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Simon King is a fund manager within Octopus Ventures. He explains the team’s approach to investing in early-stage companies and how they spot potential winners.
There’s an old adage in venture capital investing.
“Invest in A-class teams with B-class ideas, and never the other way round.”
When Netflix was founded in the nineties, it wasn’t the streaming service we know today, but a mail rental DVD company. PayPal started life as Confinity, a company developing security software. Slack, used in offices across the world, was as a by-product of a failed video game.
You get the picture.
Few successful businesses end up doing exactly what they set out to. So when you invest in an early-stage business, you have to expect it won’t be selling exactly same thing by the time it finds success.
Things evolve. Challenges are faced. New opportunities arise.
As a venture capital team, you have to be open to that. You invest in fantastic management teams and help steer them to success. It always comes back to the team. Ability to sell is critical – sell a product to potential customers, and sell a vision to employees and investors, the people who part with cash to help achieve that vision.
Having the vision
There are some straightforward market factors we need to see before investing in a business. A large addressable market is critical. Usually, this will be a market valued at more than £1 billion. The business also needs to be capable of growing rapidly in a relatively short timeframe and have a good chance of growing new markets or pushing out incumbents to meet the criteria for investment.
We’ll also look for a competitive advantage, usually in the form of significant intellectual property.
Beyond this, Octopus Ventures tries to see opportunities that have been overlooked. A fundamental part of this is valuing diverse backgrounds in the investment team. You need diversity of opinion when assessing start-ups. A team with a narrow outlook simply cannot assess opportunities as well. Take Elvie, for example, a company Octopus invested in which has great potential. It designs and manufactures health technology for women, such as a silent wearable breast pump. Many investors couldn’t see the opportunity, seeing the area as taboo.
In fact, Elvie had a fantastic opportunity to tap into a huge underserved market that had been overlooked by big pharma.
Hiring from diverse backgrounds and creating a culture of open-mindedness gives you a better chance of spotting these kinds of opportunities.
Venture teams then need to be able to sell portfolio businesses which may have grown to be valued in the hundreds of millions, if not billions in value. Octopus Ventures’ network and reputation within the acquisitions space enables them to secure the best exits for businesses, founders and ultimately for investors. Although it is important to remember that venture investing is high risk and not all companies will be successful.
Being selective
Octopus Ventures review thousands of businesses a year. As you’d expect, there’s a steep and sharp filter. The team will meet with a few hundred of these businesses and invest in just 20 to 30 of them.
Over the past decade, Octopus Ventures has become a well-recognised brand among founders and entrepreneurs. When start-ups are looking for investment, the team often make the short-list of who they want to meet with. The team also find deals from a network of angel investors, seed firms, academics, and industry contacts.
This results in a strong pipeline of investment opportunities, which is an integral part of successful venture investing.
Best in class support for portfolio companies
Europe and the UK are getting more competitive. Often companies have multiple offers. Investment teams need to differentiate their proposition.
To secure deals for in-demand companies and drive returns for end investors, Octopus Ventures developed a suite of services. That includes a dedicated talent team that helps companies hire great people. Either filling critical roles or helping to put robust recruitment and interview processes in place.
All told, Octopus Ventures has a team of over 65 people, with more than 390 years combined of relevant experience.
How clients can access early-stage investments this tax year
Octopus Ventures, the team who manage Octopus Titan VCT, are also the team behind two exciting investment opportunities for clients this tax year.
The brand-new Octopus Future Generations VCT will invest in businesses with high growth potential across three sustainability themes.
At the time of writing, it’s open for investment with a fundraise capacity of £20 million and expected to close in the run up to tax year-end.
Octopus also launched a limited-time and limited-capacity EIS offering, the Octopus Ventures Knowledge Intensive EIS Fund.
This investment is an extension of our evergreen Octopus Ventures EIS service and will allow clients to carry back income tax relief to the 2020/21 tax year.
Investing in EIS-qualifying companies can be a powerful way to target high growth, provided an investor is comfortable with the risk.
That’s because investors can claim income tax relief on the value of their investment, pay no tax on growth, and claim loss relief should an individual company perform poorly.
The fund has a capacity of £25 million and will close on 5 April 2022 or likely sooner when capacity is reached.
Please bear in mind these risks
It’s important to understand that the value of an EIS or VCT investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
The shares of early-stage companies and VCT shares are by their nature high risk, their share price may be volatile and they may be hard to sell.
Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on portfolio companies and VCTs maintaining their qualifying status.
Visit octopusinvestments.com to learn more
Our investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. We do not offer investment or tax advice. Regarding the new Octopus Future Generations VCT, this advertisement is not a prospectus. Investors should only subscribe for shares based on information in the prospectus and Key Information Document (KID), which can be obtained from octopusinvestments.com. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: February 2022. CAM011857
