EISA’s Director General, Mark Brownridge, is in optimistic mood as he argues why he believes it will be companies from within the EIS and SEIS ranks which will rise to the challenge and become the next Uber or AirBnB
So now we know for sure. 2020 was the worst year economically for the UK in 300 years as the UK economy shrank by 9.9%.
And the grim reading doesn’t stop there. According to the Office of National Statistics, that contraction is more than twice as much as the previous largest annual fall on record and is one of the largest across all the major economies in the world.
Not since 1709 has our economy fared so badly. What was the cause of the 1709 downturn? It wasn’t disease but cold weather. The Great Frost of 1709 was so cold, there were reports of flocks of birds frozen mid-air and plunging to the ground. Other stories told of corpses impossible to move because they were frozen into their bedsheets. All across Europe rivers iced over, bringing commerce to a halt. Three months of cold weather ruined a year’s worth of crops, caused starvation and was an economic catastrophe. The UK economy wouldn’t recover from it for 10 years.
The road ahead
This time round, our road to recovery should, fingers crossed, be easier. The Bank of England tells us the economy is like a “coiled spring” with businesses and households currently in stasis but ready to unleash pent-up growth when the economy is fully reopened. So the prospects of a “roaring 20s” might provide salvation.
Certainly, many of the small business owners and entrepreneurs that we talk to, and as I am sure many of you can testify, have found 2020 to be at best difficult and at worst catastrophic. Small businesses tend to be cashflow dependent; they don’t always have large reserves of profit to call upon so any downturn in sales can have a significant effect.
So far, we haven’t seen the number of insolvencies and bankruptcies that we might expect given the situation. There can be little doubt that the Government’s interventions such as CBILS, Bounce Back Loans and Future Fund have propped up small businesses. However, as these measures start to get wound down, there’s no doubt these numbers will rise.
Winners and losers
What’s clear is that the pandemic has created winners and losers, both at sector and firm level.
At sector level, fairly obviously the hospitality, travel and leisure sectors have had a tough pandemic. Pubs shut, travel banned and social gatherings off limits have meant all almost all firms in these sectors have been decimated.
But could they be due a bounce back in 2021 and beyond? With us all desperate to holiday, meet and eat together again, are these the hot sectors to invest in now?
The retail sector has created winners and losers more than most. The major online retailers and supermarkets have had a great pandemic in terms of business performance. Smaller or high street stores with little online presence have struggled or in many cases (Debenhams, Topshop) closed their doors permanently.
The other big sector winners have been those sectors which were already starting to see growth but which the pandemic has accelerated at lightning speed, predominantly in tech. Think Zoom, Hopin (first fundraising to Unicorn in 2 years) and Revolut.
The question now is will these trends continue post-pandemic or will such successes be short lived?
Other sector success stories, for obvious reasons, have been medtech and biotech. The scramble for vaccines, testing kits, PPE, personalised health and diagnostic equipment has seen a wall of money reach a sector that has typically struggled to access funding given the traditionally longer timescales needed to start and scale such businesses (by contrast BioNTech, who developed the first Covid-19 vaccine with Pfizer, started in 2008 with a “seed” investment of $150M, an amount a UK biotech startup can only dream of). Again, is this short term reaction or sustainable, long term movement?
The investment case
Many sectors are therefore in flux, which presents investors with opportunities.
During the global financial crisis of 2008, we saw that it decimated the large, static, immobile blue chip companies whose focus was on maintaining their status quo rather than innovating and getting ahead of the curve. Correspondingly, it helped smaller, more nimble operators focused on disruption and technology to flourish.
One simple example is Uber – granddad of the ‘order by app’ concept and which has totally transformed an industry. But back in 2008, it was a struggling start-up being turned down by every VC in America. Its early investors weren’t institutions but private investors like Mike Walsh. Walsh was on his way to buy a Tesla when he got a call from Uber founder, Ryan Graves, who told him about his new project. Walsh liked the idea, cancelled his Tesla order and instead invested $10,000 in Uber. That $10,000 investment went on to be worth $24,827,400. More amazingly, Walsh wasn’t a seasoned investor, this was only his second angel investment.
With sectors in flux and companies beginning to identify and capitalise on fast moving trends, it feels like now is another great investment opportunity. Clearly, the Uber example above is an exception rather than norm. For every Uber, there are 100 Betamaxes but it goes to show what is possible when investing at the earliest stages of a company’s growth journey. And it’s the job of a good VC fund not just to second guess these trends but to work with companies when things go against them and to help turn them around.
State of play
The Government plays its part by facilitating the landscape and has indeed committed to making the UK the tech and entrepreneur centre of the world. Actions speak louder than words and we wait to see whether the Government delivers but it has made a good start with initiatives such as the £20M Tech fund and the £134M Sustainable Innovation Fund. But it is private investors and fund managers who can play a significant part and drive sectors and companies forward even quicker. This is where EIS and SEIS come into play.
In the past few years, the schemes have been focused on delivering funding to companies prioritising growth, innovation and tech. During the pandemic, EIS and SEIS funded companies and the funds which invest in them, have proved the value of this strategy. They have proved to be not only nimble and adaptive but also genuinely inventive, profitable and increasingly important job creators.
Nurturing the winners
It’s been genuinely thrilling to see so many EIS or SEIS funded companies be first responders to the pandemic, each in a different but rapid and effective way. It’s now the job of those companies and the VCs that support them to ensure they continue to grow and are ready to take advantage of further opportunities when they present themselves either at a macro or micro level.
There will always be winners and losers in early stage businesses. Both receive funding but only VC backed businesses get the mentorship, support and advice required to navigate through all types of economic conditions to create consistent winners. And it is consistent winners which the economy needs to put the economic catastrophe of 2020/21 behind us, get us back on track and start delivering years of sustained growth. Those winners sit within EIS and SEIS portfolios. It’s my absolute conviction that within a UK VC portfolio right now lies the next Uber or Airbnb. It will be exciting to see exactly where it comes from!
About Mark Brownridge
Mark has over twenty years’ experience in financial services and prior to becoming Director General of the EIS Association, he was Head of Research and Development at Mazars, a leading UK financial planning firm. Mark is highly qualified being a Certified Financial Planner, Chartered Financial Planner, Chartered Wealth Manager and Fellow of the PFS and also sits on the CISI’s Accredited firms committee and TISA’s Distribution Policy Council. Mark’s involvement with EIS began 8 years ago and he has since championed EIS investing within a financial planning context and is extremely passionate about promoting the industry, increasing its effectiveness and ensuring the private sector continues to drive much needed funding to small companies.