Octopus Ventures Knowledge Intensive EIS Fund 23/24

New “Meet the manager” video – watch below

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 and has achieved several high-profile exits with trade sales to the likes of Microsoft, Twitter and Amazon through its VCTs. 

Octopus Ventures EIS launched in November 2020, to follow the same investment strategy as – and co-invest alongside – Octopus Titan VCT, the UK’s largest Venture Capital Trust. Since then, Octopus Ventures has raised £103.3 million across its EIS funds, investing into 68 companies to date (June 2023).

This is the third ‘KI approved fund’ iteration of Octopus Ventures' EIS. As it closes this tax year, investors should be able to obtain tax relief for 2023/24 and have the option to carry back to 2022/23 (tax rules can change and benefits depend on circumstances).

  • Approved KI EIS fund
  • Target return up to 10x on an initial investment, not guaranteed 
  • Deployment into a target portfolio of around 10–20 companies
  • Tax certificates expected after 6–12 months from the last investment
  • Minimum investment of £25,000 – you can apply online 
  • Next deadline: 5 April 2024 for final close (12 noon, cleared funds)

Important: The information on this website is for experienced investors. It is not a 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: you could lose all the money you invest.

The manager

Octopus Investments was launched in 2000. Today, the group has over 750 employees and more than manages £13 billion (June 2023) on behalf of over 63,000 retail investors, charities and institutions, including pension funds, fund-of-funds and family offices. 

Octopus Ventures, a dedicated business unit in Octopus Group, manages a total of over £1.8 billion across its VCTs, EIS and follow-on funds. Across the range, Octopus Ventures invests more than £200 million a year into early-stage businesses.

The 90+ strong Octopus Ventures team – expanded from 65 in the year to June 2022 – is one of Europe’s largest early-stage investment teams, and a destination for entrepreneurs seeking funding. 

The investment team is subdivided into specialist themes; B2B software, bio, climate, consumer, deeptech, fintech, and health. These sub-teams help Octopus Ventures to maintain an understanding of some of the UK’s most promising early stage technology sectors. Octopus believes this structure helps to attract the best entrepreneurs who favour specialist investors over generalists. 

Alongside investment professionals, it also includes a talent team dedicated to helping portfolio companies hire the best people, as well as provide legal, operational, and administrative support. Before joining Octopus, many of the team were well-established in other industries, such as consumer goods, professional services, and technology.

Before your subscription is invested, the cash will be held by the Octopus Investments Limited as custodian. Shares will be held by an Octopus Investments nominee company.

Meet the manager: Simon King, partner at Octopus Ventures

 

Investment strategy

The Octopus Ventures Knowledge Intensive EIS Fund 23/24 follows the same investment strategy as Octopus Titan VCT, co-investing alongside the VCT on new investments, as well as selected follow-on opportunities. 

The Fund aims to invest in high-growth early-stage companies, which are developing innovative technologies and operating in large and fast-growing markets. The team only considers businesses it believes can deliver returns of 10x on the initial investment (although the target return is lower for follow-on investments). These are high-risk young companies, so it has to be expected that some will fail.

The Knowledge Intensive EIS Fund will invest across seven broad investment themes, each overseen by a specialist team: B2B software, health, fintech, deeptech, consumer, bio, and climate. 

The quality of the 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. Indeed, Octopus Ventures has backed some of its more successful founders repeatedly. 

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 an 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, and is an early investor in Skin+Me, the personalised skin care brand backed by the first iteration of the Knowledge Intensive fund. 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.

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 20-30 new early-stage investments per year. Octopus expects to hold investments for five to 10 years.

Knowledge-intensive approved EIS funds: how do they work?

Knowledge-intensive (KI) approved EIS funds received the final go-ahead from the Chancellor in March 2020.

A KI fund must invest 80% of its portfolio in “knowledge-intensive” companies. These are businesses that are carrying out research, development, or innovation at the time of investment.

Provided certain conditions are met, a KI approved EIS fund allows investors to set their income tax relief against liabilities in the same tax year the fund closes or to carry back to the previous year, whereas a conventional EIS fund will allow investors to claim tax relief based on the tax year in which each individual investment is made or carry back to the previous tax year.

Investors in KI funds can expect to receive a single EIS5 certificate (as opposed to individual EIS3 certificates for each investee company, as is the case with non-approved funds). Certificates can be issued once the fund has invested 90% of its capital, which it is required to do within 24 months of the close. 

Please note: tax rules can change and benefits depend on circumstances. To maintain KI approved status, the fund needs to comply with requirements set out by HMRC. Should the fund fail to do so, it will impact investor tax relief. 

Portfolio

Investors in the Octopus Ventures Knowledge Intensive EIS Fund 23/24 can expect exposure to around 10-20 investee companies comprising both new and follow-on investments (not guaranteed). 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.

As at June 2023, the EIS Service and Knowledge Intensive funds have invested in 68 companies in total. 

The companies outlined below are previous investments made by Octopus Ventures EIS 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.

CoMind-Octopus-KI-EIS.jpgCoMind

CoMind is developing non-invasive technology to improve how we diagnose and treat brain disorders.

Unlike existing technologies, it is believed CoMind’s neural sensors can produce both high spatial and temporal resolution and could have numerous applications. 

Its first application is measuring intracranial brain pressure with an adhesive sensor, an improvement on the current clinical gold standard which requires penetrating the skull for many patients impacted by strokes and other brain conditions. 

Octopus Titan VCT and EIS service first invested in the business in 2021 alongside existing investors Localglobe and Entrepreneur First. The Octopus Knowledge Intensive EIS fund backed the business in August 2023. 

Skin+Me---Octopus-KI-EIS.jpgSkin + Me

Despite skincare being a large market with a myriad of products, options for anyone with skin concerns or a skin condition can be limited. High-street products can be affordable but ineffective, whilst seeing a dermatologist can be expensive. 

Skin + Me was launched to address this: to offer effective but affordable skincare for skin conditions such as acne, rosacea, dark spots and pigmentation, or cosmetic skin concerns like visible pores, glow, fine lines or texture. 

Consumers fill out a detailed online questionnaire and get recommended a dermatologist-reviewed personalised skincare plan they can subscribe to. The plan includes made-to-order treatments, using prescription-strength active ingredients. 

In December 2022, the business raised £10 million from Octopus Ventures for continued product development and marketing. In June 2023, it raised a further £16.6 million. 

Octopus Titan VCT – depopDepop – example of recent exit

Octopus Ventures EIS launched in November 2020, so is yet to yet to experience positive EIS qualifying exits. However, one notable exit example from the Octopus Ventures team is Depop.

Founded in 2011, Depop began life as a social network that enabled readers of PIG (People in Groove) magazine to buy items from the young designers featured in the magazine. It has since developed into an online fashion marketplace in which users can buy, sell and discover unique fashion. By 2021, the business was reported to have over 30 million users globally, 90% of which are under the age of 26. 

Octopus Ventures invested through Octopus Titan VCT: first, £5 million in January 2018 at a £52 million post-money valuation, then £3.77 million follow-on funding in 2019. In June 2021, Depop was acquired by Etsy Inc. for $1.63 billion, generating proceeds of £97.4 million for the VCT, an 11.1x realised return. Past performance is not a guide to the future. 

Mush – example of previous failure

As is to be expected, not all investments work out. Mush is one example. After experiencing first-hand the difficulties of coping with newborn babies, the founders created Mush, a social app for mums to meet up with other mums in their local area.

Octopus Ventures invested £1.5 million into the business through Octopus Titan VCT in January 2018, as part of a £2 million investment round. At the time, the app had been downloaded by 300,000 mums in both UK and Australia. However, after the investment, the business was unable to generate the level of growth required to attract future funding and was eventually acquired by Mumsnet Inc in September 2021. The VCT received a nominal consideration for its stake in the business.

What are the main differences between Octopus Titan VCT and Octopus Ventures Knowledge Intensive EIS Fund 23/24?

VCTs and EIS have different structures and tax reliefs. 

An investor in Octopus Titan VCT buys shares in the VCT, and has exposure to the VCT’s whole portfolio – a combination of older and new investments. The VCT is expected to generate some of its returns via tax-free dividends, not guaranteed.

When investing in the Octopus Ventures Knowledge Intensive EIS Fund 23/24, an investor gets exposure to a much smaller (10–20) number of companies, which will receive investment after the tranche closes. The investor receives shares in the portfolio companies directly and those companies will all be early stage (rather than the mix of early and later stage businesses found in the VCT). 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 and, unlike a VCT, there is no secondary market for EIS shares. 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.

Performance

Octopus has a reputation for backing some of the UK’s fastest growing private technology companies – four of the companies backed by Octopus Titan VCT have become unicorns. 

However, the EIS Service and Knowledge Intensive Fund are far younger than the VCT, having only made the first investment in March 2021. As at June 2023, the two offers have invested £68.7 million into 68 companies and have yet to achieve a positive EIS exit. The fund recently realised an investment within the three-year minimum holding period for EIS, generating proceeds of c. £1.1 million (1.23x return, before accounting for the loss of EIS tax relief). The portfolio is currently valued at £63.8 million.

The chart below shows the average performance of the total subscribed into the funds each in each full tax year from 2013/14 (or from when the current strategy was adopted if later) to 2022/23. The chart is based on the latest valuations provided by the manager, expressed on a £100 invested basis. Please note, individual investor portfolios’ performance will deviate from the average.

Performance of Octopus Ventures EIS funds per £100 invested in each tax year

Source: Octopus Ventures, as at 31 December 2023. Past performance is not a guide to future performance. The chart shows realised returns (where share proceeds have been returned to investors as cash) and unrealised returns (where cash has not yet been returned and the value of the investments is based on the manager’s own valuation methodology). There is no ready market for unlisted shares. The figures shown are net of all fees and do not include any income tax relief or loss relief.

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 investments are high-risk and should only form part of a balanced portfolio. As must be expected with early-stage investments, some or even all of the companies in the portfolio could fail: the fewer the companies included in the portfolio, the higher the risk of loss if things don’t go to plan. You should not invest money you cannot afford to lose. 

There is no ready market for unlisted EIS shares: they are illiquid and hard to sell and value. There will need to be an “exit” for you to receive a realised return on your investment. Exits are likely to take considerably longer than the three-year minimum EIS holding period; equally, an exit within three years could impact tax relief. 

To claim tax relief, for a knowledge intensive EIS fund you will need an EIS5 certificate. Certificates can be issued once the fund has invested 90% of its capital, which it is required to do within 24 months of the close. Tax reliefs depend on the portfolio companies maintaining their EIS-qualifying status. Remember, tax rules can change and benefits depend on circumstances. 

Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks.

Charges

A summary of the main charges and savings is shown below. Some of these will be payable by the investor, whilst others by the investee companies. The investment may have additional charges and expenses: please see the provider documents, including the Key Information Document, for more details.

Investor charges
Full initial charge 4%
Wealth Club initial saving
Net initial charge through Wealth Club 4%
Annual management charge 2%
Administration charge
Dealing charge 1%
Performance fee 20%
Investee company charges
Initial charge
Annual management charge
The fees and charges above are stated exclusive of VAT, which applies in some cases, as determined by the manager. Please check the VAT position carefully in the provider documents. 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

Our view

Compared with the Octopus Ventures EIS Service, the Knowledge Intensive EIS Fund provides investors with greater clarity on the timing of income tax relief, a single tax certificate, and a more diversified portfolio of 10–20 companies compared with 10–15 for the EIS fund. Otherwise, it is very similar.

It is managed by the same Octopus Ventures team which has a long track record of backing some of the UK’s fastest-growing private technology companies. 

Investors in the Fund benefit from the scale of Octopus Ventures, a team of more than 90 people, which manages £1.8 billion.

The team is well structured around specialist sub-teams, each covering a specific sector. This should facilitate the deployment of increasing amounts of capital whilst maintaining the quality of its investment approach and meeting the challenge of identifying some of the most promising companies. Moreover, the scale of Octopus Ventures is likely to attract enhanced deal flow compared with other EIS offers.

The Fund 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.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. 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
Up to 10x
Funds raised / sought
£1.5 million / £35.0 million
Minimum investment
£25,000
Deadline
5 Apr 2024 (noon)
Last updated: 25 January 2024

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