Venture capital funds have been backing British businesses for 30 years… but should you invest in them?

In November 1994, Ken Clarke, the then Chancellor, stood up in the House of Commons to present his budget.

This included a scheme intended to give individual investors access to unlisted private companies with growth potential.

Thirty years later, the venture capital fund has raised more than £12 billion for British start-ups.

In the last fiscal year, the VCT scheme raised £882 million, its third largest year of fundraising, following £1.13 billion in 2021/22 and £1.08 billion in 2022/2023. Since 2018, VCTs have invested around £2.9 billion in almost 800 companies.

By comparison, VCTs raised just £160 million in their first tax year, 1995-1996.

Richard Stone, CEO of the Association of Investment Companies, said: ‘VCTs are a British success story and they have helped create several well-known companies, creating thousands of jobs and boosting economic growth.

“VCTs have made significant contributions across sectors, from technology to healthcare, from retail to manufacturing.”

For investors, VCTs offer the opportunity to invest in innovative UK companies that they wouldn’t normally have access to – as well as tax breaks that could be useful for those who have made the most of vehicles such as Isas and Sipps.

However, the high level of risk means they are not suitable for everyone. VCTs are designed to be long-term investments, and backing start-ups means that investors must be prepared for the possibility that they will lose all their money.

We look at how VCTs work, which companies they fund and who might consider one.

What are venture capital funds?

VCTs allow individuals to invest in unlisted companies through trusts. The trusts invest the money collected from their investors in small businesses, giving them the capital they need to grow.

Chris Lewis, chairman of the Venture Capital Trust Association, told This is Money: ‘Where it has traditionally been difficult for private investors to access investments in high-growth, private companies, VCTs have provided a route to a portfolio of support these companies. start-ups and scale-ups.

‘VCTs also offer the opportunity to invest in portfolios of AIM listed companies.’

Trusts have backed some of the now household names, giving them the resources they need to develop.

Brands supported by VCT include non-alcoholic beer brand Lucky Saint, hamburger chain Five Guys, house hunting site Zoopla, fintech Wise and pasta delivery company Pasta Evangelists.

Businesses supported by VCTs employ an average of 68 people, compared to just 11 for the average small business. These companies currently employ almost 100,000 people in the UK.

In September, the VCT scheme was extended for another ten years, meaning it will run at least until 2035.

Lewis said: “HM Treasury’s decision to formally extend the sunset clause for a further ten years is testament to the importance of the scheme and provides a significant boost to investor confidence. Rachel Reeves’ first Budget specifically mentioned VCTs, and her speech was introduced under the banner of “Invest, Invest, Invest”.

‘At a time when funding from the wider venture capital market has declined and many start-ups are struggling to raise money, VCTs invested more than £500 million in scaling businesses last year.

‘This is a crucial boost to the funding landscape in Britain and proves the value of the scheme to the national economy in terms of creating new jobs and wealth creation on a wider scale.’

For example, data analytics company Quantexa secured VCT funding for the first time in 2016. As a result, the company has now grown to a valuation of $1.8 billion and delivers $100 million in recurring revenue annually.

Vishal Marria, Founder and CEO, said: “(Venture capital fund managers) Albion VC and Dawn Capital have supported us from the start and provided valuable advice and feedback.

‘We are a British-founded company…working with global industry leaders. Venture capital funds and the support of our investors continue to play a critical role in our growth trajectory.”

Should you invest in VCTs?

VCTs are generally seen as an investment option for those who have already maxed out their Isas and Sipps. This is due to the tax benefits of these wrappers, but also due to the risky nature of venture capital.

VCTs also offer an attractive tax offer as they are free from capital gains tax and free from the £500 tax-free dividend limit.

With Chancellor Rachel Reeves recently increasing capital gains tax to 24 per cent for higher rate taxpayers and 20 per cent for those paying the basic rate in her autumn budget, VCTs have become an increasingly attractive investment option.

Unlike an Isa, which has an annual fee of £20,000, the VCT fee is £200,000, meaning these investors can save themselves up to £60,000 in upfront taxes.

These tax breaks are offered to make smaller business investments attractive and are intended to compensate investors for the risk of supporting smaller and younger companies

Furthermore, investments in smaller companies are less affected by broader market movements, meaning this can be a good way to diversify a portfolio.

However, it is crucial to seek advice before deciding to put money into a VCT and ensure they are suitable for you. Investors must owe enough income tax to reclaim the 30 percent income tax credit, and must feel comfortable leaving their money in higher-risk investments.

VCT-funded companies are much more likely to fail than more established listed players. High risk can sometimes lead to high reward, but this is by no means guaranteed.

One estimate suggests that up to nine in ten investments in the earliest phases could fail.

VCT investors must be able to cope with the possibility of losing their entire investment and leave it untouched for the five-year period required to qualify for tax relief.

Lewis said: ‘The Chancellor’s mention of VCTs in her recent Budget speech has increased the visibility of VCTs as one of the core options for tax-efficient investment in Britain; in addition to pensions, ISAs and EIS.

‘VCTs are in some ways an ‘unsung hero’ because a single investment in a VCT can give retail investors access to up to 100 companies in an existing portfolio.

‘Crucially, as VCTs scale up and invest in new businesses, this diversification only increases across sectors and business maturity. There are also the well-known income tax and capital gains tax benefits of investing in VCTs.”