By Francesca Rayneau, Co-Head of Sales and Marketing

Updated August 2022

General inflationary effects fuelled by the pandemic, the war in Ukraine and supply chain disruption have added to existing price pressures, hitting consumer activity. Inflation rose to 9.1% in the 12 months to May 2022, which is the highest level in 40 years.

As the Bank of England warn the UK will fall into a recession later in the year, investing in ‘alternative’ asset classes, i.e. assets that do not fall into the traditional bracket of equity and bonds, become more popular in a typical investment portfolio. This is because they add more diversification as well as the ability to outperform more volatile stocks, which are linked to systemic market risks and prevailing macroeconomic pressures.


Investing into EIS and VCT offers experienced investors access to early-stage companies across the UK, whilst also offering tax benefits which can offset some of the risks associated with this style of investing. These investments, unlike traditional stocks whereby inflation levels can impact value of an on a daily, or even hourly basis, offer investors a stake in a company which may go on to exit in several years’ time. Successful exits are then paid back out to investors as tax-free gains (EIS) or fund the tax-free dividend stream for VCT investors.

Due to the focus on smaller private companies and a portfolio approach, EIS and VCT investments may be more resistant to the frequent market fluctuations that stocks are prone to. The company fundamentals, which may have been widely ignored on the stock market over recent years as a growth style of investing has maintained popularity, are always the most important factors: sustained growth, disciplined financial management, and improving margins could inevitably translate into valuations improving and potential suitors competing for ownership.

The investments which comprise an EIS and VCT portfolio are carefully chosen by an Investment Team, following many months of due diligence and work with the potential investee company. VC firms should have highly experienced investment teams, who understand how to invest during various economic cycles.

What we have learnt about venture funding in times of financial crises

Calculus has been investing in small UK growth companies for 23 years and in this time the UK has weathered two deep recessions. Financial crises, such as in 2008/09, can have a profound impact on smaller company funding. However, from the funding dips of 2008/09 we saw the growth of the mobile and cloud-based tech sector. Great companies can be built in difficult times.

This year, The Bank of England are predicting a contraction of GDP of just over 2%, driven by a squeeze on consumer spending power, which could lead to a rise of unemployment. Cost reduction may be at the forefront of companies strategies and investing in experienced management teams, capable of handling its operations effectively, is key.

Calculus typically avoids start-ups and early-stage financings, preferring to instead hold companies with a more established track record, with the aim of having a lower failure rate than their less experienced counterparts.

Company valuations

For over a decade, the UK economy has experienced a prolonged period of loose monetary policy, further heightened during the Covid-19 pandemic as the government plunged into it’s financial tool kit to desperately avoid an economic catastrophe. A low interest rate environment, alongside vast levels of quantitative easing, helped drive the valuations of traditional asset classes, as well as alternative asset classes, including venture capital. However, to combat inflationary pressures, monetary policy is now tightening at a record rate, which could have implications for the fundraising environment for small UK growth companies. Currently company valuations are predominantly lagging these market conditions and in most cases the adjustment/downward correction has not happened in the private sector, with management expectations unchanged from 12 months ago.

This, in part, could be due to the record-breaking fundraising year for VCTs, as UK investors poured more than £1bn into these investment vehicles. This means there is a lot of money to be put to work into VCT eligible companies (fewer than 250 employees and gross assets of £15million or less). As a seasoned venture capital investor Calculus is experienced in seeing the longer-term investment case, for companies which are providing a solution to a long-term problems. It is important for Calculus to focus on its proven due diligence process, as well as to remain disciplined regarding entry valuations. Experience navigating this area of the market is key, now more so than ever.