This article first appeared in What Investment.
Pyeongchang, South Korea, February 2018. Among the snow-covered mountains hosting the Winter Olympics sits a dark – very dark – black building. The walls are curved, yet the building is so black they appear completely flat. It’s as if someone has cut a hole in reality itself, and you’re staring straight through into outer space.
What you’re looking at is the Hyundai Pavilion. It’s the work of London-based architect Asif Khan, who has covered the building in a coating called VBx2. It’s a sprayable coating made by the same company that produces Vantablack, the world’s darkest man-made substance.
Vantablack absorbs 99.965% of the light that hits it. It reflects virtually nothing. This makes it useful in a wide range of areas, from cameras and telescopes, where stray light can impair performance, to luxury products like watches and jewellery, where Vantablack can create a unique aesthetic effect.
The company behind Vantablack is UK-based Surrey NanoSystems, which first unveiled the technology in 2014 at the Farnborough International Air Show. It’s a great example of a successful UK-based growth company, and one that we hold in the portfolio of Octopus Titan VCT, the UK’s largest venture capital trust (VCT).
VCTs are one way for individual investors to get exposure to start-up and scale-up companies whose shares aren’t quoted on an exchange. Investors buy shares in one company, the VCT, which in turn invests in many small, early stage businesses. Investing at an earlier stage means that, if things go well, there’s more potential investment profit to be made. At the same time, not every opportunity works out. Early stage investing is high risk.
Why it’s a great time to consider venture capital trusts
In recent years we’ve seen a trend among larger companies away from in-house research and development and towards acquiring smaller businesses. There’s a logic to this. As the technology driving businesses becomes more and more advanced, it often makes sense to let lots of smaller companies figure out ‘the next big thing’ and then buy up the winners.
This has created a great opportunity for VCT investors. The opportunity has never been greater for entrepreneurs to quickly build a valuable business and then sell a company (known as an ‘exit’ in the jargon). VCTs that invest in such companies will potentially benefit from faster and greater returns for their shareholders.
Investing in early stage companies can also be a good way to diversify a portfolio. Businesses with high growth potential, and which are yet to mature, can sometimes be less sensitive to shifts in market sentiment or changes in economic growth.
Investors in unquoted companies can also have a psychological advantage when there’s a stock market sell-off, like the one we saw at the start of February. That’s because unquoted companies’ share prices are worked out periodically, based on the underlying performance of the business rather than short term sentiment driven stock market volatility.
So if the market sees a temporary sell-off, VCT investors may not actually see it reflected in the price of their VCT shares. Of course, if stock market weakness reflects broader economic weakness, then you should expect this to affect quoted and unquoted companies alike.
But if it’s a temporary panic, it’s much easier to stay calm and collected when there’s no sudden share price drop to fret about. You don’t get that horrible feeling of watching everything in your share portfolio falling at the same time.
While there might be compelling reasons to invest in early stage companies, especially via an expert management team such as a VCT provides, there is no escaping the fact that investing in early stage companies puts capital at risk. Investors may get back less than they put in. While a VCT itself is listed on the London Stock Exchange, VCT shares can fall or rise in value by more than other shares and may also be harder to sell.
To give investors an incentive to take on this investment risk, VCTs offer investors tax reliefs. As well as receiving tax-free dividends and capital gains, investors can claim income tax relief worth up to 30% of the value of their investment (subject to a maximum investment of £200,000 per tax year), provided they hold the VCT for five years.
While these tax reliefs are attractive, anyone investing in a VCT needs to be aware that the benefit of the tax relief to them will depend on their own circumstances and legislation could change in future. Also, these tax reliefs depend on the VCT maintaining its qualifying status.
Investors should therefore pay attention to the quality of the companies in a VCT’s portfolio. A good VCT manager will have a proven process for zeroing in on the best opportunities.
How we look for the best early stage investments
Octopus Titan VCT gives individual investors access to unquoted early stage businesses, via a diverse portfolio of around 50 companies. We invest in tech enabled companies and focus on four broad areas: the future of money, the future of healthcare, the future of retail and the future of industry.
Within these areas, we look for companies that meet the following criteria:
- There’s a big market opportunity.
- The team is talented and ambitious.
- The business has an innovative technology or is using technology in an innovative way.
- The pace of growth is rapid.
It’s a rigorous process. Our team sees around two-thirds of the top-tier venture capital deals in the UK. We review detailed proposals from around 1,000 businesses each year, from which we select around 250 companies to analyse thoroughly. From that 250, we invest in around 10 to 20 each year.
We look for companies that have either developed a cutting-edge technology themselves, like Surrey NanoSystems has with Vantablack, or which are using technology in innovative ways to challenge an existing market. Examples of the latter include Tails.com, which custom-blends dog food tailored specifically for each customer’s dog, and Swoon Editions, which offers hand-crafted furniture at lower prices by cutting out overheads like warehouses and shops.
Even with a rigorous process, there are few guarantees when it comes to early stage investing. That applies not just to the investments that don’t work out, but also to some of those that do. The road to success can take some unexpected turns.
Surrey NanoSystems is a great example of this. The story behind Vantablack illustrates why we look for companies with great teams and great technologies.
The road to Vantablack
Back in 2009, when we first invested in Surrey NanoSystems, there was no Vantablack. There was only the technology that would later be used in Vantablack. The company had developed a new way to grow carbon nanotubes, hollow cylinders with walls formed from sheets of carbon one atom thick (see box).
Our original thesis was that these carbon nanotubes could replace the copper used in semiconductors. This was (and remains) a gigantic market, and a huge growth opportunity for the business. As it turned out, however, the semiconductor industry found ways to extend the life of copper. There may yet be a huge opportunity there, but its time has not yet come.
In the meantime, the team at Surrey NanoSystems developed its technology in new areas. They found they could arrange carbon nanotubes in such a way that they would absorb almost all the light that hit them. Think of a beam of sunlight entering a forest, bouncing from tree to tree, unable to escape.
The result was Vantablack – the name shortened from Vertically Aligned Nanotube Array black. The Vantablack coating range is currently being used or trialled in the following areas:
- Space and defence components – star trackers, sun shields, satellite calibration systems
- Terrestrial Space Imaging – stray light suppression for national space telescopes
- Automotive – sun shields for automotive vision systems, autonomous vehicle mapping and safety systems, sun shields for heads up displays.
- Consumer electronics – improved mobile camera performance, mobile electronic aesthetics
- Imaging systems – camera lenses for cinematography, professional photography and military uses
- Art and Architecture
“We are solving some critical problems across a range of industries,” says Ben Jensen, chief technical officer at Surrey NanoSystems.
“Since we launched Vantablack in 2014 we have doubled turnover year on year. This year goes well beyond even that as the business, headcount and sales are expanding rapidly.”
The future looks even brighter (if that’s the right word to use about the world’s darkest material!) Since the Hyundai Pavilion opened at the Winter Olympics, Surrey NanoSystems has seen a strong pick-up in interest across its product range.
The success of Vantablack shows why it’s so important to invest in companies with an ambitious and talented team as well as a pioneering technology. The path to success is rarely straightforward, so you need to back people who can adapt.
Backing Britain’s brightest businesses
We’ve raised a record-breaking £120 million into Octopus Titan VCT this year, and we’re now targeting an additional £80 million before the current fundraise ends.
The good news for our investors is the UK entrepreneurial scene is thriving. There are now more than 20 UK tech companies launched since 2003 valued at over $1 billion, up from just one in 2010. Three times as many venture capital deals happen here compared to the next biggest European market.
For those comfortable with the risks of smaller company investing, there’s a lot of opportunity out there, and we look forward to backing more British success stories.
For journalists in their professional capacity only. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs depend on the portfolio companies maintaining their qualifying status. The shares of smaller companies and VCT shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. This advertisement is not a prospectus. Investors should only subscribe for shares based on information in the prospectus, which can be obtained from octopusinvestments.com. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: March 2018