What kind of startups are venture capital funds (VCTs) looking to invest in in the coming year?
At the top of Santa’s wish list of startups that VCTs want to invest in as 2023 draws to a close are, in no particular order: drug testing that avoids testing pharmaceuticals on animals, ways to get renewable energy into businesses, and ventures that focus on specifically targeting the baby boomer generation, i.e. today those over 60 years old.
The Venture Capital Trust Association (VCTA), which represents 90 percent of the £6 billion of VCT assets under management, expects the amount raised through VCTs to decline in the 2024/25 tax year.
Will Fraser-Allen, chairman of the VCTA and managing partner of Albion Capital, expects VCTs to raise less than the usual £1 billion this year because of all the pressure on the economy. Brexit, Covid, Brexit, the cost of living and the end of cheap capital have all created strong headwinds for VCT fundraising. However, he points out that VCTs still outperform VCs when it comes to attracting investment proportionately.
However, the VCTA is confident that the VCTs themselves will be extended beyond their current sunset clause in 2025, following government assurances that Jeremy Hunt will help keep the scheme alive.
What kind of startups do VCTs want to invest in?
Maya Ward, investment manager at Gresham House Ventures, which has £800 million of VCT money under management, specializes in health technology, among other things.
Ward says: “This year has been quite challenging for the healthcare industry, partly due to Babylon’s bankruptcy [the virtual GP startup] making investors more selective.”
However, she still believes there is room for virtual healthcare at home as Britain has an aging population and a global shortage of healthcare professionals.
“For that reason, I’m confident that the market is giving me a little more reason to be optimistic than last year,” Wood said.
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Hugo Lough, venture capital investor at Mercia Ventures, would like to see more consumer companies specifically target the boomer generation, along the lines of travel industry Saga, as older parents and grandparents are the ones with money to spend, not the young .
Meanwhile, Adam Chirkowski, investment director at Albion Capital, which has £660 million of VCT money under management, says he is interested in finding ways for startups to supply businesses directly with renewable energy.
Cleantech, Chirkowski says, wasn’t as hard hit by the decline in venture capital investment as other sectors.
The need for companies to reach net zero as quickly as possible will become more urgent once companies realize what the penalties could be if they don’t meet the environmental targets they signed up to. The amount of environmental, social and governance (ESG) legislation has increased fivefold in just a few years, says Chirkowski.
He points out that companies that were quick to commit to ESG obligations may not have fully understood what they were committing to, given the plethora of costly ESG legislation.
“The most interesting opportunities,” says Chirkowski, “are those that do not have a positive impact on the environment, but also on revenue.”
“Sustainability is a hygiene factor for any business,” agrees Hugh Lough, venture capital investor at Mercia Ventures, which has £350 million under management in VCT funds.
Nick Sando, director of Octopus Ventures, which manages £1.8 billion on behalf of 40,000 investors, sees cryptocurrency startups as good investment opportunities. Octopus is eyeing cryptocurrency companies because they are currently cheaply priced and are well suited to a VCT’s long-term investment strategy.
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