Many investors think investing in early stage, growth companies is a high risk investment strategy, particularly when compared with the public markets where many of the businesses listed on the London Stock Exchange have decades of trading histories.
But as this pandemic has shown, just because a company is listed on a stock market or has been trading for a long-time, that doesn’t make it low risk.
So should private growth companies, many of which have used Seed EIS investment and the follow-on EIS investment be viewed in a different way?
Well two specialist investment groups, Worth Capital and Nova, sometimes known as We Are Nova, believe investors need to think about how they view risk and effectively don’t immediately think Seed EIS equals high risk and large, listed companies equals low risk.
In a short video which you can view here, the pair discuss how they aim to get diversification within the portfolio of companies they invest in across their Seed EIS funds, and how this can compliment the portfolio investors’ listed investments or other funds, such as investment trusts or unit trusts and open-ended investment companies (Oeics).
Matthew Cushen, one of the founders of Worth Capital, looks for businesses where he and his colleagues can use their branding expertise to move a business forward. They are agnostic about which sector that business is in. Current successful investments include a specialist, fashionable shoe business for women with everyday feet problems, such as bunions and a bedding business.
Another way Worth tries to create diversification is the way it looks for new businesses to invest in. This is predominantly through The Start-Up-Series which aims to invest up to £250,000 into growth companies which can benefit from Worth’s marketing and branding expertise.
The founder of Nova, Andy Davidson, who is based in the North West, offers his investors diversification through a number of different routes from Worth. By being based in Liverpool the group sources most of its deals from the northern parts of the UK, where competition for deals amongst venture capital and growth company investors is not as high.
Additionally, Mr Davidson looks for businesses with high quality technology as the basis for the business idea and often it will invest very early in a company’s life, before it has generated revenue. Among its current successful investments are a so-called MedTech business, which aims to monitor staff cleaning habits in hospitals with the objective of reducing infections within hospitals.
Mr Davidson and Mr Cushen agree on one thing — to reduce risk, but achieve real diversification investors should look to place investments with three or four Seed EIS or EIS managers if they can.
That way there is a spread of investments with managers with different investment expertise.
Lawrence Gosling is Editorial Director of What Investment and its sister website Small Business, where this article first appeared.
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