VCTs are helping to support and grow smaller UK companies through challenging times, with some of the most exciting investment opportunities lying in UK tech firms, says Chris Wiles, Senior Investment Manager, Foresight Group.
Despite the disruption caused by the COVID-19 pandemic, the opportunities available to VCT investors remain as strong as ever, especially in those industrial sectors set to play a key role in the ongoing economic recovery through the development of enabling technologies.
Uncertainty surrounding Brexit discussions has also reduced the availability of traditional funding sources for early-stage companies, presenting an attractive investment thesis for those with the requisite investment and technical expertise. VCTs can therefore achieve appealing returns for investors whilst simultaneously providing the vital support UK entrepreneurs need as the economy continues to recover.
The UK’s enduring appeal
The UK remains an excellent place to start, scale and sell a business, with broad pools of talent and an entrepreneurial culture. For example, the European Digital City Index report identified London as the best city in Europe to start up and scale a digital enterprise, citing the city’s highly developed venture capital ecosystem, as well as the presence of multiple high quality financial services firms, world renowned universities and an ever-growing talent pool.
This entrepreneurial ecosystem is not limited to London or the South East however, with Glasgow, Edinburgh, Manchester, Birmingham, Bristol, Cardiff, Oxford and Cambridge all featuring in the top 60 European cities supporting digital entrepreneurship. Cambridge in particular has seen an explosion of technology and life science start-ups over the last decade, giving the surrounding area the nickname ‘Silicon Fen’.
The funding gap
The UK’s decision to leave the EU, coupled with the economic challenges borne by the COVID-19 pandemic has resulted in significant uncertainty in the UK economy, potentially limiting the availability of funding for early-stage, advanced technology companies.
VCTs are therefore potentially an appealing source of funding for entrepreneurs and to help to fill this investment funding gap. Alongside its primary objective of providing returns for investors, VCT investors are increasingly aware of their value in supporting UK entrepreneurs in a wide range of industries. Recent AIC research bears out this idea, with 81% of investors saying that they feel the pandemic has made supporting smaller UK businesses more important.
Opportunities in technology
Despite these uncertainties, there remains a vast opportunity to improve the productivity, efficiency and environmental impact of nearly every industrial sector from manufacturing through to energy via the intelligent application of automation and digitalisation. To facilitate this transition, there will be an increasing need for enabling technologies including industrial machine learning software, novel sensors, low-cost robotics and 3D printers.
Some of the most exciting investment opportunities will come from companies that combine technologies, such as robotics, computer vision and machine learning, to deliver a solution that is greater than the sum of its parts. Another trend of particular interest is the application of cutting-edge technologies from highly developed sectors into more traditional industries; for example, the application of augmented reality technology from the gaming sector into the industrial maintenance sector to enable remote collaboration.
Finding quality investment prospects
There are several qualities which are the hallmark of an exciting investment prospect. These include the development of innovative technology, a clear roadmap to commercialisation and a significant market opportunity.
Crucially, the technology developed by investee companies will be protected, usually in the form of IP such as patents, but also as know-how, computing code or trade secrets. This helps to protect the technology from replication by a competitor giving the investee company a sustained competitive advantage and a strong opportunity to generate attractive commercial returns from its technology.
Furthermore, companies that have developed a defensible technology which has successfully proven market adoption are often attractive acquisition targets for strategic buyers or corporates. This is because strategic buyers and particularly corporates can struggle to replicate the same success with their resources quickly due to their larger-size and corporate inertia, which leads to slow decision making and technical progress.
In addition to world-class technologies, it is also important to invest in outstanding entrepreneurs who have both the technical, commercial and emotional skills to successfully bring their technology to market and scale rapidly. This route to commercialisation allows investors to achieve the high multiples upon exit which make VCT funds so attractive for those looking to diversify their investment portfolio.
