An EIS that doesn’t leave returns to chance

Enterprise Investment Scheme (EIS) funds offer attractive tax reliefs for investors. In most cases, however, the technology start-ups and scale-ups EIS funds invest in are left to sink or swim in the riskiest early stages of their development. The result is a needlessly high failure rate and reduced financial returns for investors.

The new Stellar Nova EIS Fund is different. By nurturing growth businesses, the Fund can boost their chances of success and provide stronger returns for investors.

Innovation is the lifeblood of our economy. EIS can give it a critical boost.

EIS offers start-ups and scale-ups a vital source of funding to help them develop their products and bring them to market. As a potential investor, the incentives include 30% income tax relief, the ability to defer capital gains and inheritance tax relief. Upon exit, after three years, there is an exemption from capital gains tax on any returns and investors can benefit from the downside protection of loss relief on those companies in the portfolio that may be written down.

But the focus on EIS should not be about mitigating tax bills, it should always be about the underlying investment and the considerable return potential.

Yes, growth businesses will always be high risk. But this is also a great opportunity to back future winners.

And there are increasingly promising signs for the kind of innovative tech businesses that EIS funds typically target. The past two years have seen an acceleration in digital transformation across the economy. This is boosting demand for the digitisation of all sectors throughout global economies.

Opportunities to realise value are also increasing as the London Stock Exchange embraces tech growth companies after years of trailing other global markets. Capital raised through initial public offerings (IPOs) in 2021 was the highest since 2007. The value of UK tech companies that exited via IPO, special purpose acquisition company (SPAC) or acquisition reached a record £84 billion. This positive momentum is set to continue in 2022 and beyond.

Unrealised potential

The big question is whether conventional EIS funds are doing enough to make the most of this return potential by nurturing the start-ups and scale-ups in their portfolios.

Venture capital funds have traditionally been more about the investment than support offered. As a result, barely one in ten survive and succeed. More often than not, the reasons for failure are nothing to do with the viability of the idea. Indeed, research in the US indicates that ideas account for less than 30% of a start-up’s success.

Rather, the main risks centre on the teething problems faced by all fast-growth businesses as they scale-up and mature. These range from hiring the wrong people or lack of experience within leadership to the challenges of managing finances and developing an effective operational and sales infrastructure. Underlying problems include the need to keep chasing funding at each stage of development rather than focusing on the customer acquisition upon whom success ultimately depends.

Head-start

Here at Stellar Asset Management, we want good ideas and high potential businesses to survive and thrive. Through our partnership with Nova, a dedicated start-up studio, portfolio companies within the Stellar Nova EIS Fund benefit from the dedicated resource, advice and support they need to steer through the hazardous first few years of development and growth.

Nova shifts start-up investment from a hands-off venture capital approach to a hands-on co-foundery model with strong echoes of private equity. The 100+ strong team uses more than ten years of experience of both working in and on start-ups to select the enterprises with the strongest potential. The systematic evaluation criteria look beyond the innovations in isolation to bring in such factors as the make-up of the founding team and the scalability of their products and services.

When the company is selected, Nova works as cofounders alongside the original founders, providing a dedicated founding team to complement the skillset of the original founders. Nova provides the equivalent of 600 days support acting as a cofounder in areas such as, Product Development, Design, Marketing, Finance, Legal and HR. Not only do start-ups benefit from the expertise, but they also reduce the fixed costs of having to hire people directly, giving the start-up much needed financial flexibility during the early and often challenging early years.

Winning formula

The success rate for Nova start-ups is five times higher than the industry average. This mitigates a lot of the risks that have traditionally been involved in investing in early stage businesses. It also improves the upside return potential for investors in the Stellar Nova EIS Fund.

The other big advantages of the Stellar Nova EIS Fund are visibility and speed of deployment. Following Nova evaluation and review by our investment committee, we have an excellent overview of the pipeline of portfolio companies for 2022.

The list for 2022 includes:

• Thrift – a company that helps charity retailers find the resale value of items in their store, leading to more sales, whilst supporting the circular economy in a sustainable way.
• Senti – a company that helps Asthma and Chronic Obstructive Pulmonary Disease (COPD) patients to gain, or regain, control of their condition through the use of a smart-garment that monitors their chest sounds and provides real time insights into their overall condition and likelihood of respiratory attacks.
• YouConvey – a company that provides home movers with more control over the moving process through a unique collaborative conveyancing approach. By allowing home movers to focus on the administrative element, Conveyancers are able to focus solely on the legal aspect, making the home moving process quicker, less stressful and more engaging.

As a potential investor, knowing what companies are in the portfolio up front means that you can judge their prospects for yourself. As the tax breaks on EIS only kick-in once the capital is deployed, the Stellar Nova EIS Fund also enables you to take advantage immediately rather than waiting what could be several months for selection and fund investment.

In coming articles, we will be looking more closely at the Nova start-up studio model and profiling some of the exciting young companies you could be investing in through the Stellar Nova EIS Fund.

In the meantime, if you would like to discuss any of the issues raised in this article or know more about the fund, please get in touch with one of our team today on 020 3195 3500 or contact enquiries@stellar-am.com.

Written by Pierre Clarke

Important Information

Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.

Stellar Asset Management Limited of Kendal House, 1 Conduit Street, London W1S 2XA is authorised and regulated by the Financial Conduct Authority.