What kind of startups are venture capital trusts (VCTs) looking to invest in during the coming year?
Top of Santa’s wish-list of startups VCTs want to invest in, as 2023 draws to a close are, in no particular order: drug testing which avoids have to test pharmaceuticals on animals, ways to get renewable energy into businesses, and ventures specifically targeting the baby boomer generation, which today means those aged over 60.
The Venture Capital Trust Association (VCTA), which represents 90 per cent of the £6bn of VCT assets under management, expects the amount raised through VCTs to be down in the 2024/25 tax year.
Will Fraser-Allen, chair of the VCTA and managing partner of Albion Capital, expects VCTs will raise less their usual £1bn this year because of all the pressures on the economy. Brexit, Covid, Brexit, the cost-of-living crisis and the end of cheap capital have all created strong headwinds for VCT fundraising. However, he points out that VCTs still outperform VCs when it comes to attracting investment by proportion.
However, the VCTA is confident that VCTs themselves will be extended past their current 2025 sunset clause, having been assured by the Government that Jeremy Hunt is onboard with keeping the scheme alive.
What kind of startups do VCTs want to invest in?
Maya Ward, investment manager at Gresham House Ventures, which has £800m of VCT money under management, specialises in, among other sectors, healthtech.
Says Ward: “This year has been quite challenging for healthtech, partly because of the bankruptcy of Babylon [the virtual GP startup] making investors more selective.”
However, she still believes there is room for virtual healthcare-at-home services because Britain has an ageing population with a global shortage of healthcare professionals.
“For that reason, I’m quietly confident that the market is giving me a bit more reason to be optimistic than last year,” says Wood.
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Hugo Lough, venture capital investor at Mercia Ventures, would love to see more consumer businesses aimed specifically at the “boomer” generation, along the lines of travel business Saga, considering that ageing parents and grandparents are the ones with cash to spend, not the young.
Meanwhile, Adam Chirkowski, investment director at Albion Capital, which has £660m of VCT money under management, says he is interested in finding ways that startups can supply businesses directly with renewable energy.
Cleantech, says Chirkowski, was not as badly affected by the downturn in VC investment as other sectors.
The need for businesses to get to net zero as quickly as possible will become more pressing once businesses realise what the penalties could be for not meeting the environmental targets they signed up to. The amount of environmental, social and governance (ESG) legislation has quintupled in a few short years, says Chirkowski.
He points out that businesses quick to sign up to ESG commitments may not have fully understood what it was they were committing to, given the plethora of costly ESG legislation.
“The most interesting opportunities,” says Chirkowski, “are those that have not on have a positive environmental impact but also a positive revenue impact as well.”
“Sustainability is a hygiene factor for every business,” agrees Hugh Lough, venture capital investor at Mercia Ventures, which has £350m under management in VCT funds.
Nick Sando, principal of Octopus Ventures, which manages £1.8 billion on behalf of 40,000 investors, sees cryptocurrency startups as good investment opportunities. Octopus is eyeing cryptocurrency businesses because they are priced cheaply right now and are well-suited to the long-game investment strategy of a VCT.
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