Regular readers of GBI Magazine will be familiar with the concept and implementation of EIS, but may be less conversant with its cousin, SEIS. In this article we’ll look at how the scheme has worked in practice for 3 successful companies and how in many circumstances it could be a viable alternative.
The Seed Enterprise Investment Scheme (SEIS) is the lesser-known companion programme to the much better publicised Enterprise Investment Scheme. SEIS was established by the UK government in 2012 and has enjoyed niche popularity, granting as it does a range of very attractive tax reliefs for eligible investors (including 50% relief chargeable against income tax).
SEIS has rightly been lauded as a welcome and imaginative initiative, offering entrepreneurs a new mechanism of access to willing early stage venture investors where bank financing is unavailable to a young company for whatever reason and the capital requirement too small to interest mainstream funds, and offering generous tax reliefs to eligible investors.
Here are a couple of examples.
Sentric Music was one of Nova’s first investments, supporting the Liverpool based ‘music tech’ startup to solve the problem of music artists and songwriters collecting their royalties and securing fair publishing contracts. Nova’s initial £50,000 SEIS investment and technical support allowed Sentric to bring their first industry disrupting product to market.
The digital platform gives music producers the ability to control and collect publishing royalties globally from one portal. This happens with no upfront fees, short term contracts and preferable commissions; all whilst exposing artists to increased earning opportunities by connecting their music to opportunities in TV, film, video games and advertising.
Nova’s support has followed Sentric’s progression from idea through to a successful, scalable, tech startup. Nova’s £50,000 investment has since resulted in a partial exit that returned £1,500,000; delivering 30 times investor returns over a 9 year period.
Sentric Music is today a rapidly growing music publishing company with 70+ employees based across offices in Liverpool, London, Hamburg, Mallorca, New York and LA. The company now administers the works of over 100,000 artists/writers, and 1 million songs in the UK and around the world.
Andy Davidson, CEO of Nova, told us “Being able to leverage Nova’s ‘startup generator’ business model gives us the ability to offer investors a direct route to the large and varied portfolio spread that’s required for SEIS to work.
“Doing this without incurring the costs that other providers do in sourcing the deal flow, has allowed us to develop a better SEIS investment product that maximises the benefits for both investors and the businesses it’s deployed into.”
Jenson originally invested in Market Making (trading as agency:2) in February 2014. agency:2 started as a consultancy that specialised in social media marketing providing their clients with in-depth insight and understanding about key target demographics, thereby significantly improving the ROI on their digital marketing spend.
Jenson recognised that the founders of the business (Joel Davis and Sharon Baker) had established a truly global social media agency, with a leading array of international clients – including MegaBloks, JLL & Pan MacMillan. Joel was also a regular speaker at leading marketing events and was a founder member of the DMA Social Media Council. Sharon worked in project management for global multinationals such as DoubleClick / Google and the BBC and has worked extensively on international multi-lingual engagements on behalf of agency:2’s clients.
Jenson’s Investment Committee minutes state that the reasons for investment were “The panel believed that the business operates in an attractive sector, has an appropriate business strategy which is delivering strong sales, profits and considerable growth and could provide significant upside returns if successful.”
Following Jenson’s investment the business grew from strength to strength with the launch of the Social Insight Engine (SIE) in 2015 and the business doubled in size every year. The team continued to grow in size and scope and new client wins meant that the exponential growth looked set to continue.
Whilst Jenson held the investment in agency:2, a Jenson Solutions Investment Director worked with the management team providing financial and operational support.
The business won a number of awards such as Deloitte Top 50 Fast Tech Growth, Shorty Award ‘Best Use of Facebook’ Winner in 2017 as well as being nominated finalists in The Drum Social Buzz Award and CIM Award and more recently the Financial Times ranked them the UK’s fastest growing #socialad specialist in The FT 1000: Europe’s Fastest Growing Companies 2019.
In June 2019 Jenson announced their exit from Market Making which consisted of cash and equity. This was Jenson’s fourth SEIS Exit.
Next Fifteen Communications Group acquired the entire issued share capital of Market Making. The current return is 4.0x investment with a mix of shares and equity (before tax incentives and performance fee); with earnouts this could potentially reach a 12x return.
As part of the exit, existing shareholders received an interest in SIE in proportion to their shareholding in Market Making. SIE holds the Atom technology that was developed in Market Making, so in effect investors in this company could receive a second exit from this one investment.
A spokesman for Jenson told us: “Our experience is that the EIS/VCT market is highly competitive in businesses that are typically generating £1 million of revenue and are seeking additional funding, which has the effect of driving up prices. Our EIS Fund bridges the gap between SEIS funding and the larger EIS funds in the markets.
“For our EIS deal flow we have access to our existing portfolio of SEIS companies and therefore have access to companies that we have been working with and mentoring for a number of years and are able to identify the most promising of our companies for follow on funding; additionally they are likely to fit the EIS criteria given the early stage of investment. We are also able to identify when they are likely to require follow-on capital and tranche EIS investments accordingly. We have invested EIS in 15 of our portfolio companies; in some instances they have received one round of funding and others have received multiple tranches since 2015.
“The key difference is that we will invest earlier than our EIS/VCT competitors as we have extensive experience of early stage investing, we are perhaps more comfortable at the associated risk this brings. This is higher risk than a traditional EIS/VCT which is reflected in the favourable valuations we typically invest.”
An alternative approach from Amersham: “seis-plus”
While a handful of specialist funds have sought to adopt a ‘pure’ SEIS approach, the current investment cap of £150,000 for any one qualifying company raise and a gross assets test of £200k pre-raise has dampened enthusiasm for SEIS within financial institutions for which this level of investment is too small to fit their investing criteria in terms of scale of promotion, selection, due diligence and management of such investments.
Through experience in this market, with over £6m having been invested in their managed SEIS funds (December 2019), Amersham have dealt with companies that have indeed gone on to attract ‘followon’ funding with EIS investment in the ‘standard’ manner.
However, thinking about how to optimally align managements’ interests to those of SEIS investors who naturally are concerned about initial EIS dilution as any growth company will require ‘follow-on’ investment, Amersham have developed a methodology to preassess those companies that carry sufficient potential strength to “pre-qualify” for possible follow-on EIS investment. Essentially, Amersham filter and select SEIS opportunities through the ‘lens’ of assessing these as future EIS prospects and then structure the investment decision from the very start around a twostage SEIS/EIS equity transaction. They know in such cases that that the business will require more than £150,000 to meet material growth criteria but have confidence in the core team that they will embrace the challenge of meeting the milestone criteria normally necessary to green light a second EIS stage of investment.
These companies therefore gain a degree of comfort that their first EIS stage is prefigured into the overall financing plan at the SEIS stage. Fears by SEIS investors as to possible severe dilution prospects in a first EIS tranche and risks to operating viability and get-to-market speed of a delayed initial follow-on stage can be mitigated.
Smart Plant Systems (SPS) is an example of such a two-stage-powered SEIS/EIS investment.
Smart plant systems/Amersham
SPS is a building safety and visibility tool and system, used to provide real-time insight into dangerous and hostile plant room environments by monitoring and measuring a range of configurable elements. This is a project backed in 2019 by Amersham from its principals’ incubator.
SPS was created to design, develop and bring to market an innovative “high tech, low cost” approach to round the clock, real time visibility into the status of commercial and public buildings. The objective is to monitor and report a broad range of environmental threats as well as providing data on the status of the environment and facilities across one or many areas via a real time dashboard visible at the customer’s premises or where used by facilities managers at remote location.
Development work was built on the know-how of industry-leading cyber security experts to help ensure external threats to the management and control of a Plant Room are thwarted.
The SPS devices are sold outright and are linked to a monthly subscription payable by users.
The SEIS/EIS financing was implemented to allow the Company rapidly to recruit skills, finalise the MVP, add functionality and build stock levels whilst pursuing target ongoing revenues of £1.3m p.a. in 2021 at gross margins of 50%.
SPS’s market is every organisation, whether big or small, that needs data and information to monitor facilities for its buildings or industrial processes. Revenues are derived from a “Product As a Service” model thereby deriving valuable repeat annual revenues.
The two Principals of SPS brought their respective skillsets to bear on the creation of the venture within Amersham’s incubator, which structured the company’s short and medium term growth plans to be suitable for a “SEIS-Plus” raise. They are:
· A leading Network Specialist and Ethical Hacker with over 20 years’ experience in building and breaking computers. Having qualified in Cisco CCNA (Network Associate) almost 12 years ago, he went on to work on some of the UK’s largest technological infrastructure and in recent years as an adviser to commercial organisations and UK government. He has appeared in the UK media advising a national newspaper as well making radio and TV appearances (Channel 4/BBC).
· A Chartered Accountant formerly with Price Waterhouse before spending several years in the corporate finance department of Samuel Montagu &Co. Ltd (part of HSBC’s investment banking arm) before taking senior finance positions in public and private entities, with an emphasis on managing business creation.
Amersham’s “SEIS-Plus” approach allowed for planning SPS’s transition from R&D to market within one overall approach comprising the “SEIS scope” and the “EIS scope”.
Total investment to date by Amersham in SPS is £302,943 comprising SEIS investment of £113,512 (March 2019) and EIS investment of £189,431 (April – November 2019), resulting in an overall 19.46% holding by Amersham-managed funds.