Buying shares of a company through equity funds is among the riskiest ways to invest. Businesses tend to be new and regulatory protections very limited.
But since you can invest as little as £10, it’s a cheap way to bet on startups, as long as you don’t get carried away.
Equity crowdfunding platforms are expecting a rebound this year as turmoil in financial markets has limited many startups’ access to loans and private equity, their main sources of funding.
With higher interest rates prompting private equity and venture capital firms to pull out riskier investments, crowdfunding may become a more tempting option, at least for a portion of the capital needed.
If fundraisers are interested in cash, investors might get better deals. But keep in mind that tough economic times are ahead, and those private equity experts have retired for a reason.
What is stock crowdfunding?
Retail investors have long sought access to private markets, due to the prospect of above-average returns. But the main routes of entry to individual companies require large investments, often £100,000 or more. Vehicles like venture capital trusts are aimed at wealthy investors and involve investing in a portfolio of private companies.
Equity crowdfunding investors typically invest between £1,500 and £4,000 in a single deal, and sometimes much less.
The market has grown since the early 2010s, after the global financial crisis of 2008 affected major sources of capital and encouraged equity crowdfunding platforms to fill the gap.
UK investors invest hundreds of millions every year, with Crowdcube and Seedrs raising £324m in 2021, in popular sectors like fintech and consumer goods.
Challenger bank Monzo and craft beer company BrewDog have raised multiple times on crowdfunding platforms, as well as tapping into larger core funding.
Where can I invest?
While stock crowdfunding started in the US, it grew in the UK with the rise of two leading market platforms, Crowdcube and Seedrs, which together hold 90 per cent of the market. Crowdcube co-CEO Matt Cooper says the platforms were born out of the financial crisis and remain a “fix for companies raising capital in a recession.”
Investors are charged upfront between 1 and 2.49 percent, while platforms get up to 7.5 percent of profits after a successful exit.
Fundraising companies pay between 6 and 8 percent of the money raised by the platform, including administrative fees.
Am I a typical investor?
Most investors are in their late thirties and early forties, but older people are also active.
Alayne Perrott, a retired climate scientist who has invested in 60 crowdfunding companies, has backed companies including Salisbury-based Small Robot Co and Scotland’s Orbital Marine Power.
She says investors need to have a strong appetite for risk, but can benefit from backing small businesses that are looking to innovate.
Many crowdfunding investors are excited about climate technology. Perrott says: “I am determined to translate my deep anxiety about the current trajectory of global climate into action. . . but I don’t like super glue or climbing porches.
Product incentives can also be attractive. Brian Byrnes, head of personal finance at investment app Moneybox, says he invested in a London distillery that put a third of investors’ money behind the bar like a tab: an attractive offer.
Can I lose my money?
Startups are speculative. Nearly a fifth of the companies that raised money on a crowdfunding platform since 2011 have gone out of business, according to Beauhurst, a research group that tracked 2,394 companies.
Furthermore, only 5.3 percent of these companies have achieved a successful exit in which investors were paid.
Success stories include investment app Nutmeg, which was acquired by JPMorgan for double its value in 2021 just two years after raising funds on Crowdcube.
But keep in mind that a successful company doesn’t necessarily mean a happy crowdfunding shareholder. Crowdfunding investors typically provide only a portion of the seed capital, along with the founders themselves and wealthy backers such as angel investors.
If a company does well, it will need more financing, which is usually provided by larger investors, as well as VCs and PEs. Thus, the interests of the original crowdfunders can be forgotten.
For example, some BrewDog shareholders, who number 180,000, have in the past raised concerns about aggressive dilution when institutional investors entered the picture.
How much risk is right for me?
Don’t even think about crowdfunding if you have other, more important financial bases to cover. “There are a lot of boxes you need to check before (equity crowdfunding) comes on the scene,” Byrnes says, such as debt payoff.
The Financial Conduct Authority advises investors not to bet more than 10 per cent of their net investment assets in unlisted companies.
Crowdfunding platforms say they check claims made by companies raising funds against the FCA’s “fair, clear and not misleading” guidelines. But disgruntled investors have claimed the companies may be overvalued.
The collapse of property site Emoov in 2018 just months after it raised £1.84m in funding on Crowdcube left backers in uproar, while investors in the Money Dashboard app were dismayed when ClearScore acquired it for a quarter of its valuation last year.
At the time, Crowdcube told This is Money that it cautioned investors about the “real risk in investing in new and growing companies.” Money Dashboard did not respond to a request for comment.
Disgruntled consumers can make complaints to the Financial Ombudsman, but only where they believe there were deficiencies in the way an investment was accounted for. Last year, when 48 complaints were received, only eight were accepted.
Crowdcube says it checks every launch against FCA guidelines, heavily discounts sales projections, and runs credit and bankruptcy checks on company directors. But it does not approve or review submissions, updates, or discussions on company forums.
Seedrs chief executive Jeff Kelisky says the company has a team of 30 who focus on due diligence, though he cautions that he does not require evidence for “aspirational statements” and has no opinion on whether ambitions are met. they will come true
So, esteemed investor, you are largely on your own when evaluating the offer before you.
Are there tax benefits?
UK residents are eligible for a 30% tax break on crowdfunded investments that qualify under the Government’s Business Investment Scheme. Investments. Up to £1 million must be maintained each year for at least three years. People can “carry back” their investments, treating all or part of an investment as if it was purchased in the previous tax year.
Investors can also claim loss relief if a company goes into administration or sells for less than its initial valuation.