When it comes to venture capital, there are several different types of funds that investors in the U.K. can choose from. In this blog post, we’re going to be looking at the three main types of venture capital funds: EIS funds, VCTs and venture funds. We’ll be discussing what each type of fund is, how they work, and the advantages and disadvantages of each. By the end of this post, you should have a better understanding of the different types of venture capital funds and which one might be right for you.
EIS Funds & VCTs
An EIS fund is a type of venture capital fund that provides investments into and for early-stage companies in return for equity. EIS stands for Enterprise Investment Scheme. There is no minimum investment into an EIS fund but some funds have a £25,000 minimum.
A VCT is a type of venture capital fund that invests in small- to medium-sized companies in return for equity. VCTs stand for Venture Capital Trusts. The minimum investment into a VCT is often around £3,000-£20,000, but it can vary depending on the VCT.
The main advantage of investing in an EIS fund or VCT is that investors can receive up to 30% tax relief on their investment. For example, if an investor were to invest £100,000 into an EIS fund, they would only pay £70,000 after tax relief.
Another advantage of EIS funds is that investors can receive up to 50% capital gains tax relief when they sell their shares. This means that if an investor were to sell their shares for £200,000, they would only pay capital gains tax on £100,000.
VCTs also tend to pay regular dividends, making them an attractive option for income-seeking investors. However, VCTs are generally more expensive than other types of venture capital funds due to the costs associated with listing on the stock exchange.
The main disadvantage of investing in an EIS fund or VCT is that it’s a high-risk investment. This is because the companies that EIS funds and VCTs invest in are almost all early-stage companies based in the U.K. which have yet to prove themselves. As such, there’s a chance that the company might not succeed and the investor could lose their entire investment.
Another disadvantage is that EIS Funds and VCTs tend to be less liquid than other types of investments such as stocks and bonds. This means it can be harder for investors to sell their shares when they want to cash out.
Venture funds are another type of venture capital fund which invests in early-stage companies in return for equity. However, venture funds are far less restricted by the stage of the companies they can invest in. As a result, venture funds are able to back their winners through their life-cycle, thus maximising their returns and also retaining a level of control over the company, helping shape the outcome where appropriate.
The minimum investment amount into a venture fund can vary, but it’s typically over £250,000 and in many cases well over £1m. Venture funds are typically much larger than EIS or VCT funds, with an average size of over £100 million.
One advantage of investing in a venture fund over other types of investments is that investors tend to get access to exclusive deals which aren’t available to the general public . For example, some venture funds will only invest in companies who agree not to take any money from other sources such as angel investors or crowdfunding platforms . This means that the company will be more likely to give equity stakes to the venture fund in order for them to get the funding they need .
Furthermore , since most venture capitalists are experienced entrepreneurs or professionals, they typically have a good network which they can use to help support and mentor the portfolio companies.
A disadvantage of investing into venture funds compared with other types including listed stocks and bonds, is that it can be harder for investors to cash out, as there’s usually no active market for these types of investments and fund lifetimes tend to be 10 years.
Another drawback is that venture funds have historically been the mainstay of institutional investors which means individual investors would not normally see the investments at all and if they did, access was very difficult due to the minimum ticket price.
But times are changing…
AssetTribe works with venture funds to make them just as easy to access for qualifying investors as EIS funds and VCTs. We have done this by allowing bite-sized investments that are more manageable, but also allow investors to diversify their exposure to alternatives. We also try to make the structures and fees as easy to understand as possible for our direct customers and the wealth managers we partner with.
Although companies like AssetTribe are making access to a wider range of funds more available, essentially there are still three main types of venture capital funds that remain attractive for investors: EIS funds, VCTs and venture funds.
Each product has its own advantages and disadvantages which should be considered before making any decisions about investing. And as will all types of investment, all three types carry a certain level of risk, so potential investors should do their own research before deciding which one might be right for them.
However, democratisation of the market has meant that not only are these available to a wider range of investors – beyond the institutions, but the need for transparency and ease of understanding has led to better information and more easily understood information.
If you want to know more about opportunities to invest in Alternative Investment funds, simply register now with AssetTribe.