I guess it had to happen sometime! My first investment, made a month or two ago but kept quiet until now, is SolidLabs, makers of the Primo Playset that had a successful Kickstarter last year. It’s an absolutely awesome project to teach programming to pre-literacy kids via an arduino-based device. Watch the video, it’s really excellent. So I invested in them.1
It’s been interesting and very instructive to find myself on the other side of the figurative table. Except I’m not on the other side. I’m an entrepreneur, running a business that, who knows, may itself take funding at some point. I’m investing largely because I’m lucky enough to be able to, and because I’ve always had a desire to move towards that.
However, there are some interesting lessons at the moment, worth making notes on, if only so I can look back at them later, but also so that they might be helpful to others…
Valuation? We’ve heard of it
Perhaps because I’ve been bathed in the startup world for almost a decade now (since 2007 – almost 8 years), I am (perhaps naively, we’ll see) not that bothered about the valuation. It shouldn’t be something unreasonable, but then that is usually determined by the amount of equity being raised. Every round, from seed to series whatever, should be somewhere between 10% and 30% or thereabouts.
Why am I not bothered about the valuation? Because I understand that many if not most of those businesses will go bust and return nothing, and those that do succeed will hopefully return a sufficient multiple that the initial valuation shouldn’t be a huge factor in there. I am also counting on the fact that other investors, who are putting in more money than me, are investing on a sensible valuation, and I’m investing along with them, so benefitting from their efforts at coming up with a sensible valuation.
Ultimately, I don’t care that much if the investments that work out give a 30x multiple or a 20x multiple, so long as it’s in the tens.
I also don’t care what percentage I end up owning. That’s not what matters for an investment. What I care about is that if I put £10k in, I get a multiple of that out. Whether I turn my £10k into £50k by owning 0.001% or 10% makes little difference. What makes much more difference is how much the business grows.
One thing I have learned from reading countless articles about investor flaws is not to do the classic thing of dragging out a potential investment for weeks or months. I make up my mind quickly. Investing is not all that far from educated gambling, after all. I draw on my years of experience as an entrepreneur in the startup scene to make a snap judgement, and then do some background research to make sure I’m not being scammed.
I have a budget of a few tens of thousands of pounds to invest each year, that I’ve split into £10k packets which I’m investing in different businesses. I know I’ll lose a lot of it, but the “learning” is hopefully spread and there will perhaps be a winner or two in the lot!
I won’t invest in a field that I know nothing at all about, but “tech startups” covers a fairly broad range of topics. This enables me to make these decisions snappy. If I can’t make a decision quickly, I won’t invest.
Insider information is the killer
Obviously that’s not going to be the case for all of my investments, but where available, insider information is great to have. For example, SolidLabs was also one of GrantTree‘s clients. We wrote about their technology and their business extensively. We know them, over a period of time.
Insider trading is illegal when it comes to public corporations, but it’s perfectly legal when it comes to private investments. In fact, if you’re smart, you’ll want as much insider info as possible, and working directly with a company is the best way to get that.2
I won’t say that working with GrantTree will automatically lead to an investment. It obviously won’t. I also won’t say that it is required for an investment. It probably isn’t (the second investment I’m currently looking at is not a current client). But it sure helps!
Tax incentives help a LOT
I’ve wanted to invest in startups for quite a while, but if I look at the most immediate cause for my investments? The UK tax breaks are just too good.
Get this: with SEIS investments, I get 50% of the invested amount deducted from my income tax liabilities for the year. This means I can pay myself more without paying income tax (I don’t like income tax; do you?). Effectively, my investment is half price, upfront.
That’s not all – if, god forbid, the investment goes sour, I will get a further chunk of tax deductions at that point. It can work out as well as £7.5k of tax breaks for a £10k investment. That means my £10k packet only risks £2.5k, effectively.
Can you beat that? Yes you can. After all this, SEIS also makes the gains capital gains tax-free. So if the investment doesn’t turn sour, and in fact returns, say, a 10x multiple on that £10k, I will get £100k back, tax-free.
That’s tax incentives. And then there’s the government support the UK gives to the companies themselves. With tax credits, the money spent on R&D goes 33% further. So this £2.5k I’ve risked can enable up to £13.3k of investment. Even better if the startup gets a grant, which can be 45-60% match funded. In that case, a £10k investment could net £18.2k of spend, or even up to £25k of effective spend.
So, I risk £2.5k, and the UK government can fill in up to 10x that amount, in the optimal case. Blimey, as they say in the UK.
I guess I’ll carry on and see what happens. Where possible, I’ll mention my investments here.