SyndicateRoom, one of the leading UK equity crowdfunding platforms, has published research that indicates investors in early-stage equities have enjoyed a seventh consecutive year of 30% growth. Conducted in partnership with Beauhurst, this is the second piece of in-depth analysis of the financial performance of early-stage investment into 519 UK start-up businesses between 2011 and 2017.
According to the SyndicateRoom research, of the 519 companies in the cohort, 14% had gone onto exit (a sale or public market listing) successfully generating combined returns of £3,785,896,091. SyndicateRoom said these successful businesses outperformed their peer-group by increasing in value at 42.6% per year up to the point of exit.
The study also found that businesses that exited via an initial public offering (IPO) grew faster than businesses that exited via an acquisition.
Companies that went to list on NASDAQ grew in value at 98% per year. One of the fastest-growing companies in the cohort, Adaptimmune, grew in value at 107% per year and went to list on NASDAQ with a valuation of over £1.2 billion.
These impressive data points were balanced by inevitable failures as 14% of the companies (73 in total) 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.
SyndicateRoom explained that if you invested £10,000 into the cohort in 2011, your investment would now be worth £63,848. Taking existing tax exemptions into consideration, an investor would have lost £341 of their capital after EIS tax relief or £1,367 without the EIS tax relief. The small loss would have been offset by returns from the investment totalling £24,086, yielding an ROI of 237.45% with £38,394 at work.
Fintech continues to shine in the UK with financial services experiencing the highest rate of growth at 63% CAGR, more than double the CAGR of the group as a whole. Fintech Unicorn TransferWise’s 183% CAGR topped not only the table of financial services businesses but the entire cohort.
Education was by far amongst the worst-performing sectors at 6.32% CAGR, within the cohort.
“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,” stated 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.”
Swen Lorenz, CEO of Master Investor, said that despite the risks the data was compelling;
“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.”
Tom Britton Co-founder at SyndicateRoom highlighted four key principles private investors should keep in mind when building and developing their portfolio.
- 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.”
- Create a portfolio
“From the cohort of 519 companies, only 14% 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).”
- 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%) experienced a down round. Interestingly, the average CAGR of all the companies that exited was 42%, while the average CAGR of a company that exited and experienced a down-round was a sluggish 6.53%.”
- 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.”
Growth Hunters 2018 Early Stage Equities Report