Oxford capital eis fund
Investor Portal

Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment. Take 2 mins to learn more.

EIS Investment Risks: Control of risk is the primary driver of success in EIS-based investments in start-ups

EIS Investment Risks: EIS investing has changed

Whilst Venture investing is inherently high risk, there are number of controls that can be implemented to mitigate the risks associated with investing in small companies.

Ventures investing offers the potential for attractive returns from the UK’s vibrant start-up scene. But start-up investing is risky. It’s vital to invest with the right controls in place to manage that risk.

Start-up companies have a higher tendency to fail than long established businesses. Recognising that start-ups are the grass roots of the economy, the government have now changed the focus of tax-efficient EIS investing to put greater emphasis on risk-based investing (as opposed to capital preservation and income). Many EIS providers have been forced to pivot their investment activities to comply with the new regulations.

Timing isn’t everything

Tax reliefs from EIS investments don’t kick in until clients’ funds have been invested in EIS qualifying companies, the shares have been issued to investors and an EIS3 certificate has been issued by HMRC. EIS portfolio managers need to be acutely aware of this of course, but investors should be wary that the need for timely deployment doesn’t trump risk-aware selection of investments.

Some funds offer full investment of your subscription in just a few months. The question is, is this advisable? To answer that question, you should think about the quality of the deals into which your client’s funds are being invested, as well as the quantity.

Choosing the right manager

In a world of risk-based EIS investing, the need for effective control of risk in start-up investing is paramount. Choosing an investment manager experienced in risk-based portfolio management is a key risk mitigator for your clients. This takes expertise, ongoing relationships with entrepreneurs, a positive profile among the innovators and a track record of collaborative interactions, adding value to those with the big ideas.

In this series we examine some of these simple but powerful means of reducing and controlling risk in early stage investing. Getting this right – combined with the substantial tax reliefs – can potentially deliver attractive returns whilst mitigating some of the risk to capital.

Find out more in our CPD-accredited Oxford Capital EIS Guide to Ventures Investing

Estimated reading time: 2 min

 

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    1. If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
  2. You are unlikely to be protected if something goes wrong
    1. Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
    2. Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
  3. You won’t get your money back quickly
    1. Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    2. The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
    3. If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    1. Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    2. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest
  5. The value of your investment can be reduced
    1. The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    2. These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

 

If you are interested in learning more about how to protect yourself, visit the FCA’s website here.