The news may be full of grim and depressing stories but, argues Jasper Smith, investors and their advisers would still be better off buying nascent UK businesses than nuclear bunkers
In the US state of Kansas, $3m (£2.4m) will buy you one of a dozen doomsday-proof apartments in a renovated Cold War-era missile silo. The fully self-sufficient bunker can withstand a direct hit from a nuclear bomb, fits up to 10 people in each apartment and comes with food stores, appliances, LED screen ‘windows' to live-stream the outside world and even access to a communal swimming pool.
Spend too much time reading the news these days and you might be tempted to reach for your chequebook. Brexit. The inverted US yield curve. A Chinese slowdown. We are constantly being bombarded with news about these ongoing economic sagas.
Then there is the nascent ‘fourth industrial revolution' - often discussed in Black Mirror-esque terms as promising to steal our jobs and suck us even further into our screens. Social media giants listen to our every word and hold all of our life's secrets on their servers.
In domestic politics we grimace at the resurgence of the far-right. Geopolitically, we hear about rising tensions between US and Iran and we see British warships sailing to the South China Sea. And all the while, scientists and climate protesters cry out about an impending environmental catastrophe of the kind that would mean none of the other things really matter anyway.
All of which is sufficient to beg the question: is now really the time to be investing in venture capital? Are start-ups not flimsy and mercurial, the play-thing investment equivalent of owning your own McLaren sportscar? To answer that question, you need to step away from the bunker and look beyond the noise and speculation.
A changing world is no bad thing for venture capital. You might even say that no venture capitalist has ever grown rich by things staying the same. That can be a strange thing to hear as an investor, however, as change is often a bad thing for the equities you find on the major indices. These companies are built on the status quo, so they have a significant interest in maintaining it.
Take the three biggest companies by market capitalisation - Microsoft, Amazon and Apple. Today, each is a pillar of the world economy - yet go back to their respective origin stories and you find venture capitalists who made a lot of money from those companies disrupting what was then the status quo.
So when we look at ongoing events such as the fourth industrial revolution, or the urgent environmental and privacy issues we face as a society, we see opportunity. The great companies of the future will be built on solving these issues.
Start-ups are more resilient than you might imagine - AirBnB, Brewdog, Uber and Zoopla, to name a few, were all founded during the financial crisis. Nevertheless, a robust economy is certainly preferable for making any investment.
Today there is some bearish investor sentiment, but does this suggest an imminent downturn? Not necessarily. Economic growth is historically low, but easily comparable with other major European economies of similar size and stature.
Unemployment is at the lowest it has been in four decades. Wage growth is outplacing inflation and household debt is improving. All three factors should bode well for consumer spending, which makes up roughly two-thirds of the country's GDP. The rest of the world economy is a similar story. Growth in Europe and the US looks low compared with the past century - but not compared with the past decade.
With dismal cash returns, holding onto money is just throwing it away. And timing the market is incredibly difficult - even for the experts: the International Monetary Fund has only anticipated a sixth of more than 300 recessions since 1991.
In the UK, we are brilliant at starting businesses. The most recent figures put the number at 383,000 business ‘births' in a year - that is 43 an hour, which is just over half the number of actual births an hour.
A lot of that is down to how easy it is to start a business, relative to other countries - the UK came ninth for ease of doing business in the World Bank's 2019 Doing Business survey. It also has supportive business environment, being fourth best in the world according to both Imperial College, London and the Legatum Prosperity Index 2018. Supporting that is the government-backed Enterprise Investment Scheme (EIS) that encourages investment into growth businesses with 30% income tax relief, zero capital gain tax and loss relief.
The UK also has one of the best educated workforces in the world. More than half the population have completed tertiary education - the eighth highest number in the OECD - and three out of the top 10 universities in the world are based here. These are all factors that will be vital at a time when automation is set to put a premium on the ability to adapt and learn new skills.
The future of venture capital looks very bright indeed - and certainly a better way to invest your clients $3m/£2.4m.
Form is temporary, class permanent
Nevertheless, investors have to be astute and selective. They have to choose venture capitalists who are ahead of the trend, which requires vision. The best will not only invest in businesses that have strong competitive advantages, but also with the most talented leadership teams.
Probably more than any other kind of investment, venture capital requires a very close and advisory relationship between investor and investee. Today it is not enough to simply provide cash. Companies need the right advice at the right time to avoid the many pitfalls that exist, so investors need to have confidence in a venture capitalist's ability to offer that advice.
In an age where technology has made building a ‘network' as easy as a LinkedIn request, investors and their advisers should endeavour only to seek out venture capitalists with a legitimate, broad-based network of contacts.
Jasper Smith is chairman of EIS specialist Vala Capital
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