It was the best year since the heady day of the mid-noughties for the venture capital business. At least it was the best year for Venture Capital Trusts (VCTS), which is not necessarily the same thing, although it should be a pretty good guide.
According to the Association of Investment Companies – or AIC if you are in a hurry – the VCT sector raised £402.5m in the 2012/13 tax year.
This compares with £331 million in the previous year, and as little as £158 million in 2009/09. In the year 2005/06, however, the sector raised £779 million, which was its record year. It also did better in 2005/05 and 2000/01.
The year 2003/04 was the worst recorded, (stats go back to 1995/96), when just £50 million was raised.
From an investor’s point of view there are strong tax benefits in investing into VCTs. Of course these days, tax avoidance is considered a bit fly, a bit immoral. But this does not apply to investing in VCTs; the government wants investors to pile their money into this sector.
Actually, this is the kind of news that UK plc needs. In all the criticisms aimed at banks, it is forgotten that truly innovative companies don’t need bank loans. They need investors, who take equity and a share in future profits, rather than charge a fixed interest rate, which is the same regardless of how successful the recipient of the investment is.
Think of it this way. When it comes to measuring the success of innovative companies, say ten years after inception, the curve representing success does not follow a normal distribution pattern. Rather a small number of companies – the likes of Google and Facebook – make it really big, but many others fail altogether. A banking model applying debt is manifestly not the right model for such a scenario.
Just remember, however, that smaller companies and real start-ups are too small to interest the VCTs.
For the UK it is good news that the VCT sector seems to be growing in popularity again. The UK also needs another investment level, relevant to companies that fall outside the VCT radar.
© Investment & Business News 2013