Exclusive research from online investment platform SyndicateRoom reveals investors in early-stage equities have seen a seventh consecutive year of 30 per cent growth.
Early-stage equities: A long-term study, conducted in partnership with research firm Beauhurst, is the second piece of in-depth analysis of the financial performance of early-stage investment into 519 UK start-up businesses between 2011-2017.
The report’s findings include:
Of the 519 companies in the cohort, 14 per cent had gone onto exit (a trade sale or stock market listing), successfully generating combined returns of £3,785,896,091. These successful businesses outperformed their peer-group by increasing in value at 42.6 per cent per year up to the point of exit.
Are IPOs better for exits than M&A?
The study also found that businesses exiting via an IPO grew faster than businesses exiting via an acquisition. Companies that went to list on NASDAQ grew in value at 98 per cent per year. One of the fastest-growing companies in the cohort, Adaptimmune, grew in value at 107 per cent per year and went to list on NASDAQ with a valuation of greater than £1.2 billion.
Early-stage investing does carry risk. Fourteen per cent of the companies (73 in total) in the cohort failed, resulting in a total loss of value for investors. The majority of the companies that are no longer in business, 31, failed in 2017.
Returns from early-stage investing
If you invested £10,000 into the cohort in 2011, your investment would now be worth £63,848. You would have lost £341 of your capital after EIS tax relief or £1,367 without EIS tax relief. However, returns from the investment would have totalled £24,086, yielding an ROI of 237.45 per cent and you’d still have £38,394 at work (and appreciating at 30 per cent a year).
Financial services shines
Financial services enjoyed the highest rate of growth (63 per cent CAGR), more than double the CAGR of the cohort as a whole.
TransferWise’s 183 per cent CAGR topped not only the table of financial services businesses but the entire cohort.
Education fails the grade
At 6.32% CAGR, education was by far amongst the worst-performing sectors within the cohort. Given the value society holds for personal development this may come as a shock. However, for anyone familiar with the education sector, it is only a harsh truth. Value and profit, it turns out, are not the same thing.
“This cohort was worth just shy of £1.6 billion in 2011, grew to £8 billion in 2016 and now, just one year later, I’m delighted it is valued at over £10 billion,” said Gonçalo de Vasconcelos, CEO and co-founder of SyndicateRoom. “What’s more, the cohort has returned over £3.7 billion to shareholders, demonstrating the long-term profitability of early-stage investing. And with the government-endorsed and incredibly generous tax reliefs that come with the Enterprise Investment Scheme, there has never been a better time to back trailblazing British start-ups.”
“We were delighted to partner with SyndicateRoom on what is the most comprehensive and compelling data set surrounding early-stage investing,” said Swen Lorenz, CEO of Master Investor. “What this proves is that despite the inherent risks of investing in individual start-ups, when taken as a diversified portfolio, early-stage investing can be robust and very profitable. In light of dwindling returns in other asset classes, I strongly urge private investors to take notice of early-stage equities.”
SyndicateRoom co-founder Tom Britton shared four principles private investors should keep in mind when building and developing their portfolio.
(1) Get in early
“This means investing at a point when risk is still very high, but the returns can also be very lucrative. Had you invested £10,000 in the cohort in 2011 when the companies were still at seed or venture stage, at the end of 2017 your investment would be worth £63,848. Returns from your £10,000 investment would total £24,086 and you’d still have £38,394 at work.”
(2) Create a portfolio
“From the cohort of 519 companies, only 14 per cent had provided an exit for investors. We hope this number will increase over the years, but in the meantime, if you invested in just one company you’d be facing odds of just over one in ten that it would make you money. By building a diversified portfolio, the successful exits more than outweigh the failures. If you invested £10,000 into the cohort of 519 companies in 2011, by 2017 you would have seen cash returns of £24,086 and losses of £1,367 (or £341 with EIS loss relief).”
(3) Cut your losses
“Down rounds aren’t necessarily an indicator of failure, but they’re unlikely to make highly profitable investments. Of the 73 companies that successfully exited, only 10 (13 per cent) experienced a down round. Interestingly, the average CAGR of all the companies that exited was 42 per cent, while the average CAGR of a company that exited and experienced a down-round was a sluggish 6.53 per cent.”
(4) Invest with people who are smarter than you
“Sometimes the investors are just as important as the team running the company. A solid investor group acts as mentors, introducers (suppliers, distributors, other investors), and that all important support group needed when things go wrong. This can be done through sites like SyndicateRoom which makes it easy for private investors to access the deal-flow of investment professionals and invest alongside them to build a portfolio of high-growth equities.”