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How To Build An Enterprise Investment Scheme

How To Build An Enterprise Investment Scheme Investment Portfolio Using Equity CrowdFunding

02.09.2015

Great Britain is an excellent place to create a portfolio of investments in early-stage companies. There are many reasons for this, but one of the main ones is the generous tax benefits available to investors in early-stage companies in the form of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). So, how can you build your own investment portfolio?

Wealthy individuals have long  enjoyed the tax benefits of the Enterprise Investment Scheme. Historically, there were two options available: the completely passive approach  of investing in an EIS fund or  the more active one of becoming a Business Angel. In either case, the tax sheltering is simply phenomenal, attracting envious eyes from investors across the globe.

For those taking  the active approach, the rewards of getting involved with early-stage companies can be tremendous. As super-angel Jonathan Milner puts it – “All the fun without any of the admin of running the company”. The returns can also be incredible – according to a report published by NESTA, business angels make an average return of 22% year-on-year. The downside of this approach is that you will typically need to be able to invest significant amounts per year – often the starting point for lead investors is in multiples of £100,000.

Those who take a completely passive approach by investing in an EIS fund let somebody else do the (hard!) work of finding good investments, investing, monitoring them and securing a good exit for investors. This approach usually provides a good-enough diversification albeit typically focused  on the one or two sectors that the fund managers feel  most comfortable with. This comes at a cost though and investors pay hefty management fees that can add up to nearly 40% of the capital invested in some cases!

However,  there is now a completely new way of investing using the Enterprise Investment Scheme tax relief – equity crowdfunding. This allows online investors to build their own portfolio with all the advantages of diversifying their investments across a wide range of different sectors and geographies.

So how can you use equity crowdfunding to build a diversified investment portfolio?

  1. Decide on a strategy and play the long game – five years or more. Don’t rush to invest in everything you see; keep some of your allocated capital so you don’t miss out on good deals. Bear in mind that your first investment may well go awry before you have even finished building up your portfolio. Don’t give up, that is the nature of angel investment – the bad ones go bust many years before the good ones exit.
  2. Know and understand the platforms you use to invest and what it means to you as an investor. Your first detailed due diligence should be to find out as much as you can about the platforms themselves. What are their investor protections? Do they let just about any deal list and therefore expose you to a higher risk of bad deals or are they heavily curated, making sure your time is used wisely when analyzing potential investment opportunities? Are they investor-led (like SyndicateRoom – where more favorable terms are set by the negotiation between lead investors and companies) or are they company-led (like Crowdcube and Seedrs where the terms are mainly set by the companies)?
  3. Invest with those that have sector knowledge – building a diversified portfolio is likely to take you to sectors that are outside your comfort zone. Check to see  if any lead investors experienced in that sector are putting their own money into the deal. If not, leave it alone.
  4. Diversify your investments – to build a truly diversified portfolio you should aim to make at least 5 to 10 investments per year in different sectors. Consider how much you are thinking of investing in one year and divide it by ten –  this is your average investment size.
  5. Know what the fund management fees are – if you invest via an investor-led equity crowdfunding platform you are gaining exposure to the deals experienced investors are investing their own money in but avoiding the management fees of a professionally managed fund. Say you invest £10,000 a year. If you invest this money in an EIS fund, you may end up paying up to 30 to 40% in management fees in some funds, effectively leaving you with £6k to £7k invested. However if you carry out your own due diligence and invest via an equity crowdfunding platform you invest the full £10k or to put it in another way – you get to choose 3 to 4 extra investments ‘for free’!
  6. Be prepared to follow your money – remember that most angel investments require further funding, so keep some of your powder dry, i.e. be prepared to follow your money in future rounds. If you invest £1,000, be prepared to follow with up to £5,000 if the company is going well to maximize your returns.
All in all, the due diligence required to build a portfolio of investments via an equity crowdfunding platform (what is equity crowdfunding?) shouldn’t be too dissimilar to direct angel investing. The legal process is simplified as the platform takes care of that part and if using an investor-led platform, you get the reassurance of having experienced investors bringing favorable terms and investing their own money. What is potentially very attractive is that investors can now choose which businesses their hard-earned cash will support and in the process get 3 to 4 more investments in their portfolio whilst investing the exact same amount of money. What’s there not to like?

Article cited from: http://goo.gl/ahqVEW