Startup Due Diligence for Investors – Best Practices & Checklists

What is Due Diligence?

‘Due diligence’ sounds awfully serious.

When it came into use in the mid-fifteenth century, it simply meant ‘reasonable care’. It became a specialised legal/business term in the 1930s when the US government passed a law to ensure that securities brokers disclosed sufficient information when selling to investors.

It is now used as a general term for the process of verifying information.

The level of due diligence required and the level of due diligence possible varies depending on the information being checked. Naturally, a high-level corporate merger would require extensive due diligence.

When it comes to investor due diligence on early-stage companies and startups, the due diligence need not be overly laborious. It is necessary but should not be daunting, even if it’s your first investment of this kind.

So, for the remainder of the post, I shall refer to it as DD. It’s less daunting that way. (And easier to type!)

Why is due diligence different for early stage companies?

Any sort of institutional or corporate investment requires sophisticated and extensive DD.

Investment institutions tend to invest in companies who are well past the proof-of-concept and early growth stages. As such, they can examine substantive data in their assessment and check its validity. They also need to check it so that they can justify the investment to their own shareholders.

It’s only when a company has achieved a certain level of tangible traction that you can reasonably run analytics on it in the hope of predicting the eventual outcome and the risks involved. The later stage the company, the more data, the more due diligence, the more predictable the outcome.

Early-stage companies accepting investment from private investors tend to have less tangible evidence available for checking because the company simply hasn’t been operating long enough. This means that the checks an angel investor carries out are mostly formulaic.

Due diligence at the level of early-stage investments is predominantly about checking the claims of the company in their documents.

This does not mean you should carry out minimal DD. Evidence suggests that investors who spend longer on DD get higher returns (UKBAA research has shown that at least 20 hours due diligence has a positive impact on the likelihood of a multiple investment return (Siding with Angels; Robert Wiltbank, Nesta-UKBAA)).

Correlation or causation, it doesn’t really matter. You should carry out thorough due diligence.

But the point is that it is not a complicated process. People making their first skirmishes into angel investments are sometimes put off by the idea of DD. They think that they don’t have sufficient experience to do it properly and as a result, they’ll be throwing away money.

They think like this because they have the expectation that their DD ought to be as rigorous and detailed as that carried out by a private equity firm, for example.

But this is an unfortunate belief. It’s naïve to think that the same level of DD should be carried out – there is not enough information on early-stage companies. Because they are early-stage!

If there was more information to check, then the investment would probably not be open to private investors. Nor would the opportunity for the huge returns possible for early-stage investors be available because the risk quotient would be so much reduced.

It’s important to remember the reasons why we choose to invest in early-stage companies:

  • We want to bring our experience and network to bear so that we have an active role in helping the company grow and succeed.
  • We want to take a calculated risk to help a team of founders we believe in to achieve something cool.
  • And in so doing, we want to make a good return on our investment.

The early stage means that we have the opportunity for all those things but, naturally, the risk is larger. Proper due diligence is your armour against this risk.

due diligence

Is there an optimum way to carry out due diligence?

DD research can be divided into six principal sections as set out in the following section.

But how should you approach them?

It’s simple enough to work systematically through each, but this can be time-consuming and, human as we are, we are all prone to mistakes and oversights.

It can make the process less burdensome and pressured if undertaken with one or more investment partners. You can divide the labour, check each other’s research and discuss to form an opinion.

If you then all decide to invest, it can make the process even more enjoyable and less pressured.

What DD should you carry out on early-stage companies?

Your DD should cover six main areas (I have written a downloadable checklist for each):

1. Team & Management

Early stage investment is often said to be in people rather businesses. This is because it’s the execution that counts…

This checklist will help you form an impression of whether you think the team has what it takes to execute.

Download checklist

2. The Business

Do you believe in the idea?

This checklist will help you work that out.

Download checklist

3. The Market

Market research is the process of finding out information about demand, trends, size and competition in the target market. It’s an important process for gauging sales volume, pricing and ultimately whether there is sufficient opportunity to develop an idea into a lucrative business. Entrepreneurs will present you with certain claims about their market – your DD should aim to verify their claims.

This checklist will help you decide whether the company has identified a viable market opportunity.

Download checklist

4. The Technology/Product (if applicable)

The team is often considered more important than the starting product. But it’s still essential to check the product is a great solution. A great team with a great product ticks a lot of boxes!

This checklist will help you assess the tech.

Download checklist

5. Finance & Tax

When entering into an investment agreement, you need to be aware of any information that may increase or decrease the risks involved. Financial DD ensures that you are aware of all the existing assets and liabilities.

This checklist will help you assess the company’s position.

Download checklist

6. Legal

It’s a good idea to send a legal enquiries check sheet to any company you are interested in. Use this template drawn up by Tony Littner at Harbottle & Lewis LLP, Jon Gill at Eversheds LLP and Sandy Finlayson at MBM Commercial LLP for the UK Business Angels Association. (If you’re looking at a company based outside the UK, it should work for you too.)

Download legal letter checklist template

Summary

These checklists are in no way exhaustive. Your DD questions will vary according to the type of business you are evaluating. But these should serve as a useful starting point. And they should indicate the level of due diligence required for these types of investments.

*Thanks to the UKBAA whose own due diligence checklists were the inspiration for this article.

7 Positives for the UK Startup Scene from the Autumn Budget

Yesterday the Chancellor unveiled his budget plan for the UK.

The main headline was that we can expect slow growth (around 2%) for the next few years. And that Brexit seemed to be the principal cause of this. A gloomy budget indeed.

But, as ever, even in the murkiest river a nugget of gold can be found. With a little sifting, I’ve found some positive news for us spirited folk on the startup scene.

The sifting was very boring. I’ve tried to set out my findings as clearly as possible. So, you can enjoy the gold without getting your feet wet! You’re welcome.

The Treasury conducted a survey called ‘Patient Capital Review’ which set out to consider how to support innovative firms in getting funding and achieving scale. The conclusions drawn are positive and will be a boon for early-stage companies over the next 10 years.

These conclusions resulted in an ‘Action Plan’ in the budget which aims to unlock £20bn over the next 10 years to support growth in innovative firms.

The main points are as follows:

1. Tax Breaks (EIS & VCT)

– EIS allowance for people investing in ‘knowledge-intensive companies’ will double from £1m to £2m each year.
– ‘Knowledge-intensive companies’ can receive twice as much EIS & VCT investment each year. That’s a move from £5m to £10m.

(Check out a previous post for more info on the benefits of EIS.)
SEIS & EIS budget
Result: An estimated extra £7bn of investment.

2. Government-backed Co-investment Fund

– A £2.5bn Investment Fund incubated in the British Business Bank will be established to co-invest with the private sector.
Result: An estimated extra £7.5bn of investment.

3. Backing Fund of Funds

– The British Business Bank will invest in a series of private sector fund of funds.
Result: An estimated £4bn of investment will be unlocked.

4. Backing Fund Managers

– The British Business Bank will continue to back new and existing fund managers through its existing Enterprise Capital Fund.
Result: An estimated extra £1.5bn of investment.

5. Backing overseas investment into UK

– The Department of International Trade will support overseas venture capital into the UK.
Result: An estimated extra £1bn of investment.

6. Support for Regional Investment

– The British Business Bank will establish new investment programmes to support business angel groups outside of London. This will complement existing programmes like the Northern Powerhouse Investment Fund and the Midlands Engine Investment Fund.
– £21m is budgeted to expand Tech City UK’s reach across more regions.
Result: Unlocking of investment potential outside of the London hub.

tech city uk budget (1)

7. Other

– British Business Bank to investigate supporting Women Entrepreneurs getting access to equity investment
– £2.3bn increase in R&D spending
– £1m Games Fund to support video game development
– Helping Pension Funds invest in innovative firms
– Qualification for Entrepreneurs’ Relief will no longer de-incentivize accepting external investment

I hope all that makes sense.

It’s pleasing to see that, in difficult times, the government recognises the importance of supporting the innovation sector as a key driver of our economy.

If you want more detail on this Action Plan in the budget, I’ll be at the UKBAA National Investment Summit on 28th November. Keith Morgan CEO of British Business Bank will be leading the discussion on the Chancellor’s proposals.

You can get tickets here

Hope to see you there!

How to Update Your Investors for best results

Investor Updates: Why? How? When?

What you’ll get from this post:

  • 1. Why you should update your investors
  • 2. A template for great updates
  • 3. Example updates from fast-growth companies like Sweatcoin and ScreenCloud

“We connect entrepreneurs and angel investors.”

That’s our tagline at Angel Investment Network. We’ve been doing it for 14 years so it makes sense! We help make the initial connection that results in feedback, meetings and often investment. Startups get the funding they require. Investors get access to great and diverse deal flow.

But as a result of this, most of our advice and guidance focuses on the early part of the fundraising journey: how to meet investors, how to value your idea, how to find great deal flow, how to invest etc…

This is useful (we hope!). But only as far as it goes. There’s a danger this gives the impression that the relationship between entrepreneur and investor only needs to be fostered at the very start.

This is not true, of course.

Why?

Investor = Evangelist

Any investor in your company can be an evangelist. And an important one. The best investors are not those who sit silently hoping their portfolio grows. They are the people who bring to bear all their resources to help their companies grow. But there is no guarantee they will always do this just because they invested.

It’s down to you to keep them engaged. Your updates will give them the inclination and the material to shout about you to their network.

Investor = Wise

Sure, you wanted investors for their cash. But if that was all you wanted from them, it was short-sighted. It’s a truism about angel investors that they bring more to the table than money. A good angel will have a wealth of experience in business and hopefully your sector.

But they are busy people with active interests all over the place. You’ll only get their attention if you engage them enough to deserve it.

So, let them be a light for you when all other lights go out.

Investor = Capital Mine

Some businesses only need one funding round. Some businesses go through many as part of their growth strategy. It’s not always clear which business yours will be. But it would be naive to think that you’ll never do another round.

And who are likely to be your hottest leads for later rounds?

Your existing investors of course!

They will want to avoid dilution and help the company in which they’ve invested grow. Additionally, they will want to bring on more people to invest. It’s in their interest, after all, to support the company in its growth.

That said, there’s no guarantee they will want to invest more or bring their friends on board. If you haven’t fostered the relationship and kept the excitement burning, they may want to cut their losses.

But, if you’ve kept them sweet with exciting updates, they’ll be champing at the bit to buy in and involve their network.

Finally…

It’s good business practice to update your shareholders regularly. (Once a month is optimal and what the companies in my examples below go for). Good habits breed good habits. The more you force yourself to go through the motions of running a business properly, the more ably you will run the business, until it’s second nature. And, all of a sudden, you’re a business leader.

investor update

So, how then should you update investors?

It’s quite easy really. There’s a formula you can follow each time. Just have the relevant info ready for each section and input when your update is due:

Intro:

Open with some positive statement about the exciting times the company has been going through since the last update. This should set the tone of the email.

Overview/Highlights:

Investors are almost always busy people. There is no guarantee that they will read your whole email. In this overview, give the main points you want to put across. This should give them enough info to feel enthused about you and their investment without having to read more. It also serves a secondary purpose – it should entice them to read the rest of the email!

e.g.
– Revenue is up XX%
– New Product ABC is in the final testing phases. Watch this space.
– We closed two new major partnerships with Huge Brand X & Huge Brand Y.
– Big Deal XY joined the team/board. He/she will….

Key Metrics:

Your key metrics are the figures that show your concept works. They are the essential validation on which investor confidence hangs.
These figures will differ from company to company, but your presentation of them is the same.

e.g.
We’ve seen impressive momentum across our key metrics. KPI 1 has grown XX% month-to-month. KPI 2 has grown XX% month-to-month. We are on course for a huge {insert current month}.

This information can be displayed in a graph. Hopefully, one that looks like this:

update graph

Fundraising:

If you’re raising money, give details. You may want to indicate the impressive people/funds you are in talks with; and how far advanced the talks are.

You can also include your latest deck as an attachment. And invite them to take a look. Don’t forget to engage them directly by asking for feedback or to share with any contact who may be interested.

Learnings:

Investors may also be interested in your personal growth as a management team. So, details of any findings from tests, campaigns and product launches will make interesting reading. They may also encourage investors to give advice.

Team:

If someone on the team has had a big impact, you could shout about it here. The employee will thank you for it! It also adds to the general impression of accomplishment and progress you should be conveying throughout the whole email.

a-team_logo update

Future:

What are the plans, challenges and targets for the next period? Keeping the goals of the company in front of your investors is a great way to keep them aligned with your interests. And it will demonstrate that their investment is in competent hands.

Don’t hold back from requesting advice on any of the challenges ahead. Delve into the acumen of your investors and all the while keep them engaged.

There you have it. An important task fulfilled with minimal hassle.

It’s important to note that this formula is not prescriptive. Only mention sections that are relevant. There may be sections specific to you that you want to add too.

These emails do not have to be long (more on this in the examples below). Short and sweet will suit investors. But make sure you cover the essential details so investors don’t feel shortchanged.

There is no excuse. And, as we’ve seen, the upsides are huge.

Some Real-world Example Updates

This update from Sweatcoin is a masterclass in keeping it ‘short and sweet’. No bluster. No fluff. Just hard traction. It’s easy for them because they are growing so fast (they’ve added another million users in the last month!).

(Make sure you zoom to 90% or so to read it clearly).

Click to view Sweatcoin investor update

ScreenCloud’s is a longer piece which follows our update template more closely, making good use of HTML to give clear structure. Note how they give that important overview section for those who don’t read long emails!

Click to view ScreenCloud Investor Update

It’s worth saying that both companies do a good job of creating a sense of excitement and progress. They go about it in different ways, perhaps due to time constraints and what they find manageable. The point is that the info and the impression put across in both is excellent.

N.B. All this advice works as a template for keeping prospective investors interested; and investors you never closed too – make them feel like they missed out!

That’s all for now. Hope you found this useful!

How do investors evaluate startup pitches?

An angel investor’s task is to predict the potential of a company based on early indications and very little else. There is no infallible process for doing this. This is the risk investors face; and the fear they must overcome to invest. Only then can they give themselves a shot at the returns available from a shrewd investment.

Your task as an entrepreneur seeking finance is to mitigate and alleviate that sense of fear and so lower each investor’s risk threshold. The two basic ways of doing this are:

1 – Demonstrate that the perceived risks are smaller or more easily overcome that they initially appear.

2 – Set out a credible vision for the success of the business such that the returns outweigh the risk.

This, you might argue, is easier said than done. And you’d be right.

In my experience, entrepreneurs who understand how investors assess deals, find it easiest to raise money. It’s part of the reason why people who’ve raised money before find it easier to do it again.

SO THIS BEGS THE QUESTION, HOW DO INVESTORS EVALUATE STARTUP DEALS?

As I touch on above, this is a hard thing to get right for investors – a company may tick all the boxes, but still fail down the line. But this is often a matter of luck and down to factors beyond the investors’ control.

In their evaluation steps, investors can take measures to ensure that the companies they do go into have the best chances of success.

So here’s a simple evaluation framework that we recommend to investors on Angel Investment Network. We base this on our own experience from 12 years’ hand-selecting startups for our brokerage division. Companies we’ve worked on include: SuperAwesome, SimbaSleep, Novastone, What3Words, Opun and Cornerstone.

Two of these were just named in the Independent’s Top 10 startups 2017.

A SIMPLE EVALUATION FRAMEWORK:

1. TEAM

A team for inestors

We interviewed Jos Evans who has made a number of successful investments through us. Jos gave the following advice:

“Everything comes down to the quality of the founders. If the people are excellent they will succeed regardless of whether the initial business idea works. Meet as many people as possible and cross check your network for people who might know the founders of a company you are considering investing in.”

This is sound advice from someone who is making a career from angel investing.

It is the people behind a company led by the founders and validated by their advisory board that will optimise its chances of success. If the founders are relentlessly resourceful they will find the iteration that makes the company a winner.

In their due diligence, investors spend a long time researching the founders’ backgrounds. They also often try to spend time with them on the phone and, if possible, in person. The qualities that come across go a long way to giving investors confidence and lowering their risk threshold.

Similarly, the strength of the company’s advisory board can be a very strong index of potential:

1 – It reflects well on the founders if they have managed to persuade impressive people to back them.

2 – The fact that impressive advisers have backed the idea lends credibility and validation to it.

3 – The financial and social clout of high- profile board members means that the idea will struggle to fail. propelled on by a strong support network, companies tend to find a way.

2. MARKET

Which is the more significant indicator of success – the team or the idea/market? This is an ongoing debate between investors.

Renowned US investor, Ron Conway, believes, like Jos, that the team are the foundation. The idea is liable to change, but the team’s motivation, talent and competence will remain to drive the project to success.

Other investors argue that great founders in a bad market are far less likely to succeed than bad founders in a great market.

But to polarise these two points of view misses the point a bit. Good founders will find good markets – otherwise they are not really good founders.

So, in your pitching docs you need to make sure you give clear details on the market opportunity. Are you pitching a scalable opportunity in a market of sufficient size and growth trajectory? And are you doing it at the right time?

Here is the advice we give to investors when they evaluate the market section of a pitch:

“…you want to research the market to ensure the opportunity is or will be as large as the founders claim. If your findings confirm theirs then you can feel comfortable that a) there is a significant market and b) the founders know what they’re on about!”

Remember, your pitch/business is as representative of you as you are of it. In trying to sell your pitch to investors you need to sell yourself and vice versa.

3. TRACTION

Investors want a startup investment to have as much real world proof of concept as possible.

What better way to give confidence? If you can exhibit positive feedback, high user retention, growing revenues, etc at an early stage, it proves the venture (as far as possible!).

The more traction a company has, the more ‘proven’ it appears and thus the less likely it seems that it will fail. When we remember that persuading investors is about lowering their risk threshold, it’s clear how important traction points are. Traction points instil confidence in the vision and its execution.

They are as close to evidence as an early-stage startup is likely to get.

An obvious concern for early-stage companies is that they feel they may lack traction. They are especially likely to feel this way if they are not generating revenue.

So what constitutes traction?

Traction is anything that validates your business. This will depend on the business: sometimes it will be revenue; sometimes it will be downloads or subscribers; sometimes it will be page views or awards.

In their efforts to provide traction points for their startup, entrepreneurs often make the mistake of relying on ‘vanity metrics’. For instance, an app may have had 100,000 downloads in its first month. But if 97% of those users never use the app again, the initial metric flatters to deceive. Most investors will work this out very quickly.

So the traction points you choose must actually prove the value of your business or they will undermine your pitch.

The best way to think about this, I have found, is to work out what your North Star Metric is. North Star Metric is a term coined by Growth Hackers to describe the one authentic value which shows that the business is doing what it set out to do.

4. IDEA

The points above help qualify the idea itself as valid. But we should not underestimate the effect of gut feeling when it comes to an investor’s initial assessment of an idea.

The timeless human fondness for the ego means that an initial gut feeling can have a powerful effect on the ultimate evaluation of the investor.

If an investor feels that an idea is good, they want to be proved right.idea for investors

So when an investor first reads about an idea, if they think it is a real solution to a real problem in a real market, they are likely to pursue the opportunity. They want to vindicate their instinct.

This is a classic example of cognitive bias. This is the term used in psychology to describe when it is hard to undo your initial judgment because your brain will keep finding evidence to support that judgement.

It’s why the hotel industry focuses so hard on the initial impression it creates in the lobby. If the atmosphere and décor feel high-end and luxurious and you are handed a complimentary glass of champagne, your whole stay will be filtered through the lens of this initial assessment. If the lobby is grubby, your bias will lean in the opposite direction.

This can be capitalised on by entrepreneurs. When you set out what your business actually does, do so in such a way that plays up to this bias. Make a clear and powerful first impression.

How?

The visual impression of the design of your pitch deck is very important. But so is the clear articulation of your value proposition.

We tell investors to assess whether the business is offering a real solution to a real problem. So, entrepreneurs should set out their idea using this ‘Problem/Solution framework’.

Here’s a quick example of what I could write for Angel Investment Network:

Problem: The startup industry is huge, but access to finance and investors remains difficult for entrepreneurs…

Solution: Angel Investment Network’s platform connects entrepreneurs with 130,000+ angel investors from around the world so that they can realise their potential and grow a lucrative and successful company….

The principal value of the service comes across clearly and concisely.

5. WHAT DO OTHER INVESTORS SAY?

We have seen how the advisory board can be considered a metric of sorts for future success. It follows from this that other investors can be invaluable sources of insight.

Many investors say it takes away a lot of the stress if you can share the experience. That’s why syndicates, both official ones and groups of like-minded friends, are so popular. Others may have spotted some key index of potential (success or failure) that one investor on their own may have missed.

If you already have investors on board, it is, therefore, a good idea to ask them if you can share their contact details with prospective investors.

This transparency is likely to give investors confidence in you. And allow them to allay any fears they may have by talking to people who have already invested. One caveat to this is that a prospective investor may point out a flaw that the existing investor may have overlooked!

Summary

There are many factors that any individual investor may take into account when they evaluate an opportunity. This article has aimed to cover the most general and universally useful for entrepreneurs.

But you should expect each new conversation to be different. Every prospective investor wants to see whether you are a good fit for their personal investment agenda.

On that note, it is worth saying that you should never take it personally when someone decides not to invest. It is a) a huge waste of emotional energy and b) pointless. There are so many reasons why someone may choose not to invest. One of our entrepreneurs once became despondent because a good investor had withdrawn. Little did they know it was because of a divorce!

Rejection is also a good opportunity to get candid and constructive feedback from people with real expertise – sometimes what hurts the most is the most useful in the long run.

I originally wrote this article for Toucan.co blog. It was well received so I thought I would share it again.

Women in Tech: Success & the Future…

We recently learned that Pivigo is one of 15 of the UK’s fastest growing tech companies founded by women selected to visit Silicon Valley.

The trip is part of an initiative to build ties with the US tech scene. The other firms heading to Silicon Valley include:

All are showing an annual growth rate of at least 118%.

Pivigo is a data science marketplace founded by the remarkable Dr Kim Nilsson. Their mission is to connect “…data scientists and businesses across the world…to revolutionise the way we work, live and stay healthy.”

Dr Kim left her role as an astronomer on the Hubble Space Telescope to complete an MBA and pursue a career in business. The move was a good one.

Since she founded Pivigo in 2013 the company has:

  • Raised nearly £1m in funding (£300k through our investors on Angel Investment Network!)
  • Become the world’s largest community of data scientists.
  • Completed over 80 data science projects to date. (Clients include KPMG, Barclays, British Gas, M&S and Royal Mail.)
  • Started Europe’s largest data science training programme S2DS (Science to Data Science). The programme supports career transitions of PhDs and MScs into data science roles.

pivigo data science women

Kim’s transition from academia to top founder is part of what makes her story so impressive and why, no doubt, she was a good choice to meet with executives from Apple, Google, Instagram and LinkedIn. Sherry Coutu CBE, the founder of Silicon Valley Comes to the UK, and the London Mayor’s office made the selection.

This link building through the UK’s most talented female founders comes at a time of high interest in the role of women in the growth of the European and UK tech sectors. Figures reported by LinkedIn and Founders4Schools show that:

  • Female-led companies have helped add £3bn to the economy over the past year.
  • The number of female-led companies with turnover of £250m+ grew by 14% in the same period.

But what about women business angels?

Despite the flourishing community of female founders and executives, only a small number are using their business acumen to invest in small businesses.

As a result, the UKBAA in partnership with Angel Academe, a network of female business angels, is conducting new research. They want to understand the barriers perceived by women about angel investing. The survey is being hosted and analysed by the the CASS Business School in London.

This research is also part of a their new Europe-wide project called “Women Business Angels for Europe’s Entrepreneurs”. The project will enable them to review the situation in Europe as well as the UK.

UKBAA logo women
The results will give important insight into how, as a community, we can engage more women in angel investing. Off the back of the research, the UKBAA plans to develop a programme with the goal of doubling the number of female angel investors in the UK over the next two years.

If you’re female and involved in startups, please do your bit for this iniative and fill out the 10 minute survey here.

Thanks!

SEIS and EIS Tax Relief Explained with a little help from Star Wars…

SEIS and EIS are the given acronyms for the generous tax breaks the UK government offers to investors in startup companies. (Seed) Enterprise Investment Scheme. The company must be UK registered and meet certain eligibility requirements. Eligibility is a great way to incentivize investors because it reduces their risk. Dramatically.

As it’s May the 4th. As in May the Fourth be with you. As in Star Wars Day. I thought it appropriate to share an article I wrote explaining the benefits of SEIS and EIS with a few lame Star Wars puns thrown in. You know, to keep it, well, Light.

**This article is relevant for companies registered in the UK only. However, companies registered outside of the UK may find it useful as there may be similar tax breaks offered by their local government.**

What are SEIS & EIS Tax breaks?

Investing in startup companies is generally much riskier than buying shares in much larger more established companies, although the returns are potentially much larger. As a means of offsetting this risk for investors and thereby incentivising them to invest, the UK government offers two attractive tax breaks known as SEIS and EIS (the Seed Enterprise Investment Scheme; and its parent the Enterprise Investment Scheme).

The tax breaks are very generous to investors and have been instrumental in helping the startup industry grow in the UK. As a result, investors now place high value on companies that have qualified for SEIS & EIS.

Because of this, we recommend that all UK companies raising through our platform seek ‘advanced assurance’ for SEIS/EIS if they think they will qualify. As a general rule, if you consider your company early stage then you probably qualify for both, or at least EIS.

What’s SEIS?

HMRC gives the following overview:

“…[SEIS] is designed to help small, early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies.”

Startups who qualify will be eligible to offer up to £150,000 in SEIS shares to investors.

What are the principal benefits for investors?

  • SEIS is incredibly generous and investors will get 50% tax relief per tax year on investments up to £100,000. (Relief is given each year, but the shares must be held for at least 3 years)
  • Investors will also get Capital gains exemption on the disposal of assets
  • There is a ‘carry back’ facility which allows investors to treat shares as if they were acquired in the previous tax year. Hence the relief can be claimed for the tax year before the investment.

Example:

Angel Investor Skywalker invests £100,000 into ‘Force for Good’, a ground-breaking social enterprise startup which qualifies for SEIS. For the given tax year, Skywalker has a tax liability of £50,000. Because of his SEIS shares he gets 50% of the value of his investment in relief, so £50,000.

This means he pays £0 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

If the company does well, Skywalker would also qualify for exemption from Capital Gains tax (up to £100,000) on the profit provided it is reinvested.

If the company folds, Skywalker will still receive his £50,000 in tax relief meaning only half his initial investment of £100,000 is at risk. When the company folds, he will also be given loss relief of 45% of the ‘at risk’ capital. 45% of £50,000 is £22,500.

So if the company folds, Skywalker will only have lost £27,500 even though he invested £100,000. That’s relief of 72.5%!
SEIS

Does your company qualify?

N.B. These tax breaks are only available to UK based companies; investors do not need to be UK resident but must have some UK tax liability against which to set the tax relief.

For a company to qualify for the SEIS scheme it must meet a number of qualification tests. The list below is not comprehensive as the rules in place are often quite detailed and nuanced, but it gives a helpful, broad picture:

  • Permanent UK Base- your company must have a permanent UK office or the owner must be a UK resident. This must remain the case for three years from when SEIS shares are issued.
  • Your company must not be listed on the stock exchange at the time the SEIS shares are issued.
  • Your company must have fewer than 25 full-time employees at the time the SEIS shares are issued.
  • The gross assets must not exceed £200k at the time the SEIS shares are issued.
  • Your company must be early stage in that it must not be continuing a trade that is more than two years old at the time the SEIS shares are issued.
  • Your company must not have raised money through EIS or VCT schemes in the three years prior to the SEIS share issue.
  • The funds raised must be spent within three years.
  • Your company must be independent i.e. it must not be controlled by any other company or anyone associated with that company.
  • Your company must not be a member of a partnership

To get formal approval of SEIS eligibility you need to fill out an SEIS1 form and send it to HMRC. Download the form and the notes here.

EIS

What’s EIS?

EIS is the parent of SEIS. The principle is the same – to encourage investors to invest in early stage companies by offering them a generous tax break based on the sum they invest.

When the scheme was launched in 1993 the then Chief Secretary to the Treasury, Michael Portillo, said;

“The purpose of Enterprise Investment Schemes is to recognise that 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.”

EIS is less generous in terms of relief but it is easier for companies to qualify for and there is a larger quota available for eligible companies to offer investors. 

Startups are able to offer up to £2,000,000 in EIS shares.

What are the benefits for investors?

  • Can invest up to £1,000,000 a year in EIS shares.
  • Investors will get 30% tax relief per tax year
  • Any gain is exempt from Capital Gains tax provided the shares have been held for at least 3 years.
  • Loss relief via tax liability upon disposal of shares for a loss
  • Capital gains tax on assets can be deferred if the gain is re-invested in EIS shares
  • ‘Carry back’ facility so the shares can act as tax relief for the previous tax year

Example:

Angel Investor Vader invests £100,000 into ‘Death Star Inc’, a highly disruptive Fintech startup which qualifies for EIS. 

For the given tax year, Vader has a tax liability of £50,000. Because of his EIS shares he gets 30% of the value of his investment in relief, so £30,000. This means he pays £20,000 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

If the company folds, Vader will still receive his £30,000 in tax relief meaning only £70,000 of his initial investment is at risk. When the company folds, he will also be given loss relief of 45% of the ‘at risk’ capital. 45% of £70,000 is £31,500.

So if the company folds, Vader will only have lost £38,500 even though he invested £100,000. That’s relief of 61.5%!

Does your company qualify?

To qualify for EIS your company must satisfy the following criteria:

  • Permanent UK Base- your company must have a permanent UK office or the owner must be a UK resident. This must remain the case for three years from when EIS shares are issued.
  • Your company must not be listed on the stock exchange at the time the EIS shares are issued.
  • Your company must have fewer than 250 full-time employees at the time the EIS shares are issued.
  • The gross assets must not exceed £15 million at the time the EIS shares are issued.
  • The funds raised must be spent within three years.
  • Your company must be independent i.e. it must not be controlled by any other company or anyone associated with that company.
  • Your company must not be a member of a partnership

The full criteria and guidance on how to apply for advanced assurance can be found here on the HMRC website here.

SEIS-EIS

Summary:

If you’re an early stage company registered in the UK and you’re raising money, you really should get advanced assurance for both SEIS and EIS. It can seem a little complicated, but in effect, all you need to do is submit the correct forms to HMRC and let them work out if you qualify.

You can be sure that all your competitors will be doing it – investors are far more likely to invest in an early stage company if they have the guaranteed risk mitigation that SEIS and EIS offer.

This article was originally written by Oliver Jones for Angel Investment Network‘s Learn centre. You can view the original and other similar articles covering all topics related to startup fundraising and investment here.

What’s the outlook for mobile app startups and investors in 2017?

“There’s an app for that”, or some variant of the phrase, is now one of the most common responses to anyone raising a complaint or bemoaning a problem, however small.

Rise and fall of man

The extreme sense of entitlement coupled with the profound idleness that characterises our age has created a market for apps which manage or assist with our dry-cleaning, our sex life, our tampon subscription, our polyphasic sleep-mapping, our pets’ bowel movements…I wouldn’t be surprised if somewhere in the murky depths of the App Store there’s an app for communing with the dead – or perhaps I’ve just been watching too much Black Mirror.

The last decade has seen the rapid and unstoppable emergence of the mobile application. And it’s not just quick-on-the-uptake millennials who are enamoured with this new way of being, by now nearly everyone is a smartphone-toting app addict.

But is this set to last? And what’s the outlook for mobile app entrepreneurs and investors?

The general consensus from anecdotal reports is that mobile app companies are finding it more difficult to raise finance. This requires some unpacking. Thanks to a report from our friends at Beauhurst, who track the funds raised by thousands of seed, venture and growth-stage companies, we can see that the amount invested in mobile apps in the UK reached its highest ever level of just over £560m in 2016 (that’s up from £67m in 2011 and circa £275m in 2015).

Mobile app deal numbers and amount invested 2011-2016
Mobile app deal numbers and amount invested 2011-2016

So what’s the problem? Clearly, there are enormous (and increasing) amounts of capital still being ploughed into the app industry by investors. But hold on, there’s a nuance to this.

The crucial change which gives credence to the consensus is that the stage of the app companies raising money has changed. In 2013, 70% of app companies who raised money were seed stage, but by 2016 that number had dropped to 62% with more investors opting for the more proven venture and growth-stage companies.

So from this, we can see that for early stage app companies the prospect of raising finance has indeed become marginally harder. However, the amounts being invested into the sector are still growing at an impressive rate so for apps good enough to compete, there’s still a world of opportunity.

With thanks to Beauhurst for permission to use their data. You can read their article here

Business Funding Show Event – Canary Wharf 23rd February

Angel Investment Network will once again be joining a host of other companies from the startup investment space at the latest Business Funding Show on 23rd February near Canary Wharf tube station.

PICTURE with Logos

Attendees will be given the opportunity to:

– Meet famous entrepreneurs like Mark Wright (BBC Apprentice Winner)
– Learn from Angel Investors such as Mike Greene (C4 Secret Millionaire)
– Meet a range of leading financial institutions
– Get free 1-2-1 with Top Investors & VCs
– Attend talks from industry experts

Wondering what it’s all about? Check out what it was like last year in the video below:
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If I were an SME today and I’d just started a business or I was growing a business in my early days, I’d be here at the Show, because I want to learn more and more about all the different forms of funding available, meet potential funders every year, meet with fellow entrepreneurs and learn from them, learn from the speakers, who are very experienced.Lord Bilimoria of Cobra Beer

Picture Richard

My mission is to help entrepreneurs to set-up and grow their business. So, the Business Funding Show is a perfect event for this, as it’s all about helping entrepreneurs to learn how to get money and grow fast.Richard Reed of Innocent Drinks

Our very own Xavier Ballester will also be giving a workshop on raising money through angel investors!

You can get tickets here.

Latest Success Story: Repairly get their investment fix

Repairly is one of the latest company’s to come off Angel Investment Network’s funding line. The company is now gunning to fix the technology repair industry having closed a £265,000 seed round.

Repairly is disrupting the billion-dollar technology repair services industry by offering collection and delivery on broken tech. Their mission is to make it ridiculously simple to get your phone, tablet or laptop repaired.

Repairly 3

The introduction of Repairly means that people no longer have to go to the expensive Apple Store or inconvenient corner shops – customers don’t even have to leave their desk. Repairly collect, repair and return within an average of 2 hours and 6 minutes.

Fraser Williams, co-founder and CEO at Repairly, says: “Over 32,000 phones get broken everyday in the UK alone. People don’t know where to turn when this happens. Repairly turns people’s negative experience into a positive one, and if you can find delight in a phone repair, you can find it anywhere.”

Richard Edwards, the other co-founder, says: “We ensure busy people with broken technology are back up and running as soon as possible…We saw how much technology had advanced but the support for that technology was lagging behind. People were waiting for up to 2 weeks without their phone. That seems crazy in today’s technology-reliant society.”

The business was started in 2015 after Fraser Williams dropped out of University. Richard Edwards was an early team member of the online cleaning marketplace, Hassle.com, which was acquired by Rocket Internet in July 2015.

Repairly is a graduate of the UK accelerator programme Virgin Media Techstars. The seed investment came from well-reputed investors including someone whose previous company, AddLive, was acquired by Snapchat, Richard Fearn, Daniel Murray (CEO, Grabble), Richard Pleeth (Ex-Google).

Richard Fearn comments: “Repairly’s business is growing quickly into a large market, with strong unit economics and great customer reviews.”

Exciting news for Repairly; and everyone prone to breaking their smartphone!