How To Invest In A Start-Up

Investing in Start-ups: A Growing Opportunity 

Investing in early-stage businesses has become more accessible, largely thanks to the rise of crowdfunding over the past decade. Equity crowdfunding, in particular, has seen significant growth in the UK, with fundraisings expanding from fewer than eight in 2011 to nearly 600 in 2021, according to start-up research firm Beauhurst. 

While start-ups present potential for high returns—such as BrewDog's crowdfunding investors who saw a 2,765% gain—these investments also come with substantial risks. Data from the Office for National Statistics shows that nearly 50% of start-ups fail within their first three years. 

Beyond potential returns, start-ups also contribute to economic growth. Wealth Club CEO Alex Davies notes that start-ups grow three times faster than traditional businesses and have driven 10% of global job growth since 2017. 

Ways to Invest in Start-ups 

There are three primary avenues for investing in start-ups: 

1. Crowdfunding: This method involves raising small amounts from a large number of people, typically via crowdfunding platforms or social media. 

2. Venture Capital Funds: These funds pool resources from multiple investors to invest in start-ups and small businesses. 

3. Business Angels: High-net-worth individuals invest directly in start-ups, either independently or alongside others. 

Let's explore crowdfunding and venture capital options more closely. 

Crowdfunding 

Crowdfunding is the third-largest funding source for UK start-ups, following venture capital firms and business angels. Successful crowdfunding examples include Monzo, Nutmeg, and Revolut. Crowdfunding platforms allow many investors to contribute in exchange for a small equity stake. Investors typically aim to "cash out" when the start-up goes public, gets acquired, or raises additional funding. 

Types of Crowdfunding Investments 

Crowdfunding platforms generally offer two types of investment opportunities: 

1. Equity: Investors commit a set amount for shares at a fixed valuation, receiving shares if the funding goal is met. 

2. Convertibles: Investors purchase convertibles that convert into shares at a discount during a future funding round, often before a larger round. The valuation is determined later. 

Additionally, equity fundraising offers: 

• Primary Rounds: Investors buy new shares issued by the company. 

• Secondary Rounds: Investors purchase existing shares from other investors or employees. 

Some platforms offer "cohort campaigns," allowing investors to acquire shares in multiple start-ups. In rare cases, platforms run "fund campaigns," where investors contribute to a fund that covers several start-ups. 

Evaluating Start-up Investments 

Warren Buffett's advice to "know what you know and know what you don’t" is relevant when considering start-up investments. Kirsty Grant, Chief Investment Officer at Seedrs, advises investing only in companies that are well understood and align with personal beliefs. Matt Cooper of Crowdcube suggests investors choose companies whose products or missions they support. 

Investors should conduct thorough research, considering factors such as: 

• The uniqueness and customer demand for the product or service. 

• Social responsibility and alignment with personal values. 

• The size of the target market and potential for global reach. 

• Barriers to entry for competitors. 

• The management team’s expertise. 

• Realism of financial projections and the likelihood of needing further funding. 

Since start-up investments are high-risk and illiquid, seeking advice from an independent financial adviser is recommended. 

How to Use Crowdfunding Platforms 

Crowdfunding platforms curate start-ups seeking investment and coordinate the fundraising. Two of the largest platforms in the UK are Crowdcube and Seedrs, each having raised over £1 billion. Other UK-based platforms include CrowdBnk, Crowdfunder, and ShareIn.