It’s safe to say that the UK’s technology sector is an industry on the rise. The UK is the third country, after the US and China, to reach a combined market value of $1 trillion for our technology sector.
With that said, It’s no surprise that Investors are always looking for the next ground-breaking tech companies to invest in. Between the ever-expanding advancements in AI and the continual growth of tech giants such as Amazon and Alphabet, the lucrative lure of investing in tech start-ups can’t be denied. But how can you invest in tech start-ups in the UK? In this guide, we discuss the different avenues to investment and how to invest in tech start-ups via the Enterprise Investment Scheme.
Please note that the information below is for general informational purposes only. For further clarification, please seek professional tax advice before making financial decisions.
How To Invest In A Tech Start-up In The UK
There are several avenues and ways to invest in UK tech companies, each offering different advantages depending on the level of risk you’re willing to undertake, as well as your investment goals:
- Angel Investing: This involves investing your own money directly into a start-up in exchange for equity. If you are a high net-worth individual with access to seed funds and can offer regular mentorship and guidance to a budding tech start-up – this is a great option.
- Venture Capital: Venture capital firms will invest in exchange for equity and typically provide significant funding to help the tech start-up scale. This is particularly beneficial for investments as you’re able to draw on the expertise of the venture capitalist company, which is ideal if you don’t have the time to research individual tech companies.
- Crowdfunding: By leveraging platforms such as Seedrs and Crowdcube, you are able to invest a smaller amount in exchange for equity. As well as requiring less money up front, this option generally also provides a lower level of risk, since these platforms are required to meet certain criteria such as a strong business plan and a minimum funding target.
- Accelerator Programs: These programs are designed to last only a few months at the beginning of the start-up’s life. They provide funding, mentorship, and other resources in exchange for equity and are designed to accelerate growth.
- EIS Scheme: The Enterprise Investment Scheme (EIS) offers tax benefits to individuals who invest in small to medium, growing companies, including tech start-ups. Certain criteria must be met in order to qualify for EIS. The start-up must be a U.K.-based business with less than 250 employees, it must also have gross assets of no more than £15 million. This is generally a very attractive option since it provides generous tax benefits and is of a highly tax-efficient nature.
4 Steps To Investing In A Tech Start-up Via The Enterprise Investment Scheme
Investing in a tech start-up in the UK through the Enterprise Investment Scheme (EIS) can provide attractive tax benefits and potentially high returns. Here are 4 steps to invest in a tech start-up in the UK via the EIS scheme:
- Understand EIS: Designed to encourage investment in small and growing companies, the EIS is a UK government scheme that offers significant tax breaks to investors. The company receiving the investment must comply with the criteria mentioned in the previous section. You can also read more about EIS eligibility here.
- Contact a well-known EIS fund
- Invest: In order to qualify for the tax benefits available through the EIS, you must hold shares in each company you have invested in for a minimum of three years. You can only invest up to £1 million per tax year.
- Claim tax relief: Investing in an EIS-qualifying company allows you to claim up to 30% income tax relief on the amount you have invested, up to a maximum of £1 million per tax year. Any losses incurred may be used to offset other capital gains, and you can also claim capital gains tax relief after three years.
Looking for more information? Read more about how you can benefit from EIS funds here.
Benefits of Investing In Tech Start-Ups With EIS – Funding The Future
In addition to the tax relief available, there are so many more benefits to investing in a tech start-up via the Enterprise Investment Scheme that make it a hugely attractive option:
- Diversification: Taking this investment option can help diversify your portfolio, as start-ups have the potential to offer high returns that are not dependent on traditional investment options such as stocks or bonds.
- Support for Small Businesses: Investing in small businesses with the potential for huge growth offers the opportunity to create jobs and contribute to boosting the economy.
- Impact Investing: The EIS also gives you the opportunity to provide funding to companies that may have a positive impact on society with their latest invention and innovations. You could be backing the next ChatGPT!
Why Should You Invest In Tech Start-Ups In The UK?
As mentioned at the beginning of this guide, the U.K tech sector now has a combined market value of $1 trillion. According to Growth Business, this is the first time any country other than the U.S. or China has crossed this threshold. The UK continues to hold the first position for funding fast-growth technology businesses, raising a near-record level of investment this year of £24bn. It is clear to many that the U.K. tech sector is one of the most exciting places to invest, however there are several other reasons to invest in UK tech start ups:
- Innovation: Hundreds, if not thousands of cutting-edge start-ups have flooded the U.K. over recent years. The country is home to some of the world’s leading universities, research institutions, and technology companies.
- Skilled Workforce: The U.K. government has invested heavily in STEM education to support the growth of the tech sector. This support and backing has added to an already highly skilled workforce of talented engineers, scientists, and entrepreneurs.
- Strong Investment Ecosystem: Throughout this guide, it has become evident that the U.K. has a strong investment ecosystem. There are a wide range of options that can both provide attractive tax incentives and support the growth of tech start-ups.
- Global Reach: It is common for other countries to expand their operations to the U.K. in order to take advantage of the benefits we have discussed. The U.K. has become a global hub for technology, a fact that can not be understated.
- Future Growth Potential: Since the pandemic, the tech sector has boomed thanks to the necessity for more reliable digital solutions. It has created new opportunities, such as remote working, and is now the key driver of economic growth in the U.K.
- Tax benefits: The UK government clearly believes that technology is the backbone of a strong economy in 2023 and is actively encouraging investing in UK tech firms. As we explained earlier in this article, this results in great tax incentives for investors.
Why EMV Capital?
EMV Capital is an award-winning venture capital investor with a focus on early-stage, high-growth deep tech companies. We seek out entrepreneurial teams that are building exciting B2B technology-based businesses with the potential to scale in large, proven markets.
Our international network of experts, investors, and corporates offers Investee Companies unparalleled access to investors and markets beyond the UK. At EMV Capital, we make use of a unique, transparent, and consistent method for deal evaluation and selection, which ensures a thorough and fair assessment of potential investments.
Additionally, our EIS Fund prioritises Board representation, ensuring an experienced executive is placed as a director or observer on the Board of portfolio companies.
Finally, as an EIS investor, you may have the opportunity to invest additional capital into the Fund’s portfolio outside of the Fund structure, allowing for further investment in promising start-ups.
What Tech Companies Do We Invest In?
Vortex has pioneered a “no-touch” microfluidic chip technology that enables the capture of circulating tumour cells (CTCs) from blood with remarkable yields while preserving their label-free and pure state. This breakthrough technology equips researchers and clinicians with valuable insights into whole cancer cells, a key factor underlying the causes of metastasis, treatment resistance, and disease recurrence.
Q-Bot is an award winning British company with a clear mission to revolutionise the built environment by pioneering the development of robotic and AI systems that expertly apply materials for constructing, maintaining, and upgrading buildings. With a focus on improving the health of our built environments, reducing energy consumption, and promoting sustainability in the construction industry, Q-Bot is poised to become a global leader in this cutting-edge field.
Sofant Technologies, based in Edinburgh, Scotland, is a pioneering radio technology company that leverages its proprietary RF MEMS technology to address the power consumption and heat-related issues encountered in satellite communications and 5G antenna systems. The company’s low-power, low-cost platform is at the forefront of this cutting-edge field. Sofant’s fabless semiconductor business model allows it to take advantage of established, high-volume, low-cost production methods, enabling it to remain a leader in the industry.
Why is a tech start-up a good recommendation for investing?
As we have discovered in this guide, there is the potential for excellent returns. There is also the opportunity to stay ahead of the game and be involved with projects that will shape our future.
What risks should I consider before I invest?
As with any investment, a number of risks should be considered before going ahead. It is also recommended that the investment should be part of a diversified portfolio. Companies in the early stages of their development pose risks including illiquidity, lack of dividends, loss of investment and dilution.
How do I know this investment is right for me?
First and foremost, consider how willing you are to take risks. It would also be highly beneficial to consult your financial advisor and ensure you have a strong long-term strategy in place. If a tax-efficient investment is your priority and you are willing to put in the work to mitigate the risks, this type of investment is likely a good fit for you.