Invest in Early-Stage Companies: 4 Benefits | Octopus Investments (2024)

Investing in early-stage companies could be a great opportunity for your clients.

Clients should be comfortable with the additional risks they bring.

Reason 1: A growth opportunity

When someone invests in a company at its initial public offering, there’s a good chance they’ve already missed out on some of the fastest growth that company will ever see.

While there are significant risks when investing in a very young business, that goes hand-in-hand with the potential for significant growth.

By virtue of being small, early-stage businesses have room for substantial growth. They can also be attractively priced, because many big investors and institutions look to invest in established companies with proven returns rather than higher risk small businesses. Should things go well for these businesses, and those large investors later enter the market, they tend to push up the share price.

Taking the risk of backing a company in the early stages of its growth means investors can maximise the growth opportunity. What’s more, the UK is a very attractive market for early-stage investments.

Britain is renowned for nurturing young innovative companies. The UK is now only behind the US and China for creating unicorns, which are private businesses valued at over $1 billion (£722 million).

Recent success stories include second-hand fashion app Depop, purchased by US e-commerce giant Etsy in a deal worth $1.6 billion. Another is online used car retailer Cazoo, which listed on the New York Stock Exchange.

Reason 2: Make the most of tax reliefs

There is a way clients can invest in smaller companies and claim tax reliefs to compensate for some of the risk they take. These tax reliefs can be useful to support a client’s tax and financial planning.

Some small, early-stage companies qualify for investment under the Enterprise Investment Scheme (EIS) or through a Venture Capital Trust (VCT).

For clients, investing in a portfolio of EIS-qualifying companies or a VCT provides access to smaller companies and a number of tax reliefs.

These two routes will suit the needs of different clients:

Reason 3: Exciting, agile companies which diversify a portfolio

You might hear a client say, “Cazoo is one of my investments.”

But it’s less likely a client will feel this kind of connection to the larger listed stocks they hold.

While smaller companies may be a small part of an investor’s overall portfolio, it’s quite common for clients to take a disproportionate level of interest in this area of their investments. That’s natural. Smaller companies tend to be at the forefront of emerging trends, innovating, and shaping the future. And clients can participate in their exciting growth journeys.

Reason 4: Broad support for the UK economy

Small businesses are the backbone of the UK and a critical part of the economy.

Investments in smaller companies provide capital to vibrant entrepreneurs looking to change industries, stimulate the economy and create jobs.

Government-approved investments such as EIS and VCTs play an important role in making sure these companies are given the best chances of growing and succeeding. This is especially true when the wider economy needs stimulus.

For example, since January 2020, when Covid-19 reached the UK, Venture Capital Trusts have invested more than £695 million in small UK businesses.¹

Clients can feel confident that they are helping to nurture young businesses across the UK that may be the next generation of pioneers.