How to choose the right venture capital trust

For small business owners, a venture capital trust (VCT) investment could be a game changer. It could fast-forward your company’s growth, help you hire more employees, and achieve incredible results.

As the venture capital firm that invests in your company will have some sway over your business decisions and expect to see returns, choosing the right venture capital trust fund requires careful consideration.

What is a venture capital trust?

A venture capital trust or VCT is an already established company with publicly traded shares on the London Stock Exchange.

It collects money from investors which is then used to support qualifying small businesses in the UK. HMRC has strict VCT investment rules to monitor how venture capital companies operate and how they make investments.

As VCTs are inherently high-risk, the UK government provides a number of tax incentives to encourage investors.

According to the latest reports, the VCT market is experiencing its highest investment rates in 12 years with £728m invested in 2017/2018 – a 34% increase since the previous tax year. As such, now might be a good time to think about securing a VCT investment for your company.

What are the benefits of VCT investments for your company?

If your company qualifies for a VCT investment, you could be eligible for 15% of a VCT’s funds and receive up to £5m per annum or £12m in total VCT investments. Money that could completely transform your company.

Companies that received venture capital trust funds typically experienced, on average, an increased annual turnover of £2.2m for every £1m received in investments. Most companies receive between £2m and £10m in investments, which would result in between £4.4m and £22m in revenue growth.

Business connections and expertise

In addition to increased revenue, companies benefit from a venture capital company’s business connections and expertise. As venture capital companies only profit from your company’s success, they’re invested in supporting you to achieve the best results.

In most cases, a representative from the venture capital firm will join your board to provide expert insight, mentoring and ultimately help your business to grow.

Increased workforce

VCT investments help promote a strong economy and encourage companies to increase their workforce. Overall, venture capital trust funds have allowed for the creation of 27,000 new jobs and increased the UK workforce by 116%. Nearly 50,000 people are currently employed by VCT-backed companies.

Overall market success

Since being introduced in 1995, VCTs have helped to grow and bolster the UK economy. They’ve created jobs and supported innovation.

Companies that received VCT investments have become well-known brands like Groupon or Alibaba, been listed on the London Stock Exchange, or sold to internationally renowned companies like Microsoft, Amazon, or Twitter.

Disadvantages of VCT investments for companies

Despite the wonderful benefits of VCT investments, there are a few disadvantages. When you accept a VCT investment, you’ll need to accept some loss of control over your business.

While you’ll certainly still play a key role, venture capital firms need your company to succeed and will have strong opinions and insights about ways of working and the company’s direction. You’ll need to collaborate with them and sometimes make compromises to achieve the best results.

VCT rules: Conditions your business must meet

HMRC has established strict VCT rules to ensure that VCT investments are spent wisely. To qualify for an investment, you’ll need to meet a number of conditions:

• Be permanently located in the UK. Undertake a “qualifying trade”

• Have less than £15m in gross assets before the investment or less than £16m in gross assets shortly after

• Employ less than 250 full-time staff members or 500 full-time staff members for knowledge-intensive companies

• Be commercially viable for less than seven years or 12 years for knowledge-intensive companies.

Nearly every small business will qualify for a VCT investment. As you can imagine, competition for VCTs is fierce and attracting investments can be difficult.

How to get venture capital?

As venture capital companies only make money and keep their investors happy if your business succeeds, they are extremely picky about the companies they include in their portfolio. You’ll need a strong argument about the value of your company.

Venture capital companies will want to see a track record of growth and success as well as plenty of market opportunities for your product or service. You’ll need to identify a unique selling point, something that really sets you apart from others and covers an existing market gap. You’ll also need to prove that you have the best team in place to support your growth and spend the investment wisely.

Potential investors will require robust data of CMRR (committed monthly recurring revenue), ARR (annual recurring revenue), and ARRR (annual run rate revenue). They will also require information about cash flow, customer acquisition costs, customer lifetime value, and churn and renewal rates. Having a strong analytics tool, such as Google Analytics, in place will be key for gathering this information.

Top venture capital firms

Once you’ve created a strong investment argument, it’s time to contact top venture capital firms. While there are a number of companies offering venture capital financing, we’ve detailed some of the options available in the UK.

Octopus Investment

Octopus Investment boasts a diverse portfolio of 166 SMEs including companies in the mobile, software as a service (SAAS), security, healthcare, media, and consumer industries. They specialise in helping early-stage companies and history of excellence as they’ve backed companies such as Secret Escapes, SwiftKey, and Zoopla.

Passion Capital

Passion Capital is a relatively small venture capital firm as their portfolio only includes 45 investments across the IT, healthcare, and financial service industries. Yet, they’re experts in helping small startups.

Index Venture

Index Venture provides venture capital financing among a host of other capital funding options. With over 560 investments across 160 companies, they’re quite a large scale venture capital firm and possess an impressive portfolio including well-known names such as Dropbox, Trello, Just Eat, Trustpilot, and more.

The VCT market is constantly changing so we recommend researching current VCT market leaders and double-checking that they specialise in your industry.

Other types of venture capital

If you don’t qualify for a VCT investment or aren’t sure they’re the right option, there are other sources of funding available. You could consider seed investments (perfect for launching a business), later-stage investments (ideal for more mature companies), or the Enterprise Investment Scheme (EIS).

Similar to the venture capital trusts, the Enterprise Investment Scheme also helps medium-sized companies secure venture capital financing by providing EIS tax relief to investors.

Unlike VCT investments, investors directly purchase shares in your company which ultimately gives business owners more control. Learn more about the Enterprise Investment Scheme and the conditions you must meet to qualify by reading our article Venture capital trusts vs. Enterprise Investment Scheme.