government absorbing a good deal of the risk of investing in young companies, it exempts any profits from capital gains tax. Such policies are as important in the creation of an investment culture around entrepreneurship as the privatisation of utilities was to building a share-owning society in the 1980s. Last summer the Treasury lifted the ban on putting shares of Aim-listed companies into tax-efficient Isas, another important incentive for backing companies with potential. Companies listed on Aim raised 161 per cent more in the first half of this year compared with the same period in 2013.
Where once the only investors in young firms were friends and family or the occasional deep-pocketed venture capitalist, there are new platforms that open the process to us all. Indeed, the so-called ‘alternative finance’ market is beginning to look positively mainstream.
Take Entrepreneur Bonds, self-administered company schemes that have empowered firms such as King of Shaves, upmarket fast-food chain Leon and boutique hotel index Mr & Mrs Smith to offer bonds directly to their customers, with returns ranging from 6 to 15 per cent.
In recent months London has become the world capital for financial technology (fintech) companies that offer outstanding opportunities — including peer-to-peer lending platforms that Laura Whitcombe writes about on page 10, and invoice trading sites such as MarketInvoice that offer annualised returns of up to 15 per cent.
For those looking for direct investment opportunities, either as an angel investor or by buying listed stocks, technology companies continue to lead the high-growth segment. Volatility abounds, and the memory of past bubbles is a warning to be heeded — but future promise is an essential part of the appeal of such companies. When UK-based takeaway service Just Eat went public earlier this year, its valuation of £1.47 billion was more than 100 times underlying earnings from 2013 — and although the shares dipped after the flotation they now stand well above the launch price.
Depending on your worldview, that’s a terrifying or an awe-inspiring fact. Either it shows a belief in what’s possible, or it’s wishful thinking, waiting to be shot down by wiser men of the market. Future promise will not always be fulfilled, but if you are prepared to take a punt on potential, you get your chance.
And to take advantage, investors can learn from the founders who are creating that value. Entrepreneurs are the game-changers of our recovering economy: the activists, optimists and idealists who live off the sense of possibility offered by new and bold ideas. The Prime Minister was not exaggerating when he described entrepreneurs as ‘national heroes’ in a speech last year.
The case for capitalism is best made by its creators and their start-ups. Their purpose and passion creates employment and economic value. Harvard Business School Professor Len Schlesinger is fond of quoting a statistic that big business has not created a single net job in the past 40 years. And according to the innovation charity Nesta, 54 per cent of new employment in the UK is being created by just 6 per cent of companies — many of which are recent start-ups. That’s where the momentum is, and it offers fantastic opportunities for investors who are prepared to back game-changing ideas.
If you are happier to hold your savings in the kind of low-risk, low-return, computer-generated portfolio offered by most wealth managers these days, then the approach I’m advocating may not be for you. But if you want to back higher-risk companies that may be the investment giants of the future, the time is now. That means doing your research, developing a nose for potential winners, and exploring new funding platforms and tax incentives; this is a voyage of adventure for those who believe that the best is yet to come.
Michael Hayman MBE is co-founder of campaigns firm Seven Hills and co-founder of StartUp Britain.
This article first appeared in the print edition of The Spectator magazine, dated 8 November 2014