Venture Capital Trusts May Benefit from Brexit

Venture capital trust schemes may see a benefit from Brexit, according to industry experts. David Hall, managing director of YFM Equity Partners, suggests that regulations influenced by Brussels have not necessarily been beneficial to VCTs in the UK, and that changes in these decisions based on what is best for these organisations within the UK could well see positive results. Global investors such as Henner Diekmann of Diekmann Associates, who has interests in foreign direct investment as well as start-ups and venture capital, may find that Brexit releases certain restrictions on entrepreneurial growth and creates more choice for investors.  



Rule Changes Affecting UK VCTs

The argument of David Hall focuses on how rule changes coming from Brussels have had a negative impact on UK Venture Capital Trusts. Hall cites the set of changes announced in the Budget in 2015, which place restrictions on the amount that can be invested, the use of those investment funds and the age of companies that qualify for investment. These changes include a lifetime investment limit of £12 million for each VCT-qualifying company (£20 million for knowledge intensive companies) and an eligibility rule stating that qualifying companies must have made their first commercial sale within the last seven years (ten years for knowledge intensive companies). Hall believes it is important to allow and facilitate investment into a broader range of companies within the UK, and that the age of a company is not important when compared to speed of growth. A relaxation of these rules in the UK will result in more businesses being eligible for venture capital trust investment, thereby encouraging growth.  

What is a Venture Capital Trust?

Venture Capital Trusts, or VCTs, were first introduced in 1995 by the government as part of the Finance Act. Designed to encourage investment into new businesses, VCTs are unique in that they offer attractive tax reliefs for investors both when money is invested and when income is received from that investment. You will find a concise overview of VCTs in the infographic attachment to this post, and more information about specific tax reliefs in the accompanying PDF document. VCTs have proved over the past two decades to be much less risky than was originally anticipated. In the tax year from 2015 to 2016, Venture Capital Trusts in the UK raised £458 million.  

Embed This Graphic On Your Site: <img src="https://s-media-cache-ak0.pinimg.com/originals/e8/90/f4/e890f44459c9016e7393ebcabd77c43b.jpg" width='540'><br /><a href='http://hennerdiekmann.blogspot.com/2017/05/venture-capital-trusts-may-benefit-from.html'><br /></a></p> <br /> <p> What are Venture Capital Trusts? [Infographic]</a></p> <br /> <p> </a>

Venture Capital Trust Tax Reliefs

Shares in venture capital trusts can be purchased new or second-hand, such as through the stock market. Across all shares, tax relies include exemption from both income tax on dividends for those with ordinary shares and capital gains tax when shares are disposed of. For investors buying new shares, further tax reliefs are available in the form of income tax relief on investments per tax year of up to £200,000 of 30% if shares are held for at least five years. Investors in new shares purchased before April 6th 2004 also benefit from capital gains tax deferral.  

Investing in Venture Capital Trusts

The investor profile for venture capital trusts involves a level of comfortableness with risk, as investors can get back less than their original investment. However, the potential returns are higher in exchange for the elevated level of risk. The aim of a VCT is to encourage investors to take on riskier investments in smaller companies that are not listed on the stock exchange, alleviating some of that risk through the pooling of investments and spreading of funds over a number of smaller companies. In theory, shares in venture capital trusts can be sold at any time, but in practice investors need to be able to lock in their investment for a minimum period of five years for new shares. If shares are sold within this five-year period, HMRC are entitled to claim back any tax credit that has already been received. It can also be difficult to sell shares even after this time, as there tend to be fewer buyers for VCT shares than for other forms of investment. Venture capital trusts are not often suitable for novice or hands-off investors as the charges can not only be high but also complex and difficult to understand without in-depth investment knowledge.



The predictions of David Hall paint a rosy picture for venture capital trusts after Brexit, with the potential for a relaxation of rules that could benefit many smaller companies and venture capital investors in the UK over the coming years. However, as with any investment the value can go down as well as up. Potential new investors would be advised to consult an independent financial advisor for help in working out whether this type of investment is likely to meet their needs.

UK Fintech: Ones to Watch

In the previous post the figures and predictions for FinTech funding through 2015 to 2017 were discussed. Henner Diekmann and other investors will be buoyed by the news that, despite a shaky 2016 across most of the world, experts are confident that this was just a blip and 2017 will see increased funding within the FinTech sector across the world. As a global financial centre, London produces many hot new start-ups. Here you can find out more about some of the ones to watch throughout the coming year.

Atom Bank

One of the first to jump on the new digital-only banking bandwagon, Atom Bank markets itself to the new generation of internet-savvy consumers who want something different to traditional banking services. Licenced since June 2015, Atom Bank launched its mobile app in April 2016. Since that time added services include two-year fixed-rate residential mortgages, an SME business lending product and two Fixed Saver accounts, with current accounts planned for introduction later in 2017. £234 million in capital has been raised so far by Atom, including a recent £100 million venture round.  

TransferWise

The new peer-to-peer platform for money transfers known as TransferWise was devised by Taavet Hinrikus, formerly of Skype in London. The platform offers currency conversions that are transparent and help customers avoid paying inflated exchange rates and hidden banking fees when transferring money into another currency. Authorised by the UK Financial Conduct Authority, TransferWise attained unicorn status in May 2016 with a valuation of $1.1 billion.  

Nutmeg

Online wealth manager Nutmeg has so far raised £71 million, with investors including Pentech, Taipei Fubon and Armada Investment Group. Nutmeg works with investors with starting capital from as low as £500 and charges a management fee ranging from 0.3% to 0.95%, compared to an average of 1.58% for active fund management in the UK.

These are just a few examples of companies leading what will hopefully become a UK FinTech boom in 2017.

UK FinTech Funding Rebounds After a Shaky 2016

Funding for financial technology companies in the UK saw a dramatic slow-down throughout the middle part of 2016, probably in light of the Brexit referendum result. However, final figures for the year paint a much more promising picture. FinTech investment increased by 122% between October and December, with a 33% rise in the number of deals. While the final quarter investment figure of £138.5 million ($173 million) over 16 deals is still far lower than the same quarter in 2015 ($275 million), the rapid rise means a promising start for 2017. Investors such as Henner Diekmann of Diekmann Associates will be feeling more confident about the short-term future of the financial technology sector, especially given the global predictions from both KPMG and Pitchbook forecasting a bumper 2017.


FinTech Earmarked as Key Growth Area
 
The figures for the fourth quarter of 2016 will have come as good news to the post-Brexit government, which has already stated that FinTech has been earmarked as a key growth area for the UK. Other key growth sectors include Islamic finance and green finance. Chancellor Philip Hammond was quoted as saying that the UK was a “global FinTech capital” following the latest £30 million round of funding for Nutmeg.


Embed This Graphic On Your Site: <img src="https://s-media-cache-ak0.pinimg.com/originals/ba/c5/a5/bac5a5da6eef417e3b28cad9c8a77559.jpg" width='540'><br /><a href='http://hennerdiekmann.blogspot.com/2017/04/uk-fintech-funding-rebounds-after-shaky.html'><br /></a></p> <br /> <p> Fintech Investment Activity in the UK Rebounds [Infographic]</a></p> <br /> <p> </a>

Global FinTech Funding 2015 – 2016

On a global level, funding for FinTech companies dropped by almost 50% year-on-year, from $47 billion in 2015 to just $25 billion in 2016. Looking at Europe separately, funding in the sector fell by around 80%, with just $2.2 billion raised in 2016 compared to $10.9 billion in 2015. The US tied in with the global average of around a 50% decline, from $27 billion down to $12.8 billion, while in the UK deal value went down from $4.6 billion in 2015 to just $465 million in 2016. The transaction volume in the UK did remain steady however, whereas in the US the total number of deals dropped from 615 to 489 in an atmosphere of regulatory and political uncertainty.

FinTech Forecast 2017

Despite the plummeting funding throughout 2016, a bullish report has been issued by KPMG and PitchBook for the 2017 forecast. Co-Leader of KPMG Brian Hughes stated that he believed 2017 would be a pivotal year for the US and the rest of the world in terms of funding for FinTech. KPMG further stated that the vibrant tech start-up sector in London means it will continue to be seen as one of the true global centres for finance. In wider Europe PSD2 was highlighted as a game-changer, while in the US and across the world the rise of new technologies such as the Internet of Things, AI and blockchain, combined with insurtech, resulted in a promising outlook for the coming year. Asia, and in particular China, was one area of the globe that remained steady from 2015 to 2016, in fact reaching a new record high with funding of $8.6 billion. This compares to $8.4 billion in 2015 and was largely comprised of three mega-deals.

In the post to follow you can find out more about FinTech start-ups in the UK that are billed to be the hottest tickets in 2017.

Understanding Blockchains

While most of us will be familiar with bitcoins, few of us will have heard of blockchains. An essential technology in the world of bitcoin currency, blockchains are the main technological innovation to emerge from the cryptocurrency. At a time when data security and management are important factors, blockchain software has emerged as a way to enable companies to verify transactions on a network without the complexities of central financial authority.

In 2015, an entity known as The DAO was created by a German start-up to operate using blockchain software. The original software, intended to be the basis of a crowdfunding contract, gained the attention of many cryptocurrency enthusiasts and quickly amassed more than $100 million by late April 2016. The DAO has become the largest crowdfunding event in history, having reached more than $150 million from over 11,000 members – numbers that even the creators didn’t expect. To investors and professionals who work with start-ups, such as Henner Diekmann (an experienced lawyer and partner at Diekmann Associates), the DAO’s inception demonstrates the potential of crowdfunding as a means of getting start-ups off the ground.

Embed This Graphic On Your Site: <img src=" https://s-media-cache-ak0.pinimg.com/originals/ad/66/2d/ad662da6dab73ef46ecf7e247cc1dd88.jpg " width='540'><br /><a href='http://hennerdiekmann.blogspot.com/2016/10/understanding-blockchains.html'><br /></a></p><br /> <p> The DAO: A New Breed of Human Organization [Infographic]</a></p><br /> <p></a>
DAO stands for Distributed Autonomous Organisation, which until the creation of The DAO, seemed more feasible in theory than reality. By their very nature, DAOs function like companies. But rather than have legal documents to support their existence, the structure of a DAO is coded into a blockchain. In simple terms, a blockchain is a distributed database that stores a growing list of data records. Think of it as a digital ledger that is shared among a distributed computer network and uses cryptography to enable each network participant to revise the ledger without the need for oversight from a central authority.

Changing or removal of data that’s been recorded on a blockchain is touted as quite difficult. Should a participant want to add to the blockchain, the participants in the network have to evaluate the transaction and verify its validity. If a majority of the participants are in agreement, the proposed transaction is approved and a new block is added.



What does the DAO do? 

The DAO is a complex smart contract that can be compared to a venture capital fund. It offers its own voting shares (DAO tokens) to members who get Ether, which is a cryptocurrency similar to Bitcoin. Ether is run on a network called Ethereum and is proving to be serious competition to Bitcoin. Members who buy into DAO are basically buying voting rights on how the funds collected are used.

It can be argued that this is a venture capital firm with its investors being the token holders. And while returns could be in the form of ether, the creators of the entity were quick to point out that these tokens don’t represent equity. The DAO’s goal is to support projects delivered by contractors using the ether raised by the crowdfunding exercise. By the time the crowdfunding ended, more than 50 project proposals awaited token holders to vote on.

As impressive as the rise of The DAO, it has not been as successful as creators would have wished. Any networked system is vulnerable to attack, and The DAO system was no exception. In May 2016, an unknown attacker was able to breach the system and drain a significant amount of ether collected from the sale of tokens. Since then, another two attacks have taken place with more funds being taken in the process.


Lessons to learn 

While efforts have been made to retrieve the funds that were compromised during the hacks, there are serious questions about the future of the project. Bad coding aside, there are more general lessons that all start-ups can learn from The DAO’s failed project.

For starters, where huge sums of money are involved, it’s important to put security first. The DAO’s creators overlooked a key part of its security infrastructure, and hackers were able to exploit this vulnerability in the system. Some experts argue that the coding that took place was sloppy, leaving The DAO open to attack. All businesses should ensure that they have the right checks in place to ensure that security is as comprehensive as possible.

Secondly, management and operations experience is key to running a successful venture. These aspects cannot be made up on the go, and it falls on start-ups to find the right people with the necessary experience. Seeking second opinions on key areas is always a good idea. Often a different perspective is required to identify pitfalls.

Lastly, learn from your mistakes. The Merkle reported that in all three instances very similar attacks took place. A business will be judged not only on the mistakes that it makes but its ability to rectify them. Failing to address such major issues will have a knock on effect, shaking customer confidence in all areas of the business.

Crowdfunding Opportunity – New US Law Means Anyone Can Be an Investor

Title III of the federal JOBS Act (Jumpstart Our Business Start-ups) in the US contains new rules regarding equity investing. Previously, corporate shares could only be purchased by ‘accredited investors’, people with a yearly income above $200,000 or a total net worth of $1 million. However, when the new regulations took effect in May of this year, that all changed. Now anyone can invest up to $2,000 annually in a start-up of their choice, allowing small businesses to acquire as much as $1 million in funding from groups of amateur investors.

US president, Barack Obama, called the bill a ‘game changer’ when he signed it into law four years ago. Since then, Title III, sometimes called Regulation Crowdfunding, has faced setbacks with implementation, largely as a result of concerns from the Security and Exchange Commission. The SEC feared lack of regulation could put inexperienced investors at risk of making poor choices or being conned into questionable schemes. These details were eventually ironed out in a rewrite, but experts in the financial industry remain divided as to how much difference Title III will really make. The experiment is being watched by financial firms around the world. Henner Diekmann, who is founder and partner of Diekmann Associates in Namibia, takes both a personal and a professional interest in all types of investment topics.

Opportunity for some

President Obama’s enthusiasm echoed the sentiments of many who see the bill as a way to make investment more democratic. Internet crowdfunding sites like Kickstarter and Indiegogo have become increasingly popular over the last few years, allowing ordinary people to support projects and organisations they believe in. However regulation on these sites has so far only allowed companies to offer donors trial products or other one-time advantages; long-term stock equity has remained the province of licensed investors.

Embed This Graphic On Your Site: <img src="https://s-media-cache-ak0.pinimg.com/originals/36/24/b1/3624b1337f23af8cc9abcda11d671328.jpg" width='540'><br /><a href='http://hennerdiekmann.blogspot.com/2016/10/crowdfunding-opportunity-new-us-law.html'><br /></a></p><br /> <p> Equity Crowdfunding for All [Infographic]</a></p><br /> <p></a>
Regulation Crowdfunding makes these limitations obsolete, at least in the US. There’s a host of new sites springing up to act as ‘middlemen’ for amateur investors and start-ups interested in expanding. Republic, SeedInvest, and StartEngine are just a few of the many crowdfunding sites that have appeared recently, focused on providing equity opportunities for every-day internet users.

The excitement is infectious. ‘For the first time in 83 years’ anyone can invest in ‘high-potential start-ups….regardless of income or net-worth’ states one site. Some small business owners are equally enthusiastic. Kelechi Anyadiegwu is a young entrepreneur who started an internet based African clothing line about two years ago. She has successfully attracted over 100,000 potential customers to her Instagram and Facebook pages, and orders are increasing so much that she needs to expand her infrastructure and workforce in order to handle them. Ms. Anyadiegwu sees crowdfunded equity as the way to go. She believes the women who buy from her are passionate about African textiles to the point that they would be interested in becoming not just customers but shareholders who reap a benefit from her company’s success.

Large companies will still need venture capital

However, there are many investment experts who don’t believe the new regulations will bring much change to the business landscape. A start-up with real potential is still more likely go the traditional route and look for venture funding from ‘accredited’ investors with large amounts of capital. Businesses focused on unicorn status (1 billion in total net-worth) will have a long way to go relying only on small internet based donations.

Moreover, even in the crowdfunding environment, people with a lot of money at their disposal are going to end up with a higher degree of influence. To attract these donors, start-ups will need to join ‘syndicates’, networks that allow ‘lead investors’ to follow their holding and take a more active part in what happens to the company. As syndicates take on an increasingly important role, they are likely to influence which start-ups receive capital in much the same way that traditional venture funds have picked out the winners.

Some companies may go both routes

Of course there’s nothing to stop a company that is able to attract venture capital from also building a customer base through crowdfunding equity. Rorus, is new start-up that manufactures water filtration products for developing countries. So far it’s been able to draw $300,000 from accredited sources, but young CEO Kyle Henson thinks there is still an opportunity to ‘build a community’ by offering shares through crowdfunding sites. That kind of popular support is ‘an intangible that you don’t get from private fund-raising’, he says.

Henson is likely right in his assessment that crowdfunding will help companies get extra funding for projects with an ideological message, a goal that appeals to the general public. Christian Catalini, assistant professor at MIT’s school of management, agrees. According to him, crowdfunding will provide small business with ‘new avenues of fundraising’ and the opportunity to build a committed user base. Additionally, it will likely open up more capital to underrepresented entrepreneurs, especially women and minorities. As yet it remains to be seen how big an effect this will have on the overall market, but it’s certain that all types of investors will be watching the new developments with interest.

Top Venture Capitalist Predictions for Unicorns in 2016

In the last post the change in fortune of many unicorn companies was looked at, based on a recent article by venture capitalist Bill Gurley. Investors and investment experts such as Henner Diekmann of Diekmann Associates, venture capitalists such as Gurley and the founders of technology companies that have become unicorns are all beginning to see a shift in terms of financing, with many unicorns finding themselves in precarious positions. This post brings together some of the predictions made by top venture capitalists as to what will happen to many unicorns in the near future.  

1. Some venture capitalists will have tough decisions to make regarding whether or not to put more money into existing companies in order to dig them out of a hole, or cut their losses and invest somewhere new.
2. Venture capitalist investors will require start-ups to cut expenses in order to reduce costs. While cutting perks such as free lunches may be a start, the fact is that many companies will find themselves in a position where they have to start losing employees.
3. A higher number of companies will fail as they will be unable to raise the next round of financing.
4. Start-ups that sell mostly to other start-ups will experience the most problems.
5. Large companies like Facebook, Microsoft or Google may sweep up some of the unicorns facing a rocky present, but this is only likely if the move is strategic and the price is right.
6. A lot of companies will have to take a ‘down round’ rather than face bankruptcy.
7. Some businesses will entirely recapitalise their stock in order to survive, leaving many early investors and employees wiped out.
8. Unless companies start going public, many employees and investors will find that gains made through valuation are only there on paper.

The technology ‘bubble’ that has existed for the past few years may well have popped, but the fact is that the majority of start-ups do fail and this is essentially just a return to normal. Venture capitalists will still want to invest; it’s simply that more careful risk analysis is likely to come back into play.

The attached PDF provides an overview of some of the most successful unicorns to emerge over the past few years, showing that not all of these companies are headed for disaster.

The Future of Unicorns

Unicorn is a term that was coined in 2000s to refer to start-up companies with a valuation of $1billion-plus without an established performance record. This can be a stock market valuation or an estimation from venture capitalists. The term was initially popularised by Aileen Lee, a venture capitalist and founder of the seed stage venture capital fund CowboyVC, in an article looking at software start-ups founded since the turn of the millennium. In the article Lee noted that less than 1% (0.7%) of technology start-ups reached a $1billion valuation, making them as hard to find as the legendary unicorn. The term has now become widely recognised within the technology sector, including mobile and information technology. Professionals working with new start-ups and venture capitalists such as Namibian financial lawyer Henner Diekmann could well see a wholly different landscape in the coming months and years to that which was expected.  


Embed This Graphic On Your Site: <img src="https://s-media-cache-ak0.pinimg.com/originals/a5/fe/a8/a5fea86c11af4d24788fdb9e4e579a8d.jpg" width='540'><br /><a href='http://hennerdiekmann.blogspot.com/2016/08/the-future-of-unicorns.html '><br /></a></p> <br /> <p> Startups: The “Unicorns” [Infographic]</a></p> <br /> <p> </a>
This April, a blog post from another venture capitalist Bill Gurley called into question the future of unicorns, stating that a lot of these companies are now facing limited options. Essentially, too many businesses have taken too much money based on valuations that are unsupportable. Venture capitalists keen not to miss out on backing potential unicorns may have basically abandoned traditional risk analysis in order to acquire shareholder positions. These companies are now in a position whereby raising further funding from the private markets is virtually impossible, as the previous round of funding came with large caveats to protect these late-stage investors. On top of this, the numbers are not yet good enough for these firms to go public. Founders of unicorns are now beginning to face the consequences of this investment bubble, with many venture capitalists withdrawing support or demanding cut-backs on expenses, including staff, among other things.  



Despite this economic downturn for tech companies in Silicon Valley and beyond, there are still many unicorns in existence, as shown in the attached short video. In the post to follow you will find a list of some of the biggest unicorns to emerge over the past few years and be able to read some of the predictions made by venture capitalists as to the future of fast-growing start-ups.