Lord John Nash is the founder of Future Academies and an early entrant into the UK venture capital industry, having joined Advent in 1983. This article will look at investing with a particular focus on start-ups and early-stage companies, an investment strategy that offers considerable growth opportunities for investors with a high risk tolerance.
When someone invests in a business at the IPO stage, there is a high likelihood that they have already missed out on some of the company’s fastest period of growth. However, the potential for significant growth goes hand in hand with elevated risk levels, making angel investing and venture capitalism the remit of seasoned investors with significant personal wealth.
Backing an early-stage company is a risky business but one with significant wealth generation opportunities for those capable of spotting a diamond in the rough. The UK has established itself as one of the most attractive markets for early-stage companies globally, ranking only behind the US and China for creating ‘unicorns’, a term used to describe private businesses with a $1 billion-plus valuation.
By virtue of their size, small, early-stage enterprises can have vast growth potential. In addition, they are often attractively priced, with many institutions and big investors focusing solely on established companies with proven returns. Should things go well for a start-up, it might prove an enticing option for these large-scale investors later on, pushing up the share price. To encourage investment in early-stage businesses, the UK Government offers generous tax incentives.
A recent success story includes the second-hand fashion app Depop, having been bought out by the US e-commerce giant Etsy for a staggering $1.6 billion.
Savvy investors recognise that the value of their investments, and any income derived from them, can fall as well as rise. They understand that they may not always get back the full amount invested, with this deficit equating to heavy losses in some instances. Shareholdings in small companies are by their very nature high risk, with the share price of early-stage companies notoriously volatile. The investor may also run into difficulties in the form of low liquidity when the time comes to sell.
For angel investors and VCs, choosing the right early-stage business to invest in can be likened to attempting to spot a unicorn in a field full of horses. In the UK, the start-up scene is thriving. However, with such a dizzying array of bold business ideas to choose from, it can be incredibly challenging to pinpoint a winner. While many investors fall foul of getting caught up in a great idea, it is imperative to ensure there is also a market for it. Investors need to consider whether the company solves a real-world problem, gauging the founder’s competence at articulating why their product offers a compelling solution.
A promising start-up has more than merely niche appeal, addressing a pain point with sufficient demand to fuel a growing business. In addition to assessing the target market size, prospective investors need to determine whether the product is scalable and whether the marketplace is already saturated. Crucially, they need to discern what differentiates this investment opportunity from its market rivals. Experts caution against investing in companies claiming to be a ‘jack of all trades’ too early, instead advocating start-ups focussing on solving a specific problem, and solving it well, prior to expansion.
Great products are a must. Nevertheless, a business is only as strong as its management team. Successful investors home in on founders who show more than just passion, demonstrating experience, adaptability and resilience, as well as an ability to sell well.
