Why tax-free dividends are the ‘secret weapon’ of VCTs
7 October 24
7 October 24
What is an early-stage company?
Some of the world’s most successful global businesses, names like Apple, Google and Amazon, all started life as early-stage companies. An early-stage company is often created because a significant business problem or challenge has been identified, an innovative approach has been created or developed – often using technology – and there’s a market of people who would gladly buy that product or service knowing it will save them time, money or other valuable resources.
What is early-stage investing?
Successful early-stage companies will go through several rounds of funding to help finance their growth ambitions. As they gain more traction, the amounts they look for will increase.
Investing in the early stages of the company’s growth journey usually means the rewards could be greater. It means you get to buy the company’s shares at a much smaller valuation, but it also carries more risk. Conversely, buying in at a later stage – when the company has already achieved significant growth and become well-established within its industry – usually also means paying a higher price for the shares, reducing the potential return for investors.
UK cybersecurity start-up Darktrace is a notable example of the rewards that can come from investing early. Launched in 2013, the company raised its second round of institutional funding at a £40 million valuation in 2015. Its subsequent funding rounds, which saw it funded by US investors, valued the company at $715 million in 2017 and $1.47 billion in 2018, respectively. In October 2024, Darktrace was acquired for $5.3 billion by private equity firm Thoma Bravo.1
Why does early-stage investing matter?
For three really important reasons. First, investing in early-stage companies means supporting visionary founders with the ideas that could lead to world-renowned companies. Without the financial support these companies need, those ideas may never get off the ground. Second, early-stage investing boosts economic growth and helps create jobs. As they grow, early-stage companies start to increase their revenue and take on more employees, making an important economic contribution. And third, early-stage investing gives investors the chance to own a stake in a company that could turn out to be a global game-changer. While the risks are high, the potential for outsized returns is equally significant.
Investing in early-stage companies through a VCT
Early-stage companies are usually too small, and too unproven, to be listed on public stock markets like the London Stock Exchange. This makes investing through a venture capital trust (VCT) one of the easiest ways for UK investors to invest in early-stage companies. In fact, VCTs make it possible to gain diversified exposure to early-stage companies while also spreading the risk across several different ones, any of which could have the potential to become a success.
But VCTs often provide more to early-stage companies than just financial support. For example, at Triple Point we offer portfolio companies mentorship, business expertise, and access to networks that help them to find answers to the day-to-day challenges that come from building a business from the bottom up.
What to look for in early-stage companies
As early-stage companies don’t have a long track record to evaluate, the Triple Point Ventures team looks for other characteristics that help identify a company’s future potential. These include:
Managing a portfolio of early-stage companies
The Triple Point Ventures team has an established and consistent investment process that helps them to identify the best-quality companies and to then learn as much possible about them before making a decision to invest. Of course, even after this due diligence there’s always the possibility that some of those companies will fail, but their extensive research is another layer of investment management that helps mitigate the risk of early-stage investing.
Next, the team spreads that risk by investing in a large number of portfolio companies. The Triple Point Venture VCT is currently invested in 50 companies, meaning the knock-on impact on investor returns from any single company failure is limited. Investments are diversified across several business sectors (20 so far). The team adds new companies to the portfolio each year, and also makes follow-on investments in those portfolio companies that are doing well. This means the VCT always owns a good mix of businesses at different stages of their venture lifecycle.
Why exits are important
One of main reasons for investing in early-stage companies is that these are the type of businesses larger firms often look to acquire. Research suggests most company exits are often achieved at a price of £50 million or below.2 In other words, successful early-stage businesses tend to get snapped up before they become more widely known, and before their valuation has started to accelerate. Therefore, knowing the right time to sell a company’s shares, to the right acquirer and at the right price, is key to investment returns, as profits from each ‘exit’ are repaid to VCT shareholders in the form of tax-free special dividends. As we like to say: “we invest early, because finding growth is more rewarding than following it.”
New VCT share offer now open
The Triple Point Venture VCT is now open for investment, giving investors access to a portfolio of 50 ambitious early-stage companies at different stages of maturity, alongside the opportunity to claim valuable tax reliefs. To find out more, visit https://vct.triplepoint.co.uk/p1/
Important information
This article is an advertisement for the purposes of the Prospectus Regulation Rules and is not the prospectus. The Triple Point Venture VCT carries all the risks of investment in smaller companies and places investor’s capital at risk. There is no guarantee that target returns will be achieved, and investors may get back less than they invested. Past performance and forecasts are not a reliable indicator of future performance. Tax treatment depends on the individual circumstances of each client and is subject to change. Tax reliefs depend on the VCT maintaining its qualifying status. Investors should only subscribe for shares on the basis of information contained in the Prospectus which is available on the Triple Point website. This article has been approved by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority.
1 https://www.pehub.com/thoma-bravo-completes-5-3bn-acquisition-of-darktrace/
2 Source: Beauhurst Report: Exits in the UK 2011-2021.
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