Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.
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Risk Summary

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  • You could lose all the money you invest
  • Most investments are shares in start-up businesses or bonds issued by them. Investors in these shares or bonds often lose 100% of the money they invested, as most start-up businesses fail.
  • Checks on the businesses you are investing in, such as how well they are expected to perform, may not have been carried out by the platform you are investing through. You should do your own research before investing.

You won't get your money back quickly

  • Even if the business you invest in is successful, it will likely take several years to get your money back.
  • The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
  • Start-up businesses very rarely pay you back through dividends. You should not expect to get your money back this way.
  • Some platforms may give you the opportunity to sell your investment early through a 'secondary market' or 'bulletin board', but there is no guarantee you will find a buyer at the price you are willing to sell.

Don't put all your eggs in one basket

  • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. Learn more here.

The value of your investment can be reduced

  • If your investment is shares, the percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
  • These new shares could have additional rights that your shares don't have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

You are unlikely to be protected if something goes wrong

  • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker.
  • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.

If you are interested in learning more about how to protect yourself, visit the FCA's website here.

For further information about investment-based crowdfunding, visit the crowdfunding section of the FCA's website here.
Insights
Investing Capital
Dan Smith
· 4 min read
· Updated on

Sophisticated investors: what makes investing appealing?

Most high net worth individuals have had an insider’s view of the business building process.

They understand just how tough it can be to make it and the many barriers to success.

Despite this, many stake significant proportions of their wealth on the ability of startup entrepreneurs to overcome such challenges.

For them, the right business investment opportunity, with the right people at the helm, is hard to turn down.

There are many reasons for this. Some of the most appealing reasons include

The returns

Business investments can be more volatile than other asset classes, bringing both greater risks and rewards.

Backing businesses is an illiquid investment that requires patience from investors. They may wait upwards of seven years for an exit via a sale, merger, management buy-out or listing. This is if they have picked a startup that survives the difficult five-year window and built a compelling business. However, the prospect of a lucrative return on investment can make the long journey worthwhile.

Read more: why do so many investors invest in startups?

Profit is rarely the sole motivation for investing in startups and SMEs but it is a major draw, despite the risks. The expected return on investment at the outset – and the actual figure received – can vary wildly in both directions. The length of time taken to reach the exit also tends to deviate from the original plan.The largest angel investment study ever undertaken, albeit in 2012, puts the average return rate at 2.6 times the initial investment (or 27% annual rate of return) with a 3.5-year path to exit.

This research, led Willamette University’s Robert Wiltbank and Warren Boeker, of Washington University, tracked 539 angel investors and 1,130 exits, including closures.

The UK Business Angels Association (UKBAA) estimates that angels lose money on 60% of their investments. Many successfully offset this risk by investing in numerous startups in multiple sectors.

Balanced portfolios

For sophisticated investors with stocks and other asset classes, businesses present an opportunity to diversify their portfolios. Enterprises largely operate away from the direct exposure of global economic trends and the mass fluctuations that stock markets face.

If markets plummet, the rising fortunes of the startups they have backed may well protect and even increase their wealth. This is especially true for investors that have chosen to invest in startups and SMEs in a wide range of industries.

Tax breaks

The UK government offers some of the most generous tax reliefs and incentives available to investors into startups.

The Seed Enterprise Investment Scheme (SEIS) and its older sister the Enterprise Investment Scheme (EIS) were launched to stimulate entrepreneurship in the UK by providing tax incentives to help mitigate the levels of risk involved in investments of this kind.

With both schemes offering similar incentives but with notable differences, you can find out all about the relevant tax reliefs here:

Making a mark

Startup investment is an opportunity to help solve local, national and global problems. Increasingly, entrepreneurs are building ventures that merge social or environmental impact with financial return. And private investors, alongside blue-chip giants, fund managers and investment syndicates, are keen to get on board.

Impact investing enables high net worth individuals to change the world, while potentially boosting their portfolios - and with so many socially and environmentally-minded entrepreneurs around, investors can hone in on causes that matter most to them.

Excitement

Unlike stocks and shares, business investments can be directly influenced by the investor. For some business angels, their investment is accompanied by a seat on the board or at least some advisory role within the startup.

Those from a corporate background may harbour unfulfilled ambitions to become entrepreneurs. Their investment can give them a taste of the entrepreneurial adventure without the overriding responsibilities.

A chance to add value

Many high net worth individuals have a world class level of expertise in a specific sector. Investing in a startup in the same space gives them an opportunity to put their in-depth knowledge and experience to good use.

Perhaps they want to bring more innovation or new talent into the industry – or are passionate champions for improvements to practices and service delivery in the sector.

Boosting enterprise

Investors who have navigated the entrepreneur’s journey will remember the challenges they faced along the way.

They may recall the darkest days when expert support and guidance that would have been so welcome never came.

Backing up-and-coming entrepreneurs is a chance to give others a helping hand to the top and share the lessons they learned as their company grew. The satisfaction this brings is even better if healthy returns are forthcoming.

Supporting innovation

Angel investors can play a vital role in speeding the path from research labs to market. Innovations, such as new medical devices, can be relatively capital-intensive but have huge scope if their efficacy is proven. Business investors can help to get them off the ground.

Meeting interesting people

Business investing opens doors to working with some of the enterprise community’s many dynamic and infectious characters. Life as a business investor is rarely dull, especially for those that choose to invest in several sectors in firms at all stages of the growth journey.

Investing in startups and SMEs is a way of staying connected to the business world, perhaps after retirement or an exit from their own entrepreneurial successes.

Learning new skills

Rather than a passive sideline to bolster their portfolio, business investing for some angels is seen as a new career path. Many are keen to develop their mentoring and consultancy skills as they support their investment interests to achieve their milestones.

They can also gain a deeper understanding of the startup ecosystem and the various new sectors their investments take them into.

The ‘what if’ factor

Most seasoned investors approach their investments with realistic expectations. There will always be that faint hope, however, that the entrepreneur they have backed is the next Mark Zuckerberg or Jeff Bezos. Chasing new born ‘unicorns’ – billion dollar enterprises – is akin to playing the lottery.

But for all the scaremongering about startup failures, business investment does have the ability to throw up hugely positive surprises that were never foreseen in the planning phase. It all adds to the buzz of business investment.

Investing in startups

The ability to invest in startup opportunities has never been so great. It's as important as ever to complete your own due diligence and ensure the opportunities are right for you as an investor, but the options for everyone to access the investment opportunities are undoubtedly there.

Favoured by sophisticated investors around the world, every investor will have their own reasons for investing into startups, but they all ultimately fall under the same umbrella - which is the investor has confidence in the startup company and believes their investment proposition is perfect for their own portfolio.
Driving Growth.
Creating Value.
Delivering Impact.

Backed by

Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.