After attending the Sifted Summit in London last week, Craig Cordle and Charlotte Gonçalves returned to Guernsey with fresh perspectives on how the Channel Islands can continue to support venture capital firms, startups and scaleups in the challenges they are facing now and beyond.
The summit reported dry powder in VC sitting at an all-time high of €50 billion and lauded the ongoing founder-friendly nature of the European ecosystem and seemingly inexhaustive talent in the EU tech space – but it would be complacent to ignore the challenges facing firms and founders in this space when considering how the Guernsey and Jersey financial and regulatory frameworks can best accommodate innovative and high-growth ventures and fulfil the needs of all players.
Below we reflect on some of the main challenges which stood out to us from our various conversations at the summit and consider how the Channel Islands may assist firms and founders in overcoming these challenges now and in the medium to longer-term future.
The role of family, friends and fools
Success in venture capital requires more than just money; it demands the collaboration of key players. Founders, VC firms, legal experts and early-stage investors (the, affectionately termed, "family, friends and fools") must work together. Jurisdictions like Guernsey and Jersey offer the secure environment that these early backers need through clear regulatory protections and access to the right networks of experienced legal and financial professionals, ensuring that investments are managed with care and prudence as well as a favourable neutral tax environment for global investors.
Whilst it is clear that there is a general trend towards founder or key management vesting, being the process by which founder shares are earned back over a period of time following a fundraise (one study showed that such provisions were included in 61% of VC term sheets last year), other aspects of high-growth and tech ventures clearly come down to the preference of the individual investor or founder. This is where the legal and regulatory flexibility of the Channel Islands' company and funds regimes, without the sacrifice of quality and oversight, becomes key.
The need for patient capital
The current venture capital model, designed to generate quick returns over a few years, is fundamentally misaligned with certain of the environmental and social problems that a lot of emerging tech is trying to solve – for example, the urgent yet long-term nature of the climate crisis. While VC funds typically operate on timelines of 5-7 years, climate solutions often require much longer time horizons to prove their viability and impact, let alone yield financial returns. The disconnect between VC investors' short-term financial expectations and the need for patient, long term capital tech investing can be a major hurdle for startups.
Being renowned for its mature infrastructure and having a proven track record of stability and durability, the Channel Islands' financial services industry is positioned as a beacon for patient capital. Both Guernsey and Jersey's commitment to high standards of regulation and transparency should not only foster confidence among investors who seek long-term growth and value security and predictability but also those founders and high-growth firms developing sustainable financial initiatives.
Leaving is never easy
It follows that if dry powder is at an all-time high, there must be a significant number of businesses up for sale. The trouble is that not all of them can be unicorns – and hardly any off them will be (despite lots being excellent businesses). So once you're invested, how do you get out? Having an exit strategy is key to minimising losses and maximising profits on VC investments.
An initial public offering (IPO) is perhaps the most exciting option – and, it's worth noting that after the UK, Guernsey has the most vehicles of any other jurisdiction listed on the London Stock Exchange. However, the IPO market has been depressed for a while, meaning that as fulfilling as an IPO may be, it may not be viable for most companies.
Other options include a strategic acquisition by a larger company who is willing to take the whole business, or for an investor to sell their stake only (potentially at a discount) in order to exit. A management buyout may also be an option, as may be a merger of complimentary businesses with exit opportunity for initial investors.
In each case, Guernsey and Jersey's flexible regimes can help. Whether that be flexible triggers in constitutional documentation to force an exit at a given point, or by providing for secondary or rollover funds to bring in new investors, raise additional capital and exit founders and/or initial investors.
The Sifted Summit is an annual event that brings together Europe's most innovative tech founders, venture capitalists, startup leaders and industry experts to discuss the latest trends and challenges in the startup and venture capital ecosystem. Organised by Sifted, a media platform backed by the Financial Times known for covering the European startup landscape, the Sifted Summit serves as a key gathering for founders, investors and startup operators driving innovation from the front.
Walkers' Investment Funds and Corporate practice group across the Channel Islands provide award-winning legal and professional services for every stage in an investment fund's life cycle. With a deep experience of working with some of the world's most successful financial institutions and asset managers, our talented teams are fluent in financial services and skilled at navigating the global investment markets.
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