# The Evolving Venture Capital Landscape
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2019-03-09
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: Investing in VCTs: A Guide to Diversifying Your Portfolio
Meta Description: Learn about the changing landscape of VCT investments and the strategies managers are adopting to identify high potential companies while managing risk. Find
URL: https://financedigest.com/the-evolving-venture-capital-landscapehtml

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**Belinda Thomas,** Partner at Triple Point

Despite significant changes introduced over the past few years to the types of companies in which Venture Capital Trusts (VCTs) can invest, this type of investment remains a highly attractive option for those looking to diversify their portfolios and capitalise on tax-efficient schemes. According to the Association for Investment Companies (AIC) last year VCTs raised £728m – the highest amount for ten years.

The changing backdrop to VCTs, driven by the adoption of EU state aid rules in 2015, the 2017 Budget and Patient Capital Review has meant that VCT [managers are now required to invest](https://www.financedigest.com/unstoppable-esg-momentum-puts-investment-manager-reporting-in-the-spotlight.html "Unstoppable ESG momentum puts investment manager reporting in the spotlight") in early-stage companies that have been trading for less than seven years.While this could provide [higher returns](https://www.financedigest.com/boohoo-warns-on-outlook-blaming-higher-returns-and-pandemic-costs.html "Boohoo warns on outlook, blaming higher returns and pandemic costs") to investors, there is also a greater degree of risk that needs to be carefully assessed. Furthermore, in an attempt to bring VCTs back to their original purpose of investing in true entrepreneurship, managers are no longer able to [invest funds in significantly asset-backed companies](https://www.financedigest.com/wait-and-see-u-s-companies-curb-investment-as-they-await-fed-moves.html "Wait and see: U.S. companies curb investment as they await Fed moves") or support management buy-outs.

As a result of these changes, many managers are taking a far closer look at their investment strategies and are developing ways to innovate and ensure that they have a strong pipeline of [potential investments so they are able to identify the next high potential high growth](https://www.financedigest.com/technical-textiles-market-2021-2031-potential-growth-attractive-valuation-make-it-is-a-long-term-investment.html "Technical Textiles Market (2021–2031)| Potential growth, attractive valuation make it is a long-term investment") company and limit their downside exposure. A number of different models are emerging from this shake-up. We are seeing a shift to both ends of the spectrum, with some VCT managers either becoming increasingly sector-specific and using their expertise to [develop niche strategies](https://www.financedigest.com/yves-mirabaud-says-we-are-on-track-with-our-development-strategy.html "Yves Mirabaud Says “We are on track with our development strategy”"), while others are becoming more generalist, casting their net across a wide number of sectors to ensure their portfolios remain well spread.

Some managers are focusing on [developing a strong](https://www.financedigest.com/automated-blinds-and-shades-market-to-observe-strong-development-by-2031.html "Automated Blinds And Shades Market to Observe Strong Development by 2031") regional presence to enable them to work more closely with management teams to monitor their investments. Meanwhile, others are focusing on [developing their network among business](https://www.financedigest.com/impact-com-appoints-a-raft-of-new-business-development-representatives-as-the-technology-companys-client-roster-grows-by-more-than-50.html "impact.com appoints a raft of new Business Development Representatives as the technology company’s client roster grows by more than 50%") advisers, growth consultants and entrepreneurs to more effectively screen potential investments and focus on businesses with a proven model, which is perhaps one of the more interesting approaches that is emerging.

Research shows that more than forty percent of failures among early stage companies arise from problems in the initial phase when [market demand is tested](https://www.financedigest.com/on-demand-healthcare-to-bolster-the-in-vitro-toxicity-testing-market.html "On-demand healthcare to bolster the In Vitro Toxicity Testing Market"). If there is no [market need](https://www.financedigest.com/why-you-need-to-embrace-nostalgia-marketing-right-now.html "Why You Need to Embrace Nostalgia Marketing Right Now") for a product, the product itself has been found to be flawed, or the business model itself does not work, there is a high risk that the company will fail. Companies have often found these problems difficult to address, potentially exposing [investors to a greater level of risk](https://www.financedigest.com/p2p-investors-polled-on-their-thoughts-and-opinions-on-risks-vs-rewards.html "P2P Investors Polled on Their Thoughts and Opinions on Risks vs Rewards") from the outset and leading, at best, to lower returns, or at worst, even losses within a portfolio.

The ‘challenge-led’ approach, however, works by investing in companies that have demonstrated proven solutions to the real business issues faced by large corporates, and which already have a customer base, or [market demand](https://www.financedigest.com/car-bulb-market-demand-supply-growth-factors-latest-rising-trend-and-forecast-to-2028.html "Car Bulb Market Demand, Supply, Growth Factors, Latest Rising Trend and Forecast to 2028") for their product or service. This approach addresses many of the risks associated with investing in earlier-stage businesses as the [market demand](https://www.financedigest.com/electric-vehicle-transmission-market-emerging-growth-analysis-future-demand-and-business-opportunities-2027.html "Electric Vehicle Transmission Market Emerging Growth Analysis, Future Demand and Business Opportunities 2027") will have already been established and the business model has already been proven. The investment therefore will help the company more quickly transform from a start-up to scaleup, rather than be used to [develop or market a product](https://www.financedigest.com/tire-recycling-downstream-products-market-to-observe-strong-development-by-2019-2027.html "Tire Recycling Downstream Products Market to Observe Strong Development by 2019-2027"), or test the demand.

Although changes to the regulatory landscape initially prompted some concern among both managers and investors, the result could be an evolving, and more successful VCT industry, which offers both growth companies and investors a better chance of success. This new philosophy is already being established and is enhancing the possibility for start-ups to make a successful transition to scale, while mitigating some of the risks surrounding early-stage [venture capital](https://www.financedigest.com/italys-brembo-sets-up-venture-capital-arm-to-invest-in-tech-startups.html "Italy’s Brembo sets up venture capital arm to invest in tech startups").

As [investor demand](https://www.financedigest.com/tesla-investors-to-focus-on-demand-issues-in-earnings-report.html "Tesla investors to focus on demand issues in earnings report") for VCTs increases and funds themselves are more restricted in the companies in which they can invest, those with the most entrepreneurial strategies will become the most sought after. Given the changes to the investment landscape, investors need to look beyond the past performance of VCT managers and focus instead on how they are innovating and identifying investments in the most exciting young businesses, while also finding [ways to limit the risks and deliver the future returns that investors](https://www.financedigest.com/4-ways-todays-investor-can-future-proof-their-assets.html "4 Ways Today’s Investor Can Future Proof their Assets") require.

Triple Point has already developed its own variant of this challenge-led approach and, through its Venture Fund has created a [strategy which proactively helps early-stage business](https://www.financedigest.com/foot-orthotic-insoles-market-to-generate-us-5-billion-by-2026-growth-key-business-strategies.html "Foot Orthotic Insoles Market to Generate US$ 5 Billion by 2026 | Growth & Key Business Strategies") increase their chances of success. By developing close ties with a number of established corporates and then identifying the companies that have demonstrated an ability to solve their business critical issues, this strategy addresses one of the most significant risks [facing early stage venture capital and enhances investors’](https://www.financedigest.com/gold-investors-face-bind-over-bars-from-tarnished-russia.html "Gold investors face bind over bars from tarnished Russia") chances of securing a robust return on their investment.


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