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.
Take 2 mins to learn more
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

The 5Ms of investing: The importance of understanding

The number of new businesses in the UK is rising. Figures published by the ONS in November show that 414,000 startups were born in 2016, up from 383,000 the previous year.

While many will fail, among them will be the rising stars, ripe for venture capital investment and loaded with opportunity.

Those that can excel against the ‘5Ms’ checklist of management team, market opportunity, (business) model, money and momentum will generally be most successful in securing vital investment.

These five key areas represent the fundamentals of building a startup that truly fulfils its potential and whilst there are no risk-free investments in SMEs and startups, high net worth individuals who carefully consider investees in terms of each of the 5Ms can mitigate risks and maximise their odds of strong returns.

Management team

The idea behind the startup is nothing without a team capable of delivering it. Key considerations for startup investors include the management team’s business experience and its knowledge of its particular sector. Also, if the skillset is not quite where it needs to be, are the founders coachable?

As the company grows, will the entrepreneur be willing to step aside in certain areas of the business and delegate to other members of the team?

The make-up of the team is also a factor, although savvy investors are not necessarily looking for the finished article. Rather, the startup should at least have clear plans to fill any gaps in the management team as the business expands - appointing a product development director might be most pressing for a software startup, for example, while a consumer goods firm might need to prioritise on a head of sales.

Simply put, is team in place investable, and does the startup have a robust management recruitment plan?

Market opportunity

“Admit it, you’re out of the hardware game” - Wired Magazine told Apple in a 1997 article.

Apple's much-speculated end days as a gadget-maker weren’t forthcoming however. A few years later came the iPod, then the iPhone, iPad and a continual stream of new laptop and PC models. Market predictions have a habit of being wrong.

Henry Ford faced similarly dodgy forecasting. Seeking investment for his new motor company in 1903, his bank told him automobiles were a passing fad and horse transport would prevail for years to come.

Market misinterpretation can be costly, especially as a prospective business angel looking to invest your hard-earned funds.

How can you accurately gauge the market for a startup that’s not yet trading?

Unfortunately, there is no silver-bullet formula – and homework on your part, or by advisors helping you to find an investment opportunity, is required. You must assess the size of the market the startup is aiming to disrupt or break into, the resources required to gain traction and the strength of the competition.

The startup will present you with its interpretation of these factors. Question everything: from the validity of third party data to the research methods and case study examples in the same sector. Also, consider the context of the market.

Through your experience in business, you will no doubt have a good eye for market opportunities. Does the target market seem saturated, impenetrable or perhaps absolutely ready for disruption?

Also, what evidence is there that customers will actually buy into the business?

Corporate history is littered with examples of new products completely at odds with market demand.

Even one of the planet’s biggest brands has fallen into this trap. McDonald's 1996 attempt to go upmarket with the Arch Deluxe burger, backed by US$100m advertising campaign, was a total flop. The chain failed to recognise what customers really wanted.

For similar failings read beer-maker Coors’ ill-fated move into mineral water and the great 3D TV revolution which never got going.

Read more: what do successful private investors look for in a startup?

Investors need as much proof as possible that this new game-changing idea will fly, and not flounder, once launched.

There are numerous ways to measure a startup’s market opportunity. ‘Top-down’ and ‘bottom-up’ are two prevalent approaches - top-down starts with the broader picture by looking at macroeconomic factors before gradually focusing in on the start-up’s market.

Bottom-up starts with the qualities of the individual business. Both are valid as you interrogate the likely market opportunity from all angles.

Model

The business model enables investors to test the startup’s viability and the prospect of a strong return on their investment. Does the firm have the resources to reach the customers needed to make the model function? Are its financial forecasts accurate?

From the business model, investors are looking for key details such as:

  • Financial projections for the business, usually over five years
  • The timeline to breaking even and then to scaling up before an eventual exit
  • The route to market acceptance and resources needed to fund it
  • A clear picture of how investment will be deployed in the business
  • How well protected the idea is from being copied
  • The sales channel strategy

Money

Unless already trading, startups rely on theoretical figures to secure investment. It is up to investors to delve deeper than the numbers stated by the founders.

They need to establish exactly how they were calculated and, using their business instincts, decide how realistic they are. Putting a value on an early-stage enterprise can be a dark art.

Until the firm’s product or service is live, investors have only projections and their own estimations to go by. Detailed analysis of every expected incoming and outgoing is required.

The clearer you are about the numbers and how well-founded they are, the more informed your final decision will be.

Momentum

Startups with a bright future should be able to show growing interest in their product or service, even before launch.

Is there a buzz building up around its various outreaching activities such as customer trials, conference talks, workshops and online marketing drives?

Are media contacts becoming increasingly interested in the business? Do social media indices point to a startup whose profile is on the rise?

Momentum should also be palpable among staff, with everyone on the team powering through to do lists and progressing towards targets.

Making the decision to invest in startups

Startup investment opportunities are vast and varied today and are more accessible than they arguably ever have been. Whilst this makes startup investing particularly easy in theory, the basic principles haven't changed and you need to make sure you're investing in the startups that are most suited to your portfolio needs.

With there a wealth of advice available on the topic, the most successful investors base their decisions on the outcome of looking at the five Ms of an opportunity - and by following the same route, you can do a lot to ensure the opportunities you're looking at deliver the greatest returns for you.
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.