Benchmarking seed investment returns

Benchmarking seed investment returns

Benchmarking seed investment returns

By Matthew Cushen…

 

The generous tax reliefs available under the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) attract a lot of attention. The reliefs are an attractive and successful way to encourage investment in a high-risk investment class. But the reliefs get an enormous amount of attention, often relegating the more important subject of returns.

There is not very much benchmark data on the returns on investment from EIS investments, and even less on SEIS as the scheme is only 5 years old. But there are two independent studies that have published useful insight.

A Nation of Angels

The Enterprise Research Centre (ERC), in conjunction with the UK Business Angels Association, published A Nation of Angels, in January 2015 – research completed through direct interviews with 403 business angels and 28 angel syndicates representing 8,000 angels.

Amongst the most interesting highlights:

  • 45% of angels reported that their investee businesses showed ‘high growth’ while 64% had investments showing reasonable growth
  • 60% of angels reported that they have experienced a positive (full or partial) exit since their first investment
  • 79% of the interview respondents reported that they go on to re-invest their gains in further small business investment opportunities – only 7% said they would not

It found that angels reported a lower rate of low returns and a higher rate of expected higher returns than in previous research – showing confidence in the market and the performance of their seed investments.

When asked about the growth status of their current portfolio angels reported that 19% of their investee businesses showed ‘high growth’ while 34% of their investments showed ‘reasonable growth’. (The authors of the study did not define ‘high growth’ and ‘reasonable growth’ but left them subjective.)

When asked about their expectations of their returns from their portfolio of investments made since January 2012, investors expected that 76% of their investments would yield a positive return, of which 19% of their investments would yield a 6 to 10 times return and 13% of their investments would yield more than 10 times return.

Source: The Enterprise Research Centre | ‘A Nation of Angels’ | published January 2015 | www.ukbusinessangelsassociation.org.uk/research-policy/market-research

Siding with the Angels

The innovation charity Nesta delved deep into the financial returns from seed investing with its

Siding with the Angels report. It examined 1,080 investments. The conclusions:

  • 41% of investments failed and returned no capital
  • 15% of investments returned less than the invested capital
  • 44% of investments returned capital
  • 9% returned 80% of the returns
  • Overall the investors enjoyed a return at an average of 2.2 times the original investment over 3.6 years

Despite the high proportion of investments failing, the average returns from a balanced seed investment portfolio showed a gross IRR of 22% even from unsophisticated selection.

Furthermore, the report found:

  • Investments that gave a positive return did so in around 6 years
  • Investments that failed to return capital did so in c. 3 years
  • Even limited due diligence dramatically increases returns
  • Investors who are also entrepreneurs achieve better investment outcomes

Source: Nesta | ‘Siding with the Angels’ | published 30 September 2009 | www.nesta.org.uk/publications/siding-angels

Beyond the data

We also shouldn’t forget that beyond the hard numbers there is also huge satisfaction, and rich stories, in helping to support new entrepreneurs and the engine room of the UK economy.

The future:

Are these reports a reliable guide to future performance? With the explosion in seed funding – the quantity of deals and the different routes in – some challenges have emerged:

  • There is a flood of choices of where to invest
  • Wading through the options is inefficient
  • It is hard to spot the stars
  • Valuations are becoming expensive and getting to a good value fair deal is becoming harder

Given the nature of Seed investing the results shown in the two reports and the challenges they saw emerging, the founders of Worth Capital very deliberately designed the concept of ‘competition funding’ to explore and deliver innovative ways of:

  • Giving the investor a ready-made diversified portfolio
  • Incorporating comprehensive distillation and due diligence
  • Increasing the proportion of successful businesses and reducing failures
  • Accelerating the growth of the start-ups and the value at exit

Learn how we select promising businesses to invest in

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