Mad Money #62 - Are You Ready to Drink Hemlock Yet Mr Portillo?

 

It was the night of the 1997 election and one well educated journalist, Jeremy Paxman – well who else - sensing that change was in the air asked Michael Portillo ‘are you ready to drink Hemlock yet?’

2016 has seen the Trump election, Brexit wobbles, the drop and stabilisation of Sterling but yet somehow things seem to be going along as normal. Or are they and should we put the Hemlock back in the cupboard?

Beauhurst have just published their figures for investment in the UK and it doesn’t look good.

Investment deals fell again this quarter, down 16%. Underlying investment amounts were down too and early stage companies fared the worst with deals down 20%.

So is it time to pass round the Shakespearean cup?

Well, not in Northern Ireland at any rate. The 2016 Knowledge Economy Index report has just shown that once again we are the second fastest growing knowledge economy within the allegedly United Kingdom. And those of us who work with the many innovative and growing companies springing up here, know the potential which is starting to be delivered but hasn’t perhaps yet reached the public’s attention.

Money is flowing into these companies from a multitude of sources. Techstart NI is leading many seed-stage deals, Halo business angels have invested £1.5m in the last year, and the two Invest NI assisted venture capital funds have been busy too.

There is plenty of anecdotal evidence that non-NI funds are investing in our companies too. Official figures are sparse, but our sources suggest perhaps 25 deals of £1m or more in a year.

Returning to the Beauhurst figures, they show that the general fall in investment was worst for early stage companies, falling by 20%. However you might feel that the shining new boy of crowdfunding would gallop in here to fill the gap.

But no, for the first time ever, crowdfunding also fell by 20% this quarter. A similarly timed report from Altfi backs this up and predicts that scarily, equity crowdfunding will show a year on year fall in 2016. So no white knight charging over the on-line hill to help.

In fact there are signs that the long awaited rude awakening in equity crowdfunding may be arriving too. As in all investments, the key is returns. Crowdfunding is still too young for the figures to be meaningful, but Alfi have tried their best.

Without trying to explain their methodology, they made some stabs at calculating the IRR, effectively the equivalent of the interest rate if you’d put the money into a bank. While they claim an ‘average’ of 8.55%, they go to some lengths to say that their figures are limited. For companies invested in 2012 and before, they admit their data is too sparse. And they say that for 2015 and onwards it’s too early to know how the companies are faring.

I would suggest that even 2014 is too early, leaving us with reasonable data only for 2013 companies. They show an IRR of around 3%.

Of course all of these returns are before the very generous tax breaks which help enormously. But would you be tempted by such a low return to take such risks? These, admittedly early, figures do not look good.

So we have a lot uncertainty along with weeping and gnashing of teeth from America and it looks like investment for the most important NI companies with potential for real growth is going to be problematical.

I don’t think we should be reaching for the Hemlock, either real or virtual. However I would point out that after being ingloriously kicked out of office by the electorate, Michael Portillo reinvented himself as a presenter of railway programmes.

And he is probably enjoying that a lot more than he ever did being a politician!

Alan Watts is the Director of Halo the Angel PLUS Network run by Catalyst Inc (formerly the NI Science Park).