A new way to invest in UK tech start ups. The Mindful Money interview with Force Over Mass Capital

30th May 2014

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A new investment vehicle has been launched in the UK with the aim of allowing high net worth investors access to the tech start-up sector.

The group – Force Over Mass Capital – has been established as a combined Seed Enterprise Investment Scheme (SEIS)/Enterprise Investment Scheme (EIS), which invests in around 40 firms with three quarters in the earlier stage SEIS firms.

SEISs were first introduced by the government in April 2012 in a bid to encourage investors to finance start-ups business as they provide investors with generous tax breaks for backing high-risk projects

The business, founded by Martijn de Wever (pictured) and Theo Osborne, the brother of the Chancellor of the Exchequer, aims to bridge what they see as a gap between crowd funding for very small start ups and venture capital for more mature firms. It will also take advantage of the very generous tax breaks available as the UK aims to reinforce its status as a technology hub. The minimum investment is £25,000.

The firm is partnered with Dreamstake, a leading web-based accelerator platform which connects entrepreneurs, start up firms and potential funders.

Mindful Money asks the two founders about their investment vehicle and the UK’s prospects as a tech hub.

Is the UK genuinely becoming a centre of technology and how does it compare with the US?

Martijn de Wever: “There is a big shift taking place. With tech, the US has always been a hub starting with Silicon Valley but even there we are seeing the really disruptive ideas coming from more localised areas. Solutions for problems are found everywhere but maybe Silicon Valley is a little bit sterile now. It is more a case of smaller firms with creative people that come up with new kinds of businesses. That trend is following through to Europe and now the UK is the main hub for new ideas in tech companies. The UK government is doing an excellent job of creating an eco-system that is fully supportive.”

Theo Osborne: “The government is trying to pool resources here, to get a lot of guys with intellectual capital, people who may given up jobs in the states and are now moving here to take advantage of the SEIS and EIS rules.

“London is a place where businesses can be scaled up. It is well placed in terms of time zones, rents are comparatively cheap compared to other parts of the world, certainly where the tech start ups are. It is a fully nurturing environment. There is also a co-sharing and co-working environment here, while it is a lot more secretive in Silicon Valley because it is a lot more mature – and the firms are worth billions.”

What about the hype surrounding tech stocks in the past and even now with some big firms coming to market and then falling back – should investors not be wary?

De Wever: “There has been a lot of talk about valuations and whether we should compare it to the dot.com era. There is one crucial difference. In the dot.com space, everything was more conceptual. In that period, a lot of the companies didn’t really have monetisation plans, nor were they even revenue generating. The companies that are being set up now actually make money. This is a solid base for building a sector. There is a question of what sort of value you should attach to firms. Here and there you will also have inflation of prices, some firms that have had IPOs were valued a little too richly but at the end of the day, prices never go up in a straight line.

“The big thing is that if you look on the streets, in the last 10 years technology has become so intrinsic in people’s lives. That gives me the reassurance that the tech space is a very solid market with huge upside potential. When things go up people talk about hype but these businesses have a strong growth characteristics. And in tech sometimes you can go global with the push of one button.”

What are the strengths of the UK?

De Wever: “The UK government is doing a lot to promote the tech ecosystem. In the GDP numbers it is 8% coming from technology and that is expected to rise to 12% in the next few years with a better diversification for the country than just being reliant on the financial sector.

“SEIS and EIS promote people moving to the UK. The start-up entrepreneurs come from everywhere, even from the States because they like to live in London. They see it as the first city to launch their products.

Osborne: “London has traditionally been the financial centre but we are seeing people leaving high paying City jobs and moving to start ups in Fin Tech, adapting their expertise.”

What range of firms do you invest in?

De Wever: “We invest in everything but bio tech. There is a wide stream of social media firms, the internet of things, companies that are in Fin Tech – for example payment solutions.

Osborne: “The point of the fund structure is that is very diverse and non-sector specific.”

What is the difference between the firms in the EIS and the SEIS?

De Wever: “The difference is where they are in the life cycle. They are eligible for SEIS if they haven’t had funding before. The way we structure the fund, we invest in 40 companies, with the main investments split into three phases.

“We want to take away a lot of the problems that start ups have. Start ups tend to grow up to the next round of funding, then they need to go on the road again to look for more. That is very inefficient. We want to say to the start ups that we have secured two extra rounds of funding or portions of rounds of funding for you, as long as you have a good business.”

“They have to prove that they have a valid business and a market for it and then we take care of the funding issues. The good thing is that you build a long term relationship and you become their partner in valuing their company.

“If the companies grow to a particular size, and we need more capital than the fund can support, we can invite venture capitalists to join. They are pleased with that because the space  between crowd funding and venture capitalists is not really served at the moment. That middle tranche is not touched. VCs are happy because they can invest according to their internal models. We offer our investors a seat at a table where in the past it is has been difficult to get involved in disruptive ideas.”

What is the typical journey of a firm that gets funding?

De Wever: “We have an alliance with Dreamstake. They have created a very big platform of around 11,000 people and 500 firms which get a particular ranking. For the best ones, we hold selection days every other month. We have an interview process, they pitch their ideas, then we do the due diligence on the companies from every angle. Then when we comfortable we make an initial investment of £20,000.

“Then after the firm’s have gone through the accelerator programme, we put in around £130,000. Then there is phase two and phase three of funding. The second tranche is aimed at increasing market share, new product development and optimising production process and cost structure. Stage two and three will provide direct co-investment opportunities for Force Over Mass Capital investors and external strategic partners. We deal with funding. They need to be busy reshaping the world and inventing and improving their disruptive ideas. We also let people invest in a space that has always been closed.

‘The whole process is up to an exit point which is either a trade sale or an IPO. In Europe, historically the exit point is earlier. Start ups in Europe tend to sell quicker. It is always good to first create a successful business and if an IPO is in the books, it is in the books.”

What makes the typical technology entrepreneur?

De Wever: “Entrepreneurs want to change things. They have an innate disruptive drive. They have to be very ambitious. They need creative knowledge. You need strong technical knowledge, and a good user experience guy is very important. You need to have a team with complementary skills in place. We apply a unique risk management and performance evaluation mechanism – an algorithm which analyses the makeup of the founder, the market potential and the business proposition of potential investee companies.”

Some investors may be concerned that this is a risky sector. How do you manage that risk?

De Wever: “We asked ourselves how to we build this for people to invest safely. There are three pillars. First you need a diversified portfolio. There is a lot of angel investment but it is usually on a concentrated basis, you may have some traded risk in one or two investments and need to devote quite a bit of capital. This diversified portfolio mitigates the risk. Then the tax regime gives substantial income tax reliefs and you don’t pay any capital gains tax and if companies fail there is a loss deferral too. This mitigates the risk. Finally the most important aspect in terms of risk, is that we have linked up with the Dreamstake accelerator programme. Established entrepreneurs from firms such as Yplan and Halo help mentor the start ups. They want to see what is new and up and coming.”

What is the typical investor?

De Wever:  “We are meeting a wide variety of different clients. They have to be high net worth but we want to open up this space for more investors. We like the fact that it isn’t an exclusive club.”

Osborne: “We are investing in innovation in the UK, a myriad of different start ups. We are getting tech clusters in Newcastle, Bristol, Cambridge and Oxford. We are opening up their market to individual investors who couldn’t before get into this market.”

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