Why do investors keep pumping in money when most start-ups fail? To an extent, it’s blind faith, but a lot can be attributed to the EIS tax avoidance system. This was perfectly illustrated in a recent presentation I attended.
This isn’t exactly what was said, but I think it’s a fair illustration:
- An investor puts a total of £100,000 into 100 startups – £1000 each – making the following assumptions:
- 80 will fail, so that £80,000 will be lost
- 10 will trade successfully (but not phenomenally) and the investor will get their money back eventually, let’s assume with no premium.
- 8 will be sold at an average multiple of 3x the original investment
- 1 will sell at a multiple of 10x
- Just one – the nascent “unicorn” – will sell at a multiple of 50x, netting the investor £50,000
So overall, the investor will get back £94,000 – which looks like a loss of £6,000 on the original investment.… Keep reading...