New online platforms are making venture capital easier
than ever. This week MM guides you through the steps
to success
By Geordie Clarke | Published May 17, 2013 |
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.
5. Be patient. Just because it is easy to invest in
start-ups through a crowdfunding platform does not
mean returns come any quicker. EIS and SEIS investments
can take years to produce results and it is necessary
to hold shares for a minimum of three years for them
to be exempt from capital gains tax. This is by no
means a short-term investment.
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