Octopus Ventures EIS Service

New EIS offering from the manager of Octopus Titan VCT

Best known for managing Octopus Titan VCT, Octopus Ventures is one of the UK’s leading venture capital teams, and one of the largest in Europe. 

It invests in some of the UK’s fastest-growing private technology companies. Its track record includes backing two companies which have achieved ‘unicorn’ status (a valuation of $1+ billion) and achieving a number of high-profile exits with trade sales to the likes of Microsoft, Twitter and Amazon. 

Now Octopus is launching a new EIS service. Predominantly invested by the Octopus Ventures team, the Octopus Ventures EIS Service will follow the same investment strategy as – and co-invest alongside – Octopus Titan VCT, the UK’s largest Venture Capital Trust.

The EIS Service applies a success-based ongoing charging structure investors might find appealing. 

Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value, so you could get back less than you invest.

Read important documents and apply

Highlights

  • New offer, from one of the largest and most respected venture capital teams in Europe
  • A history of backing some of the UK’s fastest-growing private technology companies
  • Backs innovative technologies companies it believes capable of delivering up to a 10x return on initial investment
  • Octopus has a history of achieving high-profile exits such as Zoopla, SwiftKey, Graze, and Tails.com (some failures, too)
  • Investors should expect a portfolio of 10-15 companies (not guaranteed)
  • Success-based charging structure aligned with investors’ interests
  • Mix of new and follow-on investments
  • £50,000 minimum investment – you can apply online

The manager

Octopus was launched in 2000 from the front room of one of its three founders. Today it has over 750 employees and manages more than £9 billion (Jun 2020) across all its businesses on behalf of over 55,000 retail investors, charities and institutions, including pension funds, fund-of-funds and family offices.

This new Ventures EIS service is managed by the Octopus Ventures team, the same team responsible for Octopus Titan VCT. 

Octopus Ventures is a dedicated business unit in the Octopus Group. The 40-strong Ventures team is one of Europe’s largest early-stage investment teams. Before joining Octopus, many were well established in other industries, such as consumer goods, professional services and technology. In fact, approximately half of the team has previously founded or co-founded a business.

The portfolio team at Octopus Ventures has grown by 45% since September with nine new investment professionals joining. The team includes investment professionals and a talent team dedicated to helping portfolio companies hire the best talent.

Octopus Ventures manages over £1.3 billion across its funds which includes the VCT as well as a number of follow-on funds used to support investee companies once they outgrow the VCT.

Octopus Ventures’ network reaches from China to Silicon Valley, with offices in London and New York, thus helping facilitate portfolio companies’ expansion into the US and other markets.

Investment strategy

The Octopus Ventures EIS Service will follow the same investment strategy and will co-invest alongside Octopus Titan VCT on all new investments, as well as selected follow-on opportunities. 

The service aims to invest in high-growth early-stage companies, which are developing innovative technologies and operating in large and fast-growing markets. The team will only consider making investments into businesses which it believes can deliver returns of 10x on the initial investment (although the target return is lower for follow-on investments). Note, alongside the high expected return, the team also expects some of the investments to fail as these are high-risk growth businesses.

The EIS service will invest across five broad investment themes, defined by Octopus Ventures as: “The future of money”, “The future of health”, “Deep technology”, “Consumer” and “Growth”. Each theme is overseen by a dedicated “pod” within the Octopus Ventures team. This helps maintain focus on each theme as the team and its assets under management grow.

The quality of the investee company’s management team remains the most important driver of investment decisions. Octopus looks for “unusually talented” entrepreneurs, with whom it can build long-term and mutually beneficial relationships. 

As an example, in 2003 the investment team that would later become Octopus Ventures backed three entrepreneurs – William Reeve, Graham Bosher and Alex Chesterman – who were founders of the merged online DVD company that later became LoveFilm (acquired by Amazon for nearly £200 million in 2011). 

Since then, Octopus has supported the same three entrepreneurs through five ventures. Mr Reeve was on the early board of Secret Escapes. Mr Bosher was behind Graze.com and Tails.com. Mr Chesterman went on to start Zoopla, Octopus Titan VCT’s first unicorn (a start-up that achieves a $1 billion valuation), then used-car supermarket Cazoo, which set the record for the fastest UK company to achieve unicorn status.

Due to its size and position in the market, the Octopus Ventures team engages with thousands of businesses every year. From these, it expects to make 50 investments per year, of which 10-15 will be new investments. Investors in the Octopus Ventures EIS Service can expect exposure to 10-15 investee companies comprising both new and follow-on investments (not guaranteed).

Target return

Whilst there isn't a set target return, the EIS service aims to invest in companies that have the potential to achieve 10x on new investments (the target return is lower for follow-on investments) – high risk and not guaranteed.  Some of the companies may fail.

Exit strategy

Octopus expects to hold investments for a period of five to ten years. 

Previous profitable exits have been achieved via IPOs, as was the case with Zoopla Property Group, sales to strategic acquirers, such as LoveFilm’s acquisition by Amazon, and sales to other funds, such as selling Octopus’s stake in Secret Escapes to Old Mutual Global Investors (partial exit). Past performance is not a guide to the future and exit options are not guaranteed.

Portfolio

Investors in the Octopus Ventures EIS Service can expect exposure to 10-15 investee companies comprising both new and follow-on investments (not guaranteed).

The service will operate a series of tranches throughout the year. Each tranche will seek to raise £25 million, at which point the tranche will close and Octopus will begin deploying investor capital. Deployment is anticipated to take six to twelve months . 

Whilst Octopus Ventures seeks to build a diversified portfolio for investors, there are no specific asset allocation targets for new or follow-on investments, nor sector or theme allocations. 

The companies outlined below are current investments made by Octopus Ventures and held within Octopus Titan VCT. These are EIS-qualifying investee companies but are unlikely to form part of a new investor’s portfolio. They are outlined to give examples of the types of companies an investor might expect.

What are the main differences between Octopus Titan VCT and Octopus Ventures EIS Service?

VCTs and EIS have different structures and tax reliefs. 

When investing in Octopus Titan VCT, an investor gets exposure to the whole portfolio (currently around 80 companies) – a combination of older and new investments. The investor buys shares in the VCT, which invests in the portfolio companies. The VCT is expected to generate some of its returns via tax-free dividends, not guaranteed.

When investing in the Octopus Ventures EIS Service, an investor gets exposure to a much smaller (10-15) number of companies, which will receive investment after the tranche closes. The investor buys shares in the portfolio companies directly. Portfolios are likely to be different, depending on the tranche. 

This means the EIS portfolio is much more concentrated: any individual failures, as well as any individual successes, will have a greater impact on the portfolio than they do within the VCT. EIS returns also tend to come in the form of exit only. Put another way, with the EIS there is more risk of losing money, but the potential rewards could be greater and the available tax relief more generous: tax benefits can change and benefits depend on circumstances.

Quit Genius – Octopus Ventures EISDigital Therapeutics Ltd / Quit Genius – recent investment

Digital Therapeutics develops healthcare-related products. Its first product, Quit Genius, built by doctors, is an app to help users quit smoking using cognitive behavioural therapy. The program is built on the evidence-based principle of Medication-Assisted Treatment (MAT), and ‘Quit Coaches’ guide users through the process of overcoming addiction by providing emotional support and education. Alongside its consumer-facing product, Quit Genius also offers an enterprise product to businesses that are looking to foster a healthy workforce and also save money on healthcare for employees. 

To date, Quit Genius has helped 60,000 people beat their nicotine addiction, achieving a 53% quit rate. The business now plans to extend to cover alcohol and opioid addictions. 

Octopus Titan VCT invested £6.5 million into the business in January 2020. 

Cazoo – Octopus Titan VCTCazoo

Cazoo is the brainchild of Alex Chesterman, the founder of Zoopla. 

The idea is to make the experience of buying a used car quick and hassle-free, much the same as buying any other goods online. Customers can place an order one day and have their car on their driveway 72 hours later. 

Cazoo launched in December 2019. In its first three months of trading, it generated revenue of £20 million. By June 2020, it reported revenues of £40 million. The business attracted £80 million of investment pre-launch (£5 million of which was through Octopus Titan VCT). Post-launch, Cazoo has raised an additional £285 million across three further rounds, the most recent of which, in October 2020, reportedly valued the business at over £2 billion.

Zynstra – a recent exit

Zynstra provides small and medium enterprises with a combination of on-site hardware and cloud-based software that offers automated anti-virus monitoring and updates, data storage, and disaster recovery. 

Octopus Ventures made its first investment into Zynstra in 2013 and participated in all of its subsequent funding rounds. In December 2019, Zynstra was acquired by US enterprise technology provider NCR Corporation for £100 million. Octopus Titan VCT yielded proceeds of £23.9 million against a total cost of £8.9 million.

MIRACL – example of previous failure

As is to be expected, not all investments work out. MIRACL is one example. It was a cybersecurity company which provided open-source encryption libraries, security authentication, and an Infrastructure as a Service (IaaS) solution for the internet of things (the interconnection of everyday objects via the internet).

Octopus Ventures invested £17 million in total into the business. MIRACL faced issues with its business model, the length of time it took to make sales and the unwillingness of potential customers to adopt new technology. This hindered MIRACL’s ability to raise further capital. By 2018 the company needed additional funds but could neither secure them nor find a buyer and was eventually placed into liquidation in January 2019. The valuation of the VCT’s holding in MIRACL had been adjusted to zero as at October 2018.

Octopus Investments has also previously run EIS funds, not all of which have worked out: these were managed by a different team, and had a markedly different investment mandate.

Performance

As this is a new offering, the EIS service does not have a track record. However, Octopus Ventures has a reputation for backing some of the UK’s fastest-growing private technology companies. 

Since launching the Octopus Titan VCTs (of which there were originally five), the team has had 41 exits, of which 14 were profitable. Of the 82 companies currently held within the Octopus Titan VCT portfolio, 54 were being held at a value above investment cost. 10 were held at investment cost, and 18 are currently held below investment cost. Past performance is not a guide to the future.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice.

EIS and SEIS investments are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. They also tend to be illiquid and hard to sell and value. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

Tax rules can change and benefits depend on circumstances.

This EIS fund invests in early-stage businesses which are more likely to fail than larger ones. So you should expect a number of failures in the portfolio, or even be prepared for all companies to fail.

Exits could take considerably longer than three years. 

Charges

A summary of the main charges and savings is shown below. 

To align interests with those of investors, Octopus collects its annual management charge (AMC) but only when a profitable exit happens. Please note, this is applied on a per-company basis so if some companies succeed and others fail, fees may be payable, despite the portfolio losing money in aggregate. 

The performance fee should be an incentive to maximise value for investors on any exit. Exits could take five years or more and are not guaranteed.

The investment may have additional charges and expenses: please see the provider documents, for more details.  You can also see an illustration of costs and charges after 8 years in the "more details on charges" section.

Investor charges
Full initial charge 5.5%
Wealth Club initial saving 0.5%
Net initial charge through Wealth Club 5%
Annual management charge 2%
Administration charge
Dealing charge 1%
Performance fee 20%
Investee company charges
Initial charge
Annual management charge
All fees and charges are stated exclusive of VAT, which may be applicable in some cases. Any fees and charges payable by the investee companies or the underlying businesses do not directly come out of your investment. However, they will effectively reduce the returns generated by investee companies and therefore impact your investment.

More detail on the charges

Timing of the offer

The service will operate a series of tranches throughout the year. Each tranche will seek to raise £25 million from investors, at which point it will close and start deploying investor capital. Deployment is expected to take six to 12 months . 

Our view

The Octopus Ventures team has a long track record of backing some of the UK’s fastest-growing private technology companies. For private investors, gaining exposure to these companies has only previously been available via Octopus Titan VCT. The EIS service allows investors to build a more concentrated – and thereby riskier – exposure, with the added benefit of the more generous EIS tax reliefs and the potential for greater rewards. 

Investors in the service benefit from the scale of Octopus Ventures, which now manages in excess of £1.3 billion. Its investment team has expanded accordingly. For instance, it has recently added nine investment professionals and created a number of sub-teams (pods), each with responsibility for one of the investment themes within the strategy. 

The aim is to be able to deploy increasing amounts of capital whilst maintaining the quality of its investment approach and meet the challenge of identifying some of the most promising companies. Moreover, the scale of Octopus Ventures is likely to attract enhanced deal flow when compared with other EIS offers.

The service comes with a success-based charging structure: the annual management charge with respect to each investee company (not the whole portfolio) only becomes payable if and when a profitable exit is achieved. 

The exposure to high-growth companies may appeal to wealthy investors seeking to complement a wider investment portfolio. The familiarity and similarity to Octopus Titan VCT may also appeal to experienced VCT investors considering more concentrated and higher-risk EIS investments for the first time.

Read important documents and apply

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.

The details

Type
Fund
Sector
Technology
Target return
Funds raised / sought
£25.0 million sought
Minimum investment
£50,000
Deadline
Tranche closes at £25m
Last updated: 17 November 2020

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