Britain’s booming digital economy is becoming a happy hunting ground for investors willing to take a chance with start-up companies.
Although the risks are high, thriving technology firms are offering some superb investment opportunities for investors who are willing to put their cash into the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
Both government-backed programs minimise risk with generous tax incentives for investors – providing backers do their homework on fund managers and entrepreneurs running companies looking for equity backers, says accountancy firm KPMG.
To prove the point, the firm points out that technology companies generate an average 25% more revenue than businesses in other sectors and nearly half are planning to expand and recruit more staff in the next 12 months.
SEIS offers investors 50% income tax relief and a 50% capital gains tax exemption on assets sold to provide investment cash – plus tax free growth on up to a £100,000 initial investment.
EIS allows larger investments with 30% income tax relief once companies grow out of the seed capital incubation period.
KPMG explains that British technology firms are global leaders in e-commerce and digital financial services.
“One of the keys to successfully investing in a technology firm is linking with a specialist fund manager who knows the sector and can help diversify investment without any compromise in yields,” said a KPMG spokesman.
“These managers will be adept are picking companies who have a real commercial prospect that generates revenues through a product that can grab a market share.”
Many of these new technology entrepreneurs are coming straight out of university research, so a relationship with higher education institutions can be a real bonus for fund managers and the investors they represent.
Planning an exit
“Another point to consider is when and how to exit,” said the spokesman. “Thinking about this after making an investment is too late. Good fund managers will already have a structure and path to follow in mind from day one.”
Hybrid funds with a mix of SEIS and EIS companies at different stages of growth can give an investor a tax efficient and high-yielding portfolio, said the spokesman.
And even if the worst happens and a new-start company fails, SEIS and EIS provide relief that lets an investor offset losses against other income providing a soft landing rather than a crash that dents any profits.