Turning bright ideas into great investments
Not all EIS funds are the made the same. We certainly want ours to stand-out. By partnering with Nova, a leading start-up studio as a potential investor you will benefit from the ability to scrutinise the businesses supported by the Fund before you decide to invest.
In the second in our series exploring the workings, potential and thinking behind the ground-breaking Stellar Nova EIS Fund, Pierre Clarke, Head of Technical & Compliance, explains why Nova’s start-up studio model has been successful in selecting and supporting great new ventures.
Proven selection process
The Enterprise Investment Scheme (EIS) was established in 1994 to help entrepreneurs attract the investment they need to bring their innovations to market. Investors benefit from generous tax incentives. While there are clearly risks in investing in early-stage businesses, there could also be significant rewards from backing a winner.
The challenge is that, on average, barely one in ten start-ups survive and succeed. Yes, some turn out to be duds. But plenty of ventures with significant turnover, high potential products and services are also failing. As I outlined in the first article in this series, the main risks centre on the teething problems faced by all fast-growth businesses as they scale-up and mature. These range from inexperienced leadership to the challenges of managing finances and developing an effective operational and sales infrastructure.
To compound the problem, many EIS fund managers are primarily focused on putting client capital to work so they can qualify for the tax breaks. Some fail to add value through nurturing the potential winners within their start-up portfolios to help boost investment returns.
This is where Nova comes in. Nova operates a rigorous and proven process of selection, early stage trials and subsequent funding, advice and support. Nova’s team is able to draw on many years of working in and alongside start-ups. As a result, they are well placed to determine which ventures have real potential and what works and what does not as they go to market.
Pipeline of ideas
How does Nova’s distinctive studio model work? The starting point is an open invitation for entrepreneurs to submit their ideas for evaluation. There are thousands coming in every year, but only a few have a real future.
When deciding which ideas to take to the next stage of trial and selection for Nova’s start-up support programme, the key criteria is whether the proposed product or service offers a viable solution to an unmet need or problem. Forget the inventor firing off hundreds of designs and prototypes every year. The best people to come up with marketable solutions are those that work in a particular field and hence see the issues and how they could be resolved first-hand.
So among the entrepreneurs chosen by Nova are an A&E doctor who has developed a next generation chest monitor to help prevent needless deaths from asthma and other lung diseases. Others include one of the country’s leading conveyancing specialists, who has developed an app to help take the needless stress and frustration out of buying and selling a home.
A solution worth exploring
The initial screening whittles the 3000+ ideas down to a long list of around 50-100 worth exploring further. Through one-to-one mentoring and advice, Nova’s team helps entrepreneurs to gauge the commercial viability of their idea. This includes speaking to potential customers to find out whether what they are offering has a market. Quite a few find it does not or there is something similar out there.
Nova then helps the entrepreneurs who do gain positive feedback to gather these findings through their award winning, online Venture Readiness program, all before an investment is made.
Developing and testing the prototype
With the market potential identified and verified, the next stage is to develop a prototype. Working with the entrepreneur as a funding co-founder, Nova brings in specialists from its development team to help turn the idea into a solution that is ready for market testing. Nova also works with the founder on how to market their solutions and develop a scalable and sustainable business. The key questions to be addressed before moving on are whether the business is delivering the right solution for the problem and whether it can win over customers.
Ready for market
By this stage, the long list of 50 plus ventures has been filtered down to about 15. From here, the Nova development team expands as they work with the founder to acquire real customer feedback, hone the product and identify market openings. This stage includes successive rounds of challenge and validation from both customers and Nova’s sector experts. If the business comes through this, it is ready to go to the Stellar investment committee for review. If approved, it is included as one of the investments to be included in the Stellar Nova EIS Fund portfolio.
As co-founders, Nova continues to work closely with the business. This includes helping to recruit people into key positions, scale-up production and provide operational support in areas such as design, marketing, finance and HR. Not only do start-ups benefit from the expertise, but they also reduce the fixed costs of having to hire people directly.
Proven track record
Nova’s model has a proven track record. In the 12 years Nova has been backing growth ventures, it has reduced the average failure rate from 90% to 50%. It has also seen its portfolio value increase by 26.7% year on year for the 10 years to 2020. Several businesses have already gone on to realise many times the original seed investment when they come up for eventual sale.
Investment in the Stellar Nova EIS Fund will increase the number and range of businesses that Nova can back. For you as investors, the active support for portfolio ventures within the Fund offers the combination of the return potential of a growth stage fund and the tax benefits of an EIS. The strong venture pipeline and pre-selection criteria also mean that you can see and judge the businesses supported by the fund before you decide to buy-in, while at the same time also avoiding the high costs other funds incur in identifying and sourcing their deal flow.
In a coming article, I will be profiling some of the exciting young companies you could be investing through the Stella 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 Stella Nova EIS Fund, please get in touch with one of our team today on 020 3195 3500 or contact email@example.com.
Written by Pierre Clarke
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.