Investors Must Look Deeper At Over-Priced Start-Ups

Too many investors with too much cash are swarming around start ups and are demanding better value for money from entrepreneurs.

Entrepreneurs showing they are financially savvy and have the skills needed to run their companies is no longer enough to attract investors who want to dig deeper in to business plans, says a study from management consultancy Humatica.

The start up sector is seeing a major shift as supply of new businesses likely to have accelerated growth falls, but the demand from investors increases, the study explains.

Investors are now looking at ‘soft factors’ such as how likely are entrepreneurs to deliver the expected growth detailed in the business plan and more information about how the business will be managed.

Unrealistic prices and expectations

“Examining these details helps experienced investors put a realistic price on a stake in a start-up company,” said a Humatica spokesman.

“The best businesses want to raise money at a premium, while investors always want to tie down the best return and sometimes raising funds for a start up is a feeding frenzy and some of these basic points are overlooked.”

The report suggests factors affecting the organisation and structure of the business led to 51% of start ups failing to hit financial targets, 45% of investors claimed these factors held back a business and only 3% considered their impact was negligible.

However, only a third of investors look deeper into a start up project because they have the cash to invest but only a few candidate companies – and opportunities quickly disappear as rival investors stake a claim without leaving time for proper due diligence.

Start up tax break temptation

Tax breaks for investors such as the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) in the UK make this scramble for shares in start ups even more desperate.

As the financial year end approaches, investors need to dump their cash into a company in one of the schemes to secure income tax and capital gains tax reliefs.

For example, SEIS dangles the carrot of a 50% income tax refund on investments up to £100,000 in the tax year plus capital gains tax reliefs on the growth of shares.

EIS offers similar income tax and CGT reliefs – but at 30% rather than 50%.

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