InvestmentsMay 17 2013

Take 5: Investing in start-ups through crowdfunding

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ByGeordie Clarke

A brace of crowdfunding platforms have launched in the past year that make investing in start-up companies and enterprise investment schemes (EIS) more accessible than ever.

With just £10 needed to invest in fledgling companies through websites like Abundance Generation, CrowdBnk, Crowdcube and Seedrs, suddenly anyone can say they are backing start-up companies.

But while these platforms have brought venture capital to the masses, there are plenty of risks involved and care is needed when committing any amount of money to a project. Here are our top tips for getting started.

1. Make sure it is right for the client. Like any asset class, the first thing to do is ensure it is suitable for the client. EIS and seed EIS (SEIS) investments are by their nature very risky assets to hold, so the client needs to have both the appetite for risk and the desire to invest in start-ups for this to be the right choice for them. Most start-up companies are expected to fail at some point, so this is a point that needs to be made clear from the start.

2. Choose a platform. Today there is no shortage of crowdfunding websites. With the exception of Abundance Generation, which involves investing in debentures tied to renewable energy projects, the major platforms out there – CrowdBnk, Crowdcube and Seedrs – involve investing in the equity of fledgling small businesses. Some platforms, such as Seedrs, hold the company shares on a nominee basis, while others simply act as an intermediary and the investor’s relationship with the company is direct. Either situation works, but the legal structure is different and one might be more advantageous than the other.

3. Select investments based on the client’s interests. The old saying “invest in what you know” certainly holds true with start-up firms, so too the adage that it is best to invest in your passions. Look for companies in a market the client understands; this will make it much easier to project a company’s potential success.

4. Diversify. The advantage of a crowdfunding platform is the ability to spread small amounts of money across a wide range of companies. Traditionally EIS required thousands of pounds just to commit to one investment. Crowdfunding makes it possible to pledge £10 to one company. If £1,000 is spread across a wide range of companies, it increases the chances of finding a winning company and mitigates losses when one of them fails.