Investing for growth - you don't have to follow the crowd
The notoriety and growth of crowd funding, and its variations, has gathered a great deal of attention. For good and bad.
On the negative side, in February this year, Lord Turner (former chairman of the former UK Financial regulator, the Financial Services Authority) warned that “The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.” Whether you subscribe to such hyberbole - is it possible to make bankers look like geniuses? - there are other funding methods that have served businesses and investors well. A notable one is the Enterprise Investment Scheme (EIS).
When the EIS launched in 1993, the then chief secretary to the Treasury, Michael Portillo, commented: “Unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”
One such company that took this route was App developer, AppBox Media. When the company launched in 2013, it had the ambition of becoming one of the top App developers in the country. It planned to achieve this by building up a portfolio of 30 apps over three years, starting with gaming and then diversifying into other areas such as cookery, healthcare, and social networking.
The question for Polat Hassan, AppBox Media's chief, was how to attract the investors it needed to jumpstart its commercial growth. To demonstrate its commitment to investors in these early days, the AppBox Media management team agreed to forego a salary for three years and instead receive share incentives. Over the next two years it launched a total of five rounds of seed fundraising, all of which were fully subscribed. By 2015, the company was debt free, had net cash on the balance sheet, and a strong and visible pipeline of new business and, in the first half of the year, it secured contracts worth £2.5 million.
"Without the tax incentives offered by EIS, we might not have held the same appeal for the investors we wanted to target, despite the solid fundamentals of our rapidly growing business," Hassan says.
By investing in young companies through EIS, qualifying investors can receive a rebate from HMRC of up to 30% of their initial investment, if shares are held for at least three years, and they may also benefit from loss relief if the value of the investment falls. If the investment succeeds, returns are exempt from Capital Gains Tax and, if investors hold the shares for two years, they become exempt from Inheritance Tax liability.
"These advantages help maximise the return on investment that can be achieved, and makes our shares more enticing to investors who are willing to hold them for a longer period of time. This gives us greater visibility of funding and makes it easier for us to plan our expansion," Hassan adds.