Are you at the start of your business odyssey? Struggling to attract investment that'll take your start-up in a successful direction? Venture capital trusts (VCTs) are publicly-listed firms that are set up to back smaller UK companies with the funding they need to achieve rapid growth.
Getting a business off the ground requires huge amounts of time and effort. It also needs funding to spend on things like materials, logistics, staff, and more. Getting that cash as a new start-up or early-stage business can be hard, however. And that's when a venture capital trust may feel like it's the right option.
VCTs are a form of private equity financing. They are what's known as a closed-end investment scheme, which can provide funding for smaller companies. In addition to that funding, however, these trusts can also know their markets. And it means they can offer valuable support too.
A venture capital trust fund has the structure of a publicly-listed company. Investors can trade shares in such companies on the London Stock Exchange and have the chance to expand their portfolios through the investments a VCT makes. And it's not uncommon for VCTs to only take minority stakes in the companies they invest in. So, much of the control is retained by you.
In the tax year ending 2020, shares to the value of £685 million were issued by VCTs in the UK. This is much-needed funding that has helped numerous small businesses take the next step.
As a start-up or young business, there are many things that pull on your tight purse strings. Each element can seem necessary in its own unique way too. But making ends meet is a challenge. If you're finding it hard to get funding from external sources, a venture capital trust is specifically set up to step in and help. And you can put that investment to good use in plenty of ways.
Is your start-up operating on a skeleton crew? Do you need additional expertise to move things forward? Are your current premises holding you back? The investment that you get from a VCT could help you recruit new experts to your team or move into a base with more space.
It's one thing for your product(s) to reach a limited, yet loyal audience. But growth can only be achieved if you can branch out further. VCTs can provide the budgets for marketing campaigns that spread the word further. And they can also offer helpful guidance on how to do it.
Looking to build on a successful first product? Reckon there's more potential that's waiting to be unlocked? With fresh cash, you can guarantee that your next step is the right one. It can be done with reliable market research, iterative product testing, or new experiments.
In other forms of equity financing, you might find that one investor is willing to provide you with the funding you need. This can be a wealthy individual or a private equity firm. But there can be times when finding one single investor isn't possible. That's when a venture capital trust fund is a potential solution.
Instead of one source that provides all the funding that your business needs, VCTs give multiple investors the chance to do so. To do this, each investor will buy shares in the VCT. The trust will then invest the amount raised into a smaller business. Normally, a business that secures money from a VCT won't be listed on the stock market. They're also seen as longer-term investments.
An investor has the chance to buy shares in a new venture capital trust scheme – or an existing one. Either way, investors can take benefit from tax relief on the cost of their shares. The trusts are investing in start-ups and newer businesses – so they can have an important role to play in the economy. But the nature of younger businesses also makes such investments higher risk.
Like any source, it's important to make the right call when looking to secure funding. For start-ups looking to take the next step, venture capital could be the solution. Not only will they offer the capital you need, but you can also benefit from their market knowledge.
That said, you'll need to have a business that's worth investing in. VCTs will do their homework to make sure their investment will literally pay dividends. At the same time, however, you must also do your homework. VCTs want to make a return – but that means helping you to become a success. If they're not committed to that, is taking venture capital trust support right for you?
You must also be prepared to give up at least some control of how things are done. A VCT can insist that any funding is in exchange for a say at board level.
Meanwhile, don't rule out alternative forms of commercial funding. While you might not get the headline amount of investment you need, the terms could be much more favourable. And there can be so much riding on making the right call. So, why not talk to someone who can help? Get in touch with Nucleus today and our specialists will help you decide what course to take.
To attract support from a venture capital trust in the UK, there aren't too many prerequisites. Two main factors will probably impact your chances. They are:
− If you have high growth potential
− If you're listed on the stock market
Usually, a business that attracts VCT funding will be relatively young – but with the prospect of success to come. If that sounds like your business, you could be ripe for investment. If not, no worries – there are other funding options. And those too could be the catalyst for your success.
No venture capital trust guide is complete without a look at the pros and cons of this particular commercial funding option. And, as with any avenue that you may be exploring, you'll need to be sure that any benefits outweigh the potential negatives.
The big advantage to your business is that you get the funding you need. That could be to hire new staff, create new products, or expand into other markets. And sometimes VCTs can unlock your growth in a way that no other form of funding can do.
For investors, meanwhile, the big draw is the tax breaks on their investment. It's not unusual to see higher earners take this investment route either. The upside of this is getting the insight and knowledge of people who have been there and done that before.
There's also a sense of stability too. VCTs are long-term investments. You can't take advantage of the tax relief on an investment for at least five years.
On the flip side, however, there's no guarantee that your business will succeed as hoped. There may also be a requirement to give up something in exchange. This could be a seat on the board or certain voting rights on future decisions. And the question then becomes "is it worth it?"
You can find different types of venture capital trust funds, yes. They're normally based on which type of business they invest in – or even for how long. You might encounter the following VCTs:
A generalist VCT can invest in any business – no matter the sector or how old they are.
While VCTs don't normally invest in listed companies, there are some trusts who will only invest if you are – or soon will be – listed on the Alternative Investment Market.
It won't come as too much surprise to learn that specialist VCTs have a particular sector or type of business in mind for their investment.
Again, the name indicates what type of VCT this is. It has a defined period in which it'll invest and then be wound up. Usually, this is as soon as the minimum five-year period is reached.
The opposite to a limited life VCT, an evergreen trust may keep investing on an ongoing basis.
There are venture capital trust rules for investors, VCTs, and companies who receive funding.
If you want to attract funding from this type of venture capital scheme, you must meet a set of qualifying criteria. First, you must have fewer than 250 full-time equivalent employees – or 500 if you're Knowledge Intensive (KI) as shares are issued. You can't exceed more than £15 million worth of gross assets before investment either – or £16 million immediately after.
VCTs can only invest in your business within the first seven years of your first commercial sale too. That increases to 10 years if you're KI. And you can only raise up to £5 million in any 12-month period (£10 million if KI). The total you can raise is £12 million (or £20 million if KI).
For investors, there are three tax breaks available via VCTs:
− 30% income tax relief on annual investments of up to £200,000 (as long as shares are held for the minimum five-year period)
− No income tax is due on dividends from ordinary shares in VCTs.
− Once you dispose of shares in a venture capital trust, you won't have to pay any Capital Gains Tax.
Of course, a venture capital trust might not be the answer to your funding needs. The idea may not appeal to you. Or your business doesn't qualify. In either case, it doesn't mean it's the end of the road. In fact, there are loads of alternative funding solutions out there. And Nucleus is a leading supporter of UK SMEs with the various options we can provide.
Learn more by talking to us today. Get in touch and we'll happily discuss what your business needs – and how we can help.
4 August, 2022