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VCTs and the rise of the billion-dollar company

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11 February 2014

Alex Macpherson, Head of Ventures team, Octopus Investments.

View a list of Octopus’ VCTs

These are exciting times to be running a VCT. A recent conversation with some friends really brought this home to me. As we were talking about work, I mentioned some of the companies in the Octopus VCT portfolios…and they had not only heard of them but were active users.

It never used to be like that. In the early days of VCTs, portfolio companies would, at best, be solid but small businesses that were just finding their feet. Investors might read about them in their regular reports, but they would rarely be well known brands.

Not every company in a VCT is going to be a household name, of course, but we now live in a world where it is entirely possible for a company to grow from start-up to star performer in much less than the five years you generally need to keep your VCT shares. Facebook, Twitter and Spotify all achieved their dominant market positions in less than five years. And if they’d been UK companies, they might well have had VCT funding to help them on their way.

In our own Octopus Titan VCTs we have great examples of companies that have achieved spectacular growth, straight off the starting blocks. Take Zoopla, one of the most prominent names in the UK housing market, but only launched in 2008. Or the members-only holiday company Secret Escapes – it’s already known to most of the population as a result of its TV adverts yet it’s only been around since 2011. Even younger is YPlan – this last-minute ticket app came out just 15 months ago but already has more than 500,000 users and is on one in five of the iPhones in London.

The fact that these companies, and many others, have been helped in their early stages by VCT investors is a good sign that the tax incentives available through the VCT regime are giving taxpayers value for money. The 38 businesses in the five Octopus Titan VCTs, for example, employed 380 when we first invested in them, but now have over 1,100 staff. Their combined revenues were around £30 million at the time of investment but are forecast to be nearly £300 million for the 2014 calendar year.  Investors have been keen to share in the potential of VCTs as well – figures from HM Revenue & Customs show that £370 million was raised by VCTs in the 2012/13 tax year, more than in any year since 2005/06.

Needless to say, it is the adoption of new technology that has created the environment where we can see rapid growth in VCT companies. It’s now possible to build a big business with relatively limited resources. In some cases, all you need is internet access.

But that doesn’t make the current situation a re-run of the dot.com boom. Although today’s successful start-ups often base their businesses on technology, they are not technology companies as such. The entrepreneurs we’ve backed in recent years come from an enormous range of sectors – including energy, food, transport, medical equipment and clothing. Rather than developing technology themselves, they are using it to disrupt or create their marketplace.

Some investors will point out that size is not necessarily a good thing with a VCT investment. If a company grows too much, it can become ineligible for a place in a VCT portfolio, or it could cause the whole portfolio to lose its VCT status. That is a challenge we have to address as VCT managers – and obviously can be viewed as a good problem to have. At Octopus we are now putting a lot of work into developing ways for our investors to continue sharing in the success of any companies that outgrow their VCT status.

This is also part of the ongoing process of developing partnerships with our portfolio companies. We have never believed in simply putting our money in and hoping for the best. Instead, we make a relatively small initial investment. Then, if the company starts to make progress, we’ll look to invest more. All the time, we maintain a close relationship with the management team – usually taking a seat on the board and offering them the benefits of our own experience as entrepreneurs.

In an environment where stratospheric growth is a reasonable goal for a start-up, it pays to offer VCT companies all the nurturing you can. After all, if the companies named above can emerge in the midst of the worst recession in living memory, imagine what a full-blown recovery might bring.

Disclaimer

This article reflects the views of Alex Macpherson of Octopus Investments on 31 January 2014. It should not be viewed as legal, tax or investment advice. The value of an investment can go down as well as up and you may not get back as much as you invest.

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