Amounts invested into VCTs reached a near record high in the 2017/18 tax year. In fact, according to the AIC, the VCT sector raised the second highest amount since 2005/6, a total for the year of £728m by 5 April 2018. As the VCT market has experienced substantial capital inflows, it continues to change, improve and adapt in a variety of ways.
Looking ahead to 2019 and beyond, we can see new trends in the VCT industry emerging, including industry specialization. We believe an increasing number of funds will specialise in specific sectors or verticals, and other funds will focus on thematic investment strategies such as impact investing. Some funds will dedicate themselves to consumer-facing businesses, and others (like the Triple Point Venture Fund) will specialise in companies addressing the challenges faced by the wider enterprise market.
Whether it is specialising in sectors like healthcare or fintech, or working with verticals such as blockchain, machine learning, or quantum computing – specialisation will arrive and deliver value to investors and investee companies alike.
“You need to start making investments on a generalist plain to see the trends, and then make a fund where you’re seeing significant opportunity.”
A Challenge Led Approach
While specialisation is attractive, when funds specialise they should be careful about how they choose to do so. Limited sector specialisation can lead to overdependency and a smaller pool of attractive assets to invest in.
At Triple Point, we are looking for businesses that are innovating to solve real world problems for corporates. Investing in this way chimes with current corporate trends – large businesses are increasingly looking to start-ups and other SMEs as potential sources for innovation. Thinking in this way allows us to find companies that are working on solutions to corporate problems, and we can determine a company's product-market fit quicker than is usually possible.
Our approach is based on research into the reasons behind the failure of early stage companies – and the most significant is that they do not have a product with the right market fit. In fact, surveys by Autopsy and CB Insights both show that over 40% of start-ups fail because their product has no market fit.
By investing in start-ups that have set out to meet a corporate challenge, we can mitigate some of the risk associated with early stage venture investing. To identify an appropriate corporate challenge and solution, investors should ask three questions. First, what corporate problem or challenge needs solving? Second, is that challenge widely applicable across industry? Third, what product that will solve this challenge?
Risk Warning: Your capital is at risk. There is no guarantee that target returns will be achieved and investors may get back less than they invested. Tax rules and reliefs are subject to change.
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