Despite the ongoing impact of the Covid pandemic, EISA’s Mark Brownridge is in an optimistic mood as he shines a practical light on the opportunities for investment in dynamic businesses which are the cornerstone of EIS and SEIS
So now we know for sure. 2020 was the worst year economically for 300 years as the UK economy shrank by 9.9%.
And the grim reading doesn’t stop there. According to the Office of National Statistics, that contraction is more than twice as much as the previous largest annual fall on record and is one of the largest across all the major economies in the world.
The Bank of England tell us the economy is like a “coiled spring” with businesses and households currently in stasis but ready to unleash pent up growth when the economy is reopened. So the prospects of a “roaring 20s” might provide salvation.
Certainly many of the small business owners and entrepreneurs that we talk to, and as I am sure many of you are, have found 2020 at best difficult and at worst catastrophic. Small businesses tend to be cashflow dependent and don’t always have large reserves of profit to call upon so any downturn in sales can have a significant effect. So far, we haven’t seen the number of insolvencies and bankruptcies that we might expect given the situation and there’s no doubt the Government’s interventions such as CBILS, Bounce Back Loans and Future Fund have propped up small businesses. But, as these measures start to get wound down, there’s no doubt these numbers will rise.
Winners and losers
What’s clear is that the pandemic has created winners and losers; both at sector and firm level. At sector level, fairly obviously the hospitality, travel and leisure sectors have had a tough pandemic. Pubs shut, travel banned and social gathering off limits has meant all almost all firms in these sectors have been decimated. But could they be due a bounce back in 2021 and beyond? With us all desperate to holiday, meet and eat together again, are these the hot sectors to invest now? The retail sector has created winners and losers more than most.
The major of online retailers and supermarkets have had a great pandemic. Smaller or high street stores with little online presence have struggled or in many cases (Debenhams, Topshop) closed their doors permanently. The other big sector winners have been those sectors which were already starting to see growth but which the pandemic has accelerated at lightning speed, predominantly in tech. Think Zoom, Hopin (first fundraising to Unicorn in 2 years) and Revolut. The question now is will these trends continue post pandemic or will these successes be shortlived? Another success story, for obvious reasons, has been medtech and biotech. The scramble for vaccines, testing kits, PPE, personalised health and diagnostic equipment has seen a wall of money reach a sector that has traditionally struggled to access funding. This is due to the traditionally longer timescales needed to start and scale such businesses (by contrast BioNTech, who developed the vaccine with Pfizer, started in 2008 with a “seed” investment of $150M, an amount UK biotech firms can only dream of). Again, short term reaction or sustainable, long term movement?
Identifying the winners
Many sectors are therefore in flux, which presents investors with opportunities. We saw during the last crisis in 2008 that the crisis decimated the large, static, immobile blue chip companies whose focus was on maintaining their status quo rather than innovating and getting ahead of the curve. However, it helped smaller, more nimble operators focused on disruption and technology to flourish. One simple example is Uber, the granddad of the order by app concept that totally transformed an industry. But back in 2008, it was a struggling startup being turned down by every VC in America. Its early investors weren’t institutions but private investors like Mike Walsh. Walsh was on his way to buy a Tesla when he got a call from Uber founder, Ryan Graves, who told him about his new project. Walsh liked the idea, cancelled his Tesla order and instead invested $10,000 in Uber. That $10,000 investment went on to be worth $24,827,400. More amazingly, Walsh wasn’t a seasoned investor, this was only his second angel investment.
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