Venture Capital – Can you afford not to have it in your portfolio?

Venture Capital – Can you afford not to have it in your portfolio?

10th December 2018 by Michaela Salomon

We believe that venture capital as an asset class has the potential to outperform most other asset classes over the long term.

Venture capital is about providing businesses with capital to invest in technology and infrastructure at the early stages of their lifecycle, and we believe those upfront investments are increasingly what drives long-term business success.

Historically many highly successful companies grew organically, that is, using revenues or loans rather than venture capital, to finance their growth from the beginning. But as technological advances come to play an increasingly important role in all areas of industry and commerce, many companies now make upfront investments in their technology and infrastructure early on in their lifecycle. While the risk of these types of companies failing is relatively high, such investment increases the chances of some of them growing significantly with the opportunity for substantial returns for investors.

By investing in the venture capital asset class, an investor can get exposure to the types of companies we believe may deliver great success, and therefore potentially high returns, in the future.  And this doesn’t take into account the magnifying effect on returns that the SEIS and EIS tax schemes can have on an investor’s potential returns.

Now what we’re not saying is that you should liquidate all of your portfolio and plough it into venture capital investments. One of the fundamental principles of investing is that higher-risk investments should on average produce higher returns and lower risk ones should conversely produce lower returns. Gilts for example are certainly lower risk than venture, and the returns profile of Gilts are generally much lower.

But a well-balanced portfolio should have a broad spectrum of risk baked in and we believe that venture capital offers a compelling case to form part of the high-risk, high return-strategy of any investor’s overall portfolio.

Seedrs will soon be launching the EIS100 Fund. To find out how you can build a diversified portfolio of up to 100 British startups, pre-register today.

EIS Relief Examples

Illustrative Examples (using a single company investment as an example):

Example 1: Investee company doubles in value

An investor subscribes £10,000 for shares in the 2018/19 tax year. The investor pays income tax at a rate of 45%. In the 2022/23 tax year, the investor sells his/her shares for £20,000.

Example 2: Investee company maintains the same value

The facts are the same as Example 1, except that in the 2022/23-tax year, the investor sells his/her shares for £10,000.

Example 3: Investee company winds up

The facts are as in the previous examples, except that the investment unfortunately fails completely and is wound up in the 2022/23 tax year, with the investor receiving no money back.Note that in Example 3, Share Loss Relief is given on the subscription price, net of EIS Income Tax Relief (if any), which in this case is the £10,000 invested – £3,000 received in Income Tax Relief, multiplied by the investor’s percentage tax bracket. At a tax bracket of 45%, the loss relief will be £7,000 x 45% = £3,150. Therefore, for £10,000 invested, the real loss is £7,000 – £3,150 = £3,850.

These examples are for illustrative purposes only and are not an indication of the future performance of the investee companies in which the Fund will invest.

Investing involves risks, including loss of capital, illiquidity, lack of dividends and dilution, and should be done only as part of a diversified portfolio. Please read the Risk Warnings before investing.

Tax treatment depends on individual circumstances and is subject to change in future.

The Seedrs 100 EIS Fund (“the Fund”) operates on the basis of deployment logic that enables investors to decide to automatically spread their investments through the Seedrs platform across eligible businesses using a proprietary algorithm. Investment through the Fund will be made at the investor’s discretion on the basis of predetermined criteria. Seedrs will not exercise any discretion in relation to the selection of investments made through the deployment logic, nor will it perform a fund management role. Each investor will be entitled to any returns from the shares held on their behalf (subject to platform fees). The Fund does not constitute an alternative investment fund, HMRC approved EIS fund, or collective investment undertaking. The Fund is therefore not a “fund” in the traditional sense and use of any terminology relating to investment funds is intended for illustrative purposes only.

Tax treatment depends on individual circumstances and is subject to change in future.

Seedrs does not provide tax advice of any kind, and nothing in this document constitutes such advice. If you have any questions with respect to tax matters relevant to your interactions with Seedrs or its affiliates, you should consult a professional tax adviser.

Michaela Salomon

Michaela Salomon

Campaign Support Team

Digital Agency Kent