Startup Success: Spotting the Right Investments with SFC Capital

Want to demystify the world of early-stage investments? Promise no more: this episode unpacks the labyrinth of SEIS and EIS tax relief and early-stage tech investment as we sit with Ed, an Investment Manager at SFC Capital. A fund that's not afraid to make bold moves, SFC Capital specializes in supporting startups from a variety of sectors, closing deals with the speed of a cheetah, and even offering follow-on funding to a select 10% of their portfolio companies each year.

Dive headfirst into the discussion as we uncover the secret sauce that makes or breaks an application at SFC Capital. How does their scoring system work? What does the ideal candidate look like? Ed shares his valuable insights on the key factors that influence SFC Capital's investment decisions - from the importance of a solid team composition to a steadfast commitment to the business and well-researched market analysis. We also get a peek into Ed's journey into investment, his personal criteria for choosing businesses to bank on, and his knack for spotting successful founders.

But it's not all about the start - what happens when it's time to make the shift from the initial stages to the later ones? We discuss the challenges of navigating late-stage investor expectations, the crucial need for a viable business model, and the undeniable importance of cash flow for success. Get a word of advice or two about early-stage investment strategies and tips, and learn about the thrill of finding the right investors, the role of luck in investment success, and the time it takes for returns to materialize. We also touch upon exciting developments in the space, including the potential of a secondary market to turbocharge investment and a novel fund designed to provide liquidity for founders. Time to sharpen your investment acumen with insights straight from the horse's mouth - tune in now!

Transcript

Stewart Noakes: 0:46

Alright and welcome. Here we are on the Investor Circle series, episode 7, with Ed from SFC. Ed, so great to have you here. I think you're live from London today, aren't you?

Edward Stevenson: 0:56

Yeah, absolutely, nice to be here. Thank you for having me, stuart. Yeah, absolutely, I am live from London. In our office in Tractury Lane, currently sitting in one of the phone booths.

Stewart Noakes: 1:04

Fantastic. So for those people that don't know what is SFC and what is the thesis that you guys worked to, yeah, okay.

Edward Stevenson: 1:10

So SFC Capital, you know, on a high level, we're an early stage fund and we specifically invest through SEIS and EIS, which is a UK-based tax scheme that essentially, on a very high level if you aren't aware of them is essentially the government giving tax relief on an investor's investment into certain companies and those companies need to meet certain criteria and there is, you know, a relatively long list, but you know, on a very high level it's for the SEIS side of things. It's the company can't have been trading for more than three years and can't have gross assets of over 300K. There are other little criterias around and I think if you're not familiar with them and you're looking to raise in the UK, I'd certainly would recommend researching it. Just type in SEIS into Google, because it's a fantastic way to raise money in the UK and obviously it's. I think it's one of the most attractive schemes in the world really for investors. So it does make it, you know, a really good early stage ecosystem.

Edward Stevenson: 2:09

So, yeah, we're obviously specialising that SEIS and EIS, which is the sort of like the later stage for later stage companies, the tax relief and the compature, but it's essentially part of the same scheme.

Edward Stevenson: 2:22

So any company that comes to us, you know, has to be eligible for those schemes and, specifically, we will invest from the SEIS fund first, which is up to 250K, and then we will reinvest from the EIS fund as a follow on fund.

Edward Stevenson: 2:38

So we have the ability to follow on into our portfolio, which I think is a big advantage that we can offer. Yeah, sadly we can't reinvest it in all of them because we have so many now we've got we're closing in on about 500, I think portfolio companies, but I would say probably 10% a year might receive follow on funding from us every year. So you know, if you're doing well, hit your targets that you laid out when you previously invested in, there's a good shot you'll get follow on from us. We don't specialise in a sector or a stage, so we are a generous fund and we will invest in everything from, you know, prototype pitch deck sometimes all the way through to revenue generating companies and all the way from products companies, such as, you know, a drinks company, all the way through to companies, the deep tech companies, ip, heavy companies, such as a company that we did recently that's looking to, you know, transport icebergs from the Atlantic to the Middle East to provide drinking water.

Stewart Noakes: 3:32

Crazy direct to you.

Edward Stevenson: 3:33

Yeah, a real range and, yeah, very active. So do about 100 investments a year, so making us the most active, I think, in the UK at least, maybe not, if not Europe by number of deals and then about, yeah, 20, 20 follow on investments into existing portfolio companies.

Stewart Noakes: 3:52

Yeah, that's all about in a nutshell. I mean trying to deal with 100, 100 investments a year. How big is the team?

Edward Stevenson: 3:57

Yeah, so the team is about 10 of us full time and you know obviously everyone's got their own. You know roles when it comes to getting a deal. You know, from that first meeting all the way through to closing it, you know we have various team members that are involved in various parts of this process. So you know my job specifically is on the deal flow side. So I'm responsible for going out, finding the companies, meeting them and then, you know, deciding which ones I think have got a good shot at the investment committee to receive investment.

Edward Stevenson: 4:26

And you know, then we've got someone, a financial analyst, who does all the DD, which is the next stage following the meetings. And then you know we've obviously got the investment committee that you know ultimately makes a decision. We present them with a memo, essentially, just like, you know, most of the funds, I'm sure. And then obviously we've got, you know, law firm that we use, you know, to draft the paperwork. You know we do the majority of deals lead the rounds. That we would always like to try, and you know, put our documents in place is at least the starting point, and then we obviously work from those templates.

Stewart Noakes: 4:58

Yeah, you guys, from what I remember, like to be the first check, right?

Edward Stevenson: 5:01

Yeah, well, I mean obviously, yeah, we have to be obviously, as SEIS is typically the first money a company's raised. It's the first company a company, first money a company raises. So, yeah, by definition, we are typically one of the first investors in. You know they might have had a bit of money from, from you know their own pocket or you know their friends and family sort of type network investment a little bit before, but we're typically the first you know sizable check into into the companies we invest in, absolutely. So, yeah, now we've got a process, really efficient process I think, which we need to do to close 100 investment a year. And, yeah, the time to from a first meeting to close is six weeks is what we target. We can close deals in a week. Right, you know the process is.

Edward Stevenson: 5:43

Is is designed in a way that we can get everything covered, do everything above you know as it needs to be done, and cover everything that we need and get those closed. It's not often us there's. The problem is often companies not providing us with the information we need. Probably enough, the patient side sometimes takes time, I'll be honest, but you do get companies that provide the information like that and are happy to go with the offer that's put on the table. And those are the dream types of companies, if I'm being honest the ones that proactive, responsive, are able to make their own mind up but take advice on board and ultimately just want to get the deal closed, get the money in the bank and get running.

Stewart Noakes: 6:29

Well, I have to say, I mean we met when I was doing what we call a reverse due diligence, called on behalf of a set squared company, just to find out more about SFC. And well, up until that point I'd never really considered putting companies towards the funds like yours or SFC specifically, although I'd heard of people doing it. But actually the things you're talking about with the efficient process and stuff, it really struck me as quite special.

Edward Stevenson: 6:50

And.

Stewart Noakes: 6:50

I particularly honed in on some of the guidance that you guys give afterwards around taking on a non-exec for your board and get the money and that stuff. I was really impressed with the efficiency of the due diligence process and the way you were able to provide term sheets so quickly to companies that you really believed in and then get that process moving, and I've since recommended maybe five or six companies that come to you and a couple of them have received funding and the process has been super cool. I've really appreciated that. It's done the job that it's there to do.

Stewart Noakes: 7:21

The founders have been relieved by the process rather than felt burdened by the process, which has been really good, and the money has then been put to good use. So I've been really, really, actually very impressed with everything that SFC has done so far.

Edward Stevenson: 7:32

Fantastic, it's good to hear, but yeah, we'd like to think we're sort of no nonsense.

Stewart Noakes: 7:36

Get it done All tech companies, though no icebergs from the.

Edward Stevenson: 7:40

Yeah, yeah, yeah, yeah, of course.

Stewart Noakes: 7:41

Yeah, yeah, yeah. Really, you've got to look up that company. That looks so interesting.

Edward Stevenson: 7:44

Yeah, yeah, nas North Atlantic Research Society I think it's called Check it out. It's pretty incredible what they did.

Stewart Noakes: 7:52

So most of the Kennepe people are doing some sort of technology-based company. So could I just ask what's the suite, but what's the perfect looking applicant from your perspective?

Edward Stevenson: 8:05

Yeah, I mean that's a big question and everyone's got their own opinions right and what criteria they need. We have developed a sort of in-house proprietary scoring mechanism based on 10 years of doing this and identifying which companies that have done well, what the common characteristics are, and we sort of transpose that into a scoring mechanism. It's out of 60, and a company needs to achieve a certain score to make it through the first stage, to even get to the evaluation stage. We score them and if they get above a certain score, based on all the different data points that we use, which I think is about 25 individual data points, which adds up to 60. If they get above a certain score, then they get through. So it's broadly separated into categories. So we have a people category, attraction category, a market exit, potential category, and then a few other sort of categories, and what we're looking for really is at the early stage. Obviously we are going to. We do accept that typically at the early stage.

Edward Stevenson: 9:19

We're not expecting companies to have trading history and traction in the conventional sense sales licenses requiring revenues. Obviously. If they do have that, fantastic, obviously that's they get lots of points for traction. Obviously, if they're in the vision to have got to a point where they're selling the product without having raised much money previously, that's obviously fantastic. So typically the stage of the best that the majority of them are going to be early, pre-revenue, if I'm being honest.

Edward Stevenson: 9:43

So it's, we really pace a huge amount of emphasis on the team. I know a lot of funds. That's a pretty standard answer. That's the team and what makes a good team? Again, that's a difficult and an age old question. We like to see we have a preference for co-founding teams. So we do do sole founders but we do have a preference for co-founders, multiple members of on the management team with a nice combination of skills across the team. So we like to have technical, commercial operations all covered in the team. So obviously it's no use if you've got three co-founders but they've all got the same background. And then we like to see we like to have seen them having committed to the business or at least going to commit. Just a point if investor ever asked you are you going full time or are you going full time? The answer is always yes.

Stewart Noakes: 10:37

It's amazing how people get vague of that yeah.

Edward Stevenson: 10:40

And don't take any time to even consider it. Even a pause of a seconds. That could be a deal breaker.

Edward Stevenson: 10:46

I appreciate you might not be full time business at the early stage. They might not be full time straight away, but as part of the round. The answer should always be yes, we're going in this full time. You can't have a situation where investors are investing and you're still got one firm one for out, so ideally you'd already be fully in. But I appreciate everyone's got to pay the bills. So until you've got funding in the company, I appreciate that everyone can survive to do that. But yeah, full time again on reasonable salary expectations. It's a sensitive subject because everyone's got different lifestyles.

Stewart Noakes: 11:18

But don't take the You're not looking to put 250K in to watch it all walk out?

Edward Stevenson: 11:25

Yeah, yeah, so basically be reasonable, base it on the financial position of the company and the raise and be reasonable, and then again, that is a red flag at the investment.

Edward Stevenson: 11:33

If the salary is a 2R, then that is a red flag for us personally and can be a deal breaker. And then, yeah, we obviously like to have founders that have been a previous experience of running a company. That's obviously another positive thing. And then we're moving into the product. Again, as I said, doesn't necessarily have to be selling the product, but we do like to see evidence of something having been built, something tangible, something functioning, that you're able to demonstrate not just to us as investors, but also to potential customers.

Stewart Noakes: 12:01

And it's good to have Just trying to work out how that goes with icebergs. I'm not quite sure.

Edward Stevenson: 12:05

Yeah, no, I think obviously when we're talking about software companies here, I think probably when it comes to that the stage of the product and I want to talk to Yee Jeep and also to tell you guys how really interesting this is we're obviously happy to invest on a pitch deck, on a prototype at that stage because we appreciate the value of the IP. But when it's a software, more straightforward software stuff, we do like to see evidence. I can MVP and that also shows that the founders put some skin in the game, either through their own money or their own time, to get the product there. What we don't typically like to see is when you break down the use of funds over half of it ideally shouldn't be going on the products. Over half it should be available operational expenditure, working capital, basically to start selling the products and bringing on the team around that. So that's again quite rudimentary.

Edward Stevenson: 12:52

We're looking at it and it's not a hard and fast rule, but, to break down, that's how we like it. And then, yeah, then it comes to market. We're quite broad with the market analysis that we do. We just are quite. We segment it into software, fintech, insuretech, and that's typically how we look at the market analysis. And obviously there's certain sectors that we want to get more exposure to at the moment and I can give you the usual buzzwords but you would have heard of a million times before AI, machine learning, fintech, all less. So now Do a lot of green focused stuff Again, massively broad sector. But that's how we look at it and we're doing quite a bit of tech stuff at the moment. And then we're going into the specifics of the round. So we like to see current investment. So we like when the companies bring other investors alongside us for obvious reasons, de-risk it but also shows that they are able to raise money outside of just our network.

Stewart Noakes: 13:51

And we like that's a really interesting point, I mean in terms of the 250,. How much of the 250 ticket do you want, Because that's the maximum on the S&M?

Edward Stevenson: 13:57

Yeah yeah, yeah, so we can take the full 250, but we're always happy to reduce that down and leave maybe 50 to 100K available for their own investors then from their network. Obviously, seis is the most attractive, so it goes the quickest and everyone always wants a piece of the SEIS, right, because it's better for the tax relief and investors. So we typically probably do maybe like 150 to 200K from our fund and then they can raise the balance from their network if they've got any. We also have an angel network, so we have our own funds that we manage on behalf of investors, but we have an angel network as well, which is a bunch of about 500 plus active investors that would rather be more discretionary in their investment approach. So they pick and choose their preferred options from the fund, and so that's the way we do all the heavy lifting essentially from the fund or the DD, get all the paperwork in place and then promote it to the network and they'll then pick and choose which ones they like to look of, and then that way we can actually increase the amount of money we can bring to the table beyond the 250 limit, even because some of them are non-SEIS EIS investors. So actually I was on average, we're looking at 100 to about 300K we can bring to around.

Edward Stevenson: 15:06

And then, yeah, valuation again a real tough, massive subject, but often a big sticking point, or which. The valuation is what takes out the majority of the negotiation, arriving one. Very difficult at the early stage to value a business, for obvious reasons. There's not much data to go. Well, it's a pre-revenue right.

Stewart Noakes: 15:24

Pre-revenue right and even early revenues.

Edward Stevenson: 15:26

You can't really be applying all these sort of discounted cash flow models or multiples to that because the revenues aren't having been consistent enough, to be honest. So we like to take a bottom-up approach. Obviously we want to arrive at a fair number for both parties. Don't want to take too much of the company that you kill it from day one in the sense that you're over-diluting the founders, but at the same time we need to have enough of the state that mitigates the impact of dilution that we are going to take as early-stage investors. And it is crazy how much dilution you can. Take Recent example we sort of started at sort of 17% and now we're now down to that one or two percent. So it's so important to get that started position right. So, yeah, we typically say sort of 10 to 20% on the round is what founders should have in mind when going out and raising their initial rounds.

Stewart Noakes: 16:15

So you're doing 150 to 250k for 10 to 20% Exactly, yeah, and you're trying to be the first check, the early check, going in? Yeah, yeah, yeah.

Edward Stevenson: 16:23

So, but if it's, a 500k round, we do 250 and they bring another 250, then that's obviously 10 to 20% of that. If you go 20% it's 2 million. But yeah, if it's just 150, the valuation obviously is determined by the round size as well. So that's obviously another motivation for the company to go out and raise further funds as part of the round. But at the same time and another issue of that is that when you say that to founders, often they already start off wanting to raise a light round, for obvious reasons, the more money the better.

Edward Stevenson: 16:56

But the more you raise, the longer it's going to take and the more complicated it becomes. The more investors you bring in, the more complicated it becomes actually closing it from a practical point of view. And the longer it takes and the longer it's taking, the more it's distracting you from getting on and growing the business and achieving grabbing that market share which the opportunity might have gone in. So you need to balance the need to get cash in quickly and just get moving with the need to have a decent amount of cash to give you a decent runway.

Stewart Noakes: 17:24

So there's a balance there, and I would always be flexible as a founder.

Edward Stevenson: 17:27

If you do set yourself to a number, don't necessarily have to stick to it If you're finding it's taking too long. Have a couple of different scenarios in your head in terms of the round size that you want and what milestones could be achieved with that, and then use that to be flexible.

Stewart Noakes: 17:43

You know what. It's really interesting to say that I'm so supportive of that because it's one of the reasons that I've recommended some of the companies come to SFC, which is like you can work really quickly with SFC to put this kind of money in place and get on with what you're trying to do, but you can spend six more months trying to work out what you're going to do and how you're going to get the money and then you're going to miss the boat. So it's really interesting. Thank you for sharing that.

Edward Stevenson: 18:03

Yeah, yeah, no, that's fine, no worries.

Stewart Noakes: 18:07

So one of the questions that comes up in our community a lot is from foreign companies, particularly Portuguese ones, looking at the SES stuff and wondering if it's possible to raise money in the UK under that tax regime. Can it be done, and can it be done with SFC?

Edward Stevenson: 18:21

Yeah, absolutely it can be done. There are, again, specific rules and requirements around the way you structure it. Again, I would advise companies to do their own research and to seek legal advice on this, of which there are plenty of lawyers that will do it. We have a law firm that we have used multiple times to do exactly that. When a company is based in Europe or the States or elsewhere, they basically just essentially, on a high level, they need to open up a company here, a branch, either a subsidiary or a holding company, and they need to have a permanent presence in the UK.

Edward Stevenson: 18:59

I think one of the directors would need to be based in the UK, but so long as that's the case, absolutely they can open up an entity here in the UK, potentially an employer director who's based in the UK, if they know of one, and then they would be eligible for SELS and from us as well. As I said, we've done several companies structured in that way. We did a really good, great one from. The business was originally based in Turkey two sisters actually focusing on the e-commerce sector, and I think they got the part of the global talent visa, which is run by the government moved over to the UK.

Edward Stevenson: 19:38

They opened up a company here, structured it in the right way and we made an SELS investment. So they've got some scenery in. Turkey and actually there was a Turkish fund invested as well alongside us and a German fund, so it was a real pan-European round. That and, yeah, fantastic, lots of great companies, amazing yeah.

Stewart Noakes: 19:58

I mean because, as you say, this SEIS stuff, it's world-class right, the best row of regimens in the world for raising that, yeah, absolutely yeah, so no, 100% is very possible and, yeah, recommend it. Okay, so I mean Ed. For people listening to this, they're probably wondering what's your background. How on earth do you end up being like an investment manager at SFC? Did you go to university? Have you done this before Like? Or is this just a first-time gig for you?

Edward Stevenson: 20:23

Yeah, no, Okay. Yeah, it's not the most usual background story. I don't actually really ever intend to get into it.

Edward Stevenson: 20:30

if I'm being honest, I did university and all that I did economics university not that I think that's been much used, but anyway, that's a different story. And then I went into lobbying public affairs didn't really enjoy that and then moved into work for a credit-raising agency doing credit ratings on government debt, which was enjoyable from a sort of macro perspective and that obviously gave me sort of an awareness of trends et cetera. But you know, it was pretty data-heavy, quite a lot of spreadsheets. And then, yeah, obviously I started to actually do a bit of angel investing myself through the SGI schemes, as I'd heard of them. So I thought why not, are we?

Stewart Noakes: 21:13

doing that directly? Are we doing that through things like CrowdCube or Cedars? Yeah, CrowdCube and Cedars.

Edward Stevenson: 21:18

And stuff, yeah, yeah. And then I heard of SFC. I was, through that, reached out to them as a potential investor and then obviously we have a sort of scouting program, right. So if you ever have a good business that you think would be a good fit for us, you can send it to us and if we invest, we pay our success fee and they recommended I do that and I sent them a few businesses and off the back of that I think we got invested in a couple and they were like well, obviously you've obviously got some sort of eye for this. Do you want to make a couple in full-time Position's just opened up.

Edward Stevenson: 21:54

This was about three years ago and, yeah, I said I wasn't actually. Yeah, I said, yeah, absolutely, I'd give it a go. Sounds like it looks really interesting. And you know, here I am today.

Edward Stevenson: 22:06

So you know we obviously do a lot of, you know, assessment of the financials as part of the DD, but you know a large part of it is also what you think of the team and what you make of the people, right, and that's less sort of quantitative stuff, right, the feeling you get, almost. Then it's very difficult to describe what the right feeling should be, but you do just, you know, get more and more of an understanding of which founders you think are going to be able to ultimately get on with it and execute on the vision and be a success. And my job is really trying to identify those, trying to separate those from the ones that probably aren't going to make it. And you know, sadly, there's no, you know specific, you know calculation you can do to identify those. But you know you just need to get a feeling.

Edward Stevenson: 22:59

We do do like psychometric testing and stuff as part of the due diligence. So you know we play some weight on that, so we try and be, you know, objective from that side of things. But there's also, you know, there's sort of the ability of the founders to sort of the way they communicate, the way they behave, do they take on, you know, do they have that characteristic of yeah, I know what I'm doing, I can get this done arrogance in a way, but not so arrogant that they don't take any feedback on board. So they need a bit of, they need arrogance and humility.

Stewart Noakes: 23:31

That's a dangerous combination.

Edward Stevenson: 23:33

Yeah, and those two characteristics are obviously quite contradictory, right? So it's very difficult to find a founder that has those characteristics, but if I look through our portfolio of 500 companies those that do well, of which we have plenty the overarching, one common characteristic would be that they are superstars and they get you done. They get stuff done really quickly, but at the same time, they listen to all parties and take the feedback on board. They might not do anything with it, but they listen to it, at least incorporate it into their decision, and then they make a decision and they get it done and they execute. So you know, I think it is quite clear that there's what you want.

Stewart Noakes: 24:13

Super interesting, We've got a really geeky saying that we have in the coaching and mentoring side of Canopy, which is it's an old joke. So as a dad joke, I apologize for this. How many psychiatrists does it take to change a light bulb? The answer is one, but the light bulb has to want to change.

Stewart Noakes: 24:28

Yeah, yeah yeah, mentoring and coaching. We're like if you're a founder that really wants to do something, we can help you, but if you're just gonna sit there and say what I want to do, that or this doesn't make any sense to me, or whatever, we can't get you anywhere. So we're looking for those light bulb people all the time 100%.

Edward Stevenson: 24:41

I fairly agree, yeah.

Stewart Noakes: 24:43

What's the joy for you, Ed? What's the joy in being like doing this investment stuff? What makes you smile every day?

Edward Stevenson: 24:48

Yeah, I mean, we do a lot of deals, right? So you know we close 100 deals, so I'm seeing a large amount of pitch decks. You know, I think between me and my colleague who work on the sourcing side, we're looking at 3, 4,000 decks a year probably.

Stewart Noakes: 24:59

That's insane man. How do you even yeah?

Edward Stevenson: 25:02

yeah, so you know there can be deck fatigue and you know there can be fatigue sometimes just listening to people's businesses the whole time. But that said, when you get a good business and you really, you know, get passionate founder who's working on a really interesting idea or interesting market or solving a really interesting problem, then you know you get really excited about that deal, and then you know you really want to get that deal because it's competitive right, the good deals are competitive.

Edward Stevenson: 25:28

But you know it's exciting to meet one at the founder like that that makes you excited and makes you want to close a deal and make the investment, and that is really exciting. When you find a founder like that and the chase starts and all that sort of things, that's really exciting. And then you know, ultimately seeing those companies go on and do well is obviously, you know, a fantastic feeling. You know, sadly, there are plenty of times where you know we've had fantastic companies and there'd be fantastic businesses, but something just hasn't quite worked or they've got unlucky or something totally out of their control has happened and actually they haven't gone on to achieve what they could have done, which is really sad actually, because you know the potential of the team and the business and but you know there's a vast amount of luck involved, as well as with everything in life. So that's, you know, always difficult to take.

Stewart Noakes: 26:18

And then of course, you're at the stage where in this kind of investment round there's probably one in 50 that have a chance of doing something really mega right, and maybe three or four out of 50 are going to do something medium, but a huge proportion are going to ultimately fail at that particular level.

Edward Stevenson: 26:31

You're right. Those are the exact numbers yeah, and a failure isn't necessarily like a liquidation. It's like it just doesn't go on and hit the milestone, it doesn't go on to get to the next stage and then it was it to crack on. So, yeah, you're absolutely right. But every of those, we're fully aware of the numbers. But you know, every business we invest in, you know we start off thinking this does have a really good shot.

Stewart Noakes: 26:49

Absolutely Are you willing to do that?

Edward Stevenson: 26:51

Right, that's the whole point of what we try and do. But, yeah, at least anything can happen tomorrow, let alone a year's time. So, yeah, that's just the way the cookie crumbles. And that's why I think our volume approach is totally the right strategy for the early stage investing. You know, I appreciate later stage, when you're doing bigger tickets, you know you want to be more, you know focused. But you know our overall thesis and strategy is volume, diversity and quality. And, as you said, if you get enough really good companies with good diversity across everything the team, the sector, the market, the business model then you got a good shot of getting the returns at the end.

Stewart Noakes: 27:29

And you know we are starting to see now you know the exits and returns coming through which is great. Ten years right, it's about the right time for.

Edward Stevenson: 27:36

Yeah, I think, yeah, you've got to start. You've really got to expect five to ten, five at best, ten, probably more realistically. And we've been going for ten years now and, interestingly, the earlier the initial funds which we launched 2012, I think, 2013, they're now starting to, you know, mature and deliver the returns, and that's ultimately how long the return period is. And you know it's just the reality of it and you know some investors don't realize it takes that long.

Stewart Noakes: 28:04

But they get their tax relief when they put into the fund.

Edward Stevenson: 28:06

Yeah, exactly, so you get your tax relief. You know, initially the 50% back. If it's SIS 30%, so yeah and then, yeah, then obviously you know, then we try and aim to start returning money in them. Yeah, within five years.

Stewart Noakes: 28:22

Yeah, super interesting. I've got a couple of investments I made 10 years ago that I'm really hoping will pay out soon. One of them is actually CrowdCube and a small investment in that itself as a platform.

Edward Stevenson: 28:33

Oh well, okay, really interesting yeah.

Stewart Noakes: 28:35

Yeah, so I knew the founders when they first began the project and just really believed in them as people also put a little bit in and round. Who knows what that will go this year.

Edward Stevenson: 28:46

Yeah, I think that's good. I think the one thing that the early stage investment in the UK maybe, and probably globally is missing is the liquidity side. It's quite difficult to get your money out ultimately when it's in.

Stewart Noakes: 28:56

There's no secondary market really there are secondary, but they lack the liquidity really don't they?

Edward Stevenson: 29:01

That's the problem. So that's one thing that I think needs to be improved and I think if you can improve that, I think we'll just double, triple the amount of investment going into the space out of these schemes. Because if you can get your money out relatively easily after sort of the three year period, which is the minimum holding period you need to hold the shares for, to retain the relief and all the benefits as well, because it's also capital gains free as well. On the upside, no capital gains on any profit basically. So again, it's fantastic, and if you can get a liquid secondary market, then you're away.

Stewart Noakes: 29:34

I don't know if you've seen it and I won't go too much into this because it's about you and SFC but there is a new fund that's just done its first version, maybe six months ago, and is one of the investment managers who left CrowdKeeper a while ago, and what he's done is founders put in a little bit of their equity from their companies into this little fund and then they all get a return if anybody gets an exit. It's a way of them getting some liquidity before their own exit.

Edward Stevenson: 30:00

Yes.

Stewart Noakes: 30:02

A couple of hundred K into one is about 10 or 15 founders that do it into the same pool and then they all kind of live a little bit of liquidity off of each other until they finally get their own exits from their own companies.

Edward Stevenson: 30:15

No, that's very interesting concept. Yeah, I like sound of it. That's quite innovative yeah absolutely yeah, that's what it's all about.

Stewart Noakes: 30:22

So this podcast and this conversation has been absolutely awesome. I really appreciate your time today. Thank you so much for this, and I wonder if you could close us out with your top tip. This is really, for first time, founders raising their first money SFC and the ESCIS is an absolute sweet spot. So what's your top tip for somebody who's looking to come to you for money?

Edward Stevenson: 30:43

Yeah, it's a great question. I think it's probably around that point I mentioned earlier, which is being flexible with what you're after. You always have in mind different scenarios when it comes to the round and the raise, and gauge it on how the conversations are going with investors, and don't set yourself to one target and focus on that incessantly and then end up maybe not raising it and basically just giving up, whereas I think cash is king at the early stage. So I think you need to prioritize getting cash into the business so you can get a moving, build out the product, stop building out the sales, getting the traction that will enable you then to go and raise the larger rounds of a million pound plus rounds, which you might read stories in the paper about million pound rounds for startups at the early stage with pre-revenue. But those are the exception.

Edward Stevenson: 31:39

Those are the ones that publicize what you don't read about is the hundreds of other deals that are done at 100 to 500K for the first round, at the 10, 20% mark, and those are the majority of deals that are done at our stage.

Edward Stevenson: 31:57

And if you fit yourself into that, then you've got a good shot of raising it relatively quickly and, as I said, then you've got the cash. Then it's about you just going on and executing on the business plan and the vision. And so, yeah, I would say, be flexible and also be reasonable and be realistic. So, be reasonable with your expectations and the terms that you're demanding and, yeah, don't treat the investor as the enemy. But at the same time, obviously you've got to be professional and fight for your ends and there's always going to be a negotiating, of course, we would expect that, but if you work with them and, yeah, I think you've got a good shot of raising the funds from someone- like us.

Stewart Noakes: 32:42

It's really interesting, and thanks for that. I mean, in my head I'm just hearing this phrase you can have 100% of nothing or you can have 85% of something. Well, exactly.

Edward Stevenson: 32:49

Yeah, that's bottom. Yeah, that's bottom, that's exactly it. Yeah, that's the mindset you should have at the beginning. Don't be too possessive of your equity at this stage. The valuation will take care of itself. Once you build the business up and get traction, then the valuation will take care of itself. That's when you'll start and that's when you'll make the money. But you need the money cash. You need cash to get there right, and so you need the investors to work with them and, yeah, it can be a really fruitful relationship for the both parties.

Stewart Noakes: 33:19

It's super interesting as well. I mean, a narrative that I've heard a few times recently is the point where you're raising money. You can all these numbers come from all sorts of different algorithms and ways of thinking, but the moment you start actually making profit, it really level sets the whole valuation model because there's some performance now to look at. So you're selling stories at this stage, right, you're selling stories really to the Series A stage, and then suddenly you get this readjustment, usually down, not up, in the valuation. It becomes a real tangible thing yeah, exactly, actual performance.

Edward Stevenson: 33:50

And that can be a really difficult phase to adjust to yeah, exactly right, yeah, yeah, and it's bottom there as well, selling the vision initially, and then you've got to prove that actually it's viable and that's what the late stage investors will need to see.

Edward Stevenson: 34:03

At the moment, you've got to be a flexibility with the best. As a R stage, we're happy to believe that you can execute on a vision and invest, as you said, in a plan, but later stage funds they're going to 100% need to see a viable business model and you need to get to there and you've got one shot at it, so you need to be focused on it 100%. Go on to the day where you just keep on funding the business. The cash flow, basically it's become a lot tighter, especially at the later stage.

Stewart Noakes: 34:30

Yeah, yeah, thank you so much for today. It's been absolutely brilliant to get your insights. I really appreciate it and I hope everybody listening to the podcast really appreciates just how gold some of your insights have been today. Thank you so much.

Edward Stevenson: 34:41

Great Well, thank you for having me. I really enjoyed it.