Investing in startups is exciting. Having been on both sides of the negotiation table, it’s given me great insight in the emotional, financial and administrative side effects of having a “good idea”.
My mentor and I lead an investment club of about 30 high-net worth individuals who are interested in making use of their personal cash, industry knowledge and connections beyond their day jobs.
We come from a number of very different industries: advertising, retail, technology, fast-moving consumer goods, TV, and law to name a few. This breadth of experience means we are able to back entrepreneurs looking for investment in a wide range of sectors.
How do we choose who to take a chance on? There are a number of factors investors will look for.
1. The idea and marketplace
Investors want to be excited by an opportunity and influence it from the get go – they’ll look for a marketplace that they know and understand. And with more than 600,000 businesses launching every year in the UK, the idea has to be innovative. Currently, about three new investment opportunities come across our desk per week and we probably meet with two businesses per month. If we like the idea, we’ll contact the other members to gauge interest, and after some due diligence and a meeting with the entrepreneur, the interested parties will make an offer.
2. The entrepreneur(s)
In some instances, we have backed businesses where the entrepreneur is far more impressive than the products/services they are trying to launch. There are a number of individuals that we would continue to back in whatever they wanted to do in the future. One such business is Squid London, set up by two impressive women. They had invented a fabric that changed colour when wet and developed a range of umbrellas, macs, shower curtains and more. Squid products are now available all over the world and they’ve recently obtained a Peppa Pig licence. The confidence, drive, application and excitement for business and innovation of these two ladies has been extraordinary.
On the other hand, we’ve also met some business owners with great ideas but an inability to listen or take advice. We want to be able to use our business experience and contacts to help these businesses grow, and provide guidance as mentors, rather than just invest cash. An entrepreneur intent on taking huge sums of money out of the business is also not investable – such moves not only hurt the company but will aggravate investor relationships. Relationships are key.
3. Does the company qualify for SEIS or EIS relief?
Because we are investing as individuals, there are superb tax advantages when working with startups that qualify for the government-backed Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) relief. SEIS is suitable for new companies with fewer than 25 employees, gross assets of less than £200,000 at the time of investment, and can only receive £150,000 of investment under the programme (other criteria also apply [pdf]). Eligible businesses need to apply for certification from HMRC.
We’ve only invested in SEIS- and EIS-certified companies so far. If the company succeeds, the investors are exempt from capital gains tax on that profit (providing they have owned the shares for three years). If it fails, some of that loss can be offset against income tax. There is obviously still some risk but with the current low interest rates, the opportunities for those who have cash available can be plentiful.
