Startup Funding Club EIS / SEIS Fund

As a nation, we are pretty good at start-ups. The UK creates more “unicorns” than any other European country. A unicorn is a firm set up after 2000, now valued at more than one billion dollars. Examples include ASOS, Funding Circle, Just Eat and Zoopla.

Often, these unicorns are successful because they change the way consumers buy and use things. They use technology to provide better services, at lower cost, to grab market share or to develop completely new offerings. 

The Startup Funding Club targets bright young British businesses which possess innovative and disruptive technologies to deliver tomorrow’s products and services. The fund invests at a very early stage. Most of the businesses will have low or even no revenue at this point, so it’s high risk for investors, softened somewhat by the tax relief. 

Highlights

  • Evergreen fund investing in early stage “disruptors”
  • Co-investment opportunities with a large network of business angels
  • Diverse range of sectors, from technology to consumer products
  • Exposure to 10-15 companies with advance assurance
  • Choice of wholly SEIS or EIS investments, or a blend of both
  • No direct initial charges and low annual fees
  • Minimum investment £5,000

The manager

The Startup Funding Club (SFC) is an angel investment club focusing on very early stage businesses. It identifies the opportunities for investment and provides ongoing support and expertise to the portfolio companies in which it invests. 

The SFC can tap into its angel network of over 300 individuals – these are high profile and active angel investors from various backgrounds, many of whom have direct experience in building and investing a successful young company. They invest alongside SFC investors and bring additional funding and experience to the portfolio.

Initially, the SFC was SEIS only, but as its portfolio matured it now invests in EIS-qualifying businesses. This is partly to facilitate follow-on funding for successful SEIS portfolio companies. The fund manager is Innvotec, which has 30 years’ experience investing in private companies, particularly those exploiting innovative technologies.

SFC has an experienced team. They review over 1,000 opportunities each year, narrowing these down to around 20 new investments every year. The selection process includes the usual filters of requiring a credible team, having a scalable business idea and a unique selling point. The SFC also considers: “is it a rule breaker?” They require the business to challenge its industry’s status quo, implement a new model and impose its own rules.

The SFC Funds have so far raised £5.5m under SEIS deployed over more than 60 companies. The current sector breakdown of the SEIS investments, by amount invested, is shown below.

Strategy

The fund follows the principle that 10% of angel investments should generate 90% of the returns as a whole. Based on this, they hope that of a portfolio of ten companies, one might be a runaway success and carry along the others, although this is not guaranteed. Investments in the fund are spread across a range of companies and sectors: typically, investors in the fund would be exposed to 10 to 15 individual companies.

Angel investors co-invest alongside the fund. When investing in the same funding rounds, the fund and the angels invest on the same terms and receive the same rights and protections.

Once it has invested, the SFC provides support and expertise to the companies to nurture them and help them grow. These include services such as insurance, bookkeeping and company secretarial services, digital marketing support and intellectual property expertise.

Investors can choose to have their portfolio entirely in SEIS or EIS companies, or alternatively choose a hybrid option where the allocation depends on the amount invested. The table below shows the hybrid allocation. SFC estimate the average blend would provide an income tax relief saving of around 32% – 38%, depending on the amount invested. Remember, tax benefits depend on individual circumstances and tax rules can change.

Allocation of SEIS and EIS investments

Size of Investment % into SEIS % into EIS
£5,000 to £30,000 40% 60%
£30,000 to £50,000 30% 70%
£50,000 to £100,000 20% 80%
£100,000 to £1m 10% 90%

The fund is evergreen but targets an exit from each portfolio between years three and seven (not guaranteed).

Existing investors can take part in follow on funding by investing in the EIS portion of the fund. These follow-on rounds offer an improved risk profile, as the companies have started to demonstrate success. 

Track record and performance

There is a lack of data on angel investments generally, because much is done via private deals which are not reported. However, limited studies show that angel investments return on average 2.5x of the original capital invested. (Wiltbank and Boeker, 2007).

The SFC team has an emerging three-year track record. The first fund started out as SEIS only, but now some of the investments are seeking follow on investments now have EIS-qualifying investments too. This is the first year of the fund offering EIS.

Below are the latest performance figures for Startup Funding Club Funds. New investors will not be participating in these but will invest in the latest fund. All are operated on the same model, with SFC in charge of selecting companies, arranging investments and supporting companies. Please note past performance is not a guide to the future and you could get back less than you invest. 

Startup Funding Club: annual performance to April each year (%)

  launch date April 2015 April 2016 April 2017
Startup Funding Club 2014 (Funding Alpha) April 2014 40% 14.3% -10.0%
Startup Funding Club 2015 April 2015 n/a 11% 20.7%
Startup Funding Club 2016 April 2016 n/a n/a 25%

Source: Source: Startup Funding Club and Innvotec. The figures above shows valuations each April since inception. Please note these are unquoted companies and the share price is based Innvotec’s own valuation following industry-standard valuation guidelines. Past performance is not a guide to the future.


An example of a success

Future Mobile Technology (FMT) was established in 2013 to sell and manufacture low cost cellular handsets such as tablets and smart phones for a global market. The company has offices in London (UK), Cape Town (South Africa) and Shenzhen (China). FMT owns 2 brands of consumer electronics: Netsurfer® and WYZEMAN®.

The company is now recognised as a leading brand of low cost tablets and smart phones running on Android operating system and supplies major Mobile Network Operators in several emerging countries.

Since SFC invested, the company achieved revenues of over £5m in 2015 and generated after tax profits. FMT signed a licensing agreement with Google in July 2014 which has elevated it to the status of a top tier brand. Further growth in revenues and profits will come from the introduction of new products and the launch of the company’s own range of smartphones. Sales have expanded into more countries in Africa and products are now being distributed to 6 Southern African countries. FMT are also in advanced talks with major network operators to supply them with low cost mobile devices.

An example of a failure 

At the time of writing, Startup Funding Club does not have any official failures in the portfolio and all companies are still trading – however they expect the first failures to happen by the end of 2017 (i.e. three years after the first investments were made).

One such failure in the portfolio is a company called VN Carbon Capture (Gas) Ltd which received investment in March 2014.

The company was formed to pursue the commercialisation of a discovery by researchers at the University of Newcastle allowing a cost-effective capture and recycling of CO2 using nickel nanoparticles which could translate into significant commercial potential. The investment was made on the back of a promising feasibility study and funds were used to run further laboratory tests and simulations with a view to develop the research into an industrial technology. Unfortunately, further research showed the technology was not economically viable in real life conditions and did not get commercial traction despite receiving interest from the scientific community, the press and industrial companies. The company will close in 2017.

Startup Funding Club says the lesson learnt here is to focus investments on more advanced projects where the management can show evidence of the commercialisation potential and market validation. The failure shows a need to invest in “research heavy” project only when the R&D work is fully funded. SFC works closely with Innovate UK to provide private funding to companies that have already received large grants from Innovate UK in order to develop and bring to market their technology. 

Fees

The fees paid directly by investors are in our view refreshingly simple and can allow more of the investment to benefit from tax relief. 

There are no direct initial charges paid by investors.

There is an Annual Management Fee of 1.5% per annum plus VAT, which is deferred and only paid once cash becomes available in the portfolio from exits, maximising growth prospects. 

There is a performance fee of 30%, paid on returns over 120% of the initial investment, including tax relief.

There are fees within the fund, charged to investee companies, which will indirectly affect the returns to investors.

Risks

Investors must be aware they are investing in very early stage businesses. Should the firm fail then the investment will retain little or no value. By definition this is a high-risk investment which could result in a total loss, as well as having the potential to deliver high returns. In a portfolio of ten companies, one might do very well (although there are no guarantees), several could fail and the others might just tick along. 

Earlier-stage companies usually take longer to mature. Further funding rounds will be common so there is risk of dilution. 

The usual risks with unquoted companies exist with this SEIS/EIS offer. For instance, SEIS and EIS investments are illiquid and capital is at risk. Investors should only invest money they cannot afford to lose. Tax benefits will depend on individual circumstances and tax rules can change. 

Our view

The Startup Funding Club does what it says on the tin. It invests in UK startups. There are likely to be some winners and a fair few losers in the portfolio. We like the breadth and scope of this fund, and the low and simple direct charges to investors. It’s not without risk: the name says it all. For investors keen to get exposure to the bright new businesses of tomorrow, we think this is one to consider.

Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based 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. 17.08.17


The details

Min. Investment
£5,000
Strategy
Growth
Amount Raising
£5 million
Type
early stage
Deadline
discretionary

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