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The UK relies on smaller companies to drive economic growth and maintain its position as a hub of world-leading, innovative businesses, but investors could be underexposed to this vibrant part of the stock market.
The fact that the country’s smallest businesses have yet to float on the stock market means that investors can find it difficult to gain access to them. However, for investors with an appropriate risk appetite, products such as venture capital trusts (VCTs) can help channel investors’ money into these small businesses, offering the management teams of these companies the support and funding they need to succeed.
According to the Octopus High Growth Small Business Report of 2015, which was commissioned by Octopus Investments and the Centre for Economics and Business Research, of the 5.3 million companies in the UK just 22,470 are classed as high growth small businesses (HGSBs).
HGSBs are classified as companies that have more than 20 per cent average annual growth in revenue over a three-year period and have an annual turnover of between £1m and £20m.
Despite accounting for less than 1 per cent of UK companies, HGSBs contributed almost 20 per cent of the growth in the UK economy in 2014, as measured by gross value added, according to the Octopus High Growth Small Businesses 2015 report. The report was commissioned by Octopus Investments and the Centre for Economics and Business Research.
The economic contribution of HGSBs is also clear in other areas. In 2014 they were responsible for the creation of a third of new jobs in the UK, even though they accounted for just 2 per cent of the country’s total employment. An impressive 250,000 jobs were created by these businesses in 2014.
HGSBs also boost local economies across the length and breadth of the country. While many blue-chips focus their operations in London, high-growth small businesses can be found in every part of the UK – in fact, almost three in five are based outside of the capital and the south-east.
Number of HGSBs by region
Source: Octopus High Growth Small Businesses 2015 report
While these high-growth firms are busy supporting the UK economy, VCTs – which were set up to invest in companies with net assets of less than £15m and no more than 250 employees – are busy supporting HGSBs. 
As Stuart Lewis (pictured), VCT business line manager at Octopus Investments, told us recently: “The government is using VCTs to direct money to younger, exciting companies that have the potential for transformational growth.”
“This area has been the bread and butter of Octopus Titan VCT since it was launched in 2007. Whilst past performance is not a reliable indicator of future results, Titan has a strong track record of investing into young start-up companies, developing them and watching them grow into household names.”
A topical example is SwiftKey which has made plenty of headlines in the business press recently after being bought by Microsoft in early February.
SwiftKey is behind an app that uses artificial intelligence and typing prediction technology to improve built-in keyboards on Android, BlackBerry, Windows Phone and Apple smartphones. Octopus Titan VCT was one of the early backers of the company, making its first investment in 2010.
“This is a great example of how VCT money is being used in the UK to create world-leading companies that can challenge the best of Silicon Valley,” Lewis said.
“Octopus came across SwiftKey's two founders when they had little more than a great idea; today this company employs more than 140 people and the application has been downloaded on more than 300 million devices around the world. This is a fantastic example of how two talented entrepreneurs can really take on the world of tech by making customers' experience frictionless and more pleasurable.”
The VCT exited from the company once the deal had concluded which resulted in a special dividend for investors. The proceeds from SwiftKey's sale will be used to add to investments in established portfolio companies – which include residential property crowdfunding website Property Partner and online furniture business Swoon Editions – as well as funding new early-stage companies. It should be noted that past performance is not a reliable indicator of future results.
SwiftKey isn’t the only household name that Octopus has had a successful relationship with. It was an early backer of online property giant Zoopla. The firm invested in the site based on their confidence in the founders Alex Chesterman and Simon Kain, the entrepreneurs behind previous success LOVEFiLM, the DVD-by-mail and streaming video on demand service that was sold to Amazon.
“We knew the founders of Zoopla from previous entrepreneurial activity and we always have a bias towards great teams. We believe if you have the right team in place, the rest of the business will fall into shape,” Lewis said.
“You often see that someone who has gone on to have a successful entrepreneurial streak will quite often be able to do it again and again and again.”
Octopus originally invested in 2009 and after Zoopla’s IPO on the London Stock Exchange was priced at £919m, investors were rewarded with a sizeable return on their investment. Lewis states that, in addition to pleasing investors, it is also really satisfying to think of all the jobs created and benefits to the wider economy of such an exciting growth story.
“We invested at a very early stage and we followed that investment right through to it becoming nearly a billion pound business when it listed on the stock exchange,” he stated.
“It's a perfect example of VCT money being used to grow a fledgling business, creating hundreds of jobs and delivering a fantastic service to its customers.”
The above article was prepared in partnership with Octopus Investments and should not be taken as investment advice.
Important Information:
We recommend investors seek professional advice before deciding to invest. VCTs are high risk products. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. VCT shares could fall or rise in value more than the shares of other companies listed on the main market of the London Stock Exchange. They may also be harder to sell. 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 to Trustnet 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: February 2016.