By Ben Chernoff, Director at Davis Grant
The UK tech sector looks set to beat its previous records for raising investment this year – with firms already securing more than £13.5 billion in the first six months of 2021.
The latest Digital Economy Council and Tech Nation figures show that venture capital investment in the first half of 2021 was three times what was raised during the same period in 2020.
This has led to the creation of 20 new tech ‘unicorns’– businesses that are valued at $1 billion or more.
The UK is also home to 12 decacorns, which are businesses with a value of $10 billion or more.
These deals have mainly been achieved through venture capital investment.
What is venture capital investment?
Venture capital investment offers private investors the opportunity to fund a business in exchange for equity.
It is somewhat similar to initial seed investment, but the scale of funds raised is significantly different.
While seed funding focuses on the launch of a business, venture capital funding is designed to help companies scale up and drive growth.
What are the different rounds of venture capital funding?
Most venture capital relies on consecutive rounds of funding, with each stage referring to a certain class of preferred stock sold.
Typically seed funding will be followed by round A funding, which takes place once the company has an established customer base and reputation.
If the business feels it needs more finance for growth it will move to round B and then C and so on.
Each stage and equity on offer are usually determined by the company’s value at the time, which is typically based on its market size, growth prospects and its governance, as well as the amount that it hopes to raise.
What are the tax benefits of venture capital to investors?
Venture capital funding is usually given to businesses by venture capital firms, which offer venture capital trusts (VCTS) to investors.
While the focus of most people’s investment will be on the growth of the business and their returns, investors are afforded several tax incentives on investments up to £200,000 each year.
If an investor uses a VCT they can claim up to 30 per cent income tax relief on the amount invested, provided the VCT shares are retained for at least five years.
Where an investor chooses to sell a VCT share and they make a gain on its disposal they are not subject to Capital Gains Tax. Some VCTs may also pay dividends. There is no tax to pay on these dividends.
How we can help
If your tech business is at the stage where it is seeking venture capital investment, we can help you make the most of the money you raise by offering advice on a wide range of issues, from determining where money is best invested to tax planning. To find out more about our services for the tech sector, please contact us.