A Young Investor’s Guide To Equity Crowdfunding
For young investors looking to enter the world of crowdfunding as your first investment venture – We invited Luke Lang, co-founder of leading equity crowdfunding platform ‘Crowdcube’, to share his tips on what to look for before supporting a startup financially.
Equity crowdfunding has grown at a rapid pace since it came into being just five years ago when Crowdcube launched.
To date, over £190 million has been invested in more than 400 businesses through Crowdcube alone, and £130 million is forecast to be invested through the sector this year.
This is clear that investors appetite to invest in innovative businesses is unwavering.
Investors can handpick the businesses they want to back by investing as little or as much as they like in return for an equity share in a business, which is just one of the reasons behind the sector’s growing popularity.
A diverse range of businesses are increasingly now turning to crowd investors to raise finance.
Everyday investors now have access to interesting and ambitious businesses that previously would have only been accessible to an elite minority.
With more and more people investing through equity crowdfunding, we highlight four things all investors should consider before joining the crowd:
1. With rewards, there will be risks…..
Investing in startup, early and growth stage businesses does have the potential for great returns but they are not guaranteed and your capital is at risk.
With three exits having already been delivered from businesses to fund on Crowdcube and 95% of businesses still trading, we’re seeing early signs of success from crowdfunded businesses.
Whilst it is an encouraging sign, which shows crowdfunded businesses bucking the high failure rates often reported among early-stage businesses, success is not guaranteed and some businesses will unfortunately fail.
To mitigate these risks, you should only invest what you can afford to lose.
2. Building a diversified portfolio…..
A diversified portfolio should always be a key component of any investment strategy to help manage and reduce exposure to the risks.
With a variety of businesses in different stages and sectors now turning to the crowd to raise finance, there’s a broad mix of investment opportunities available to satisfy any risk appetite, investment preferences and budget.
It has never been easier to build a broader, more diverse portfolio.
3. Generous Tax Breaks…..
There are some generous tax breaks available to investors in the UK, which could result in up to 50% tax relief on equity investments in the form of SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme).
With EIS relief, you can invest up to £1 million in any given tax year and receive up to 30% tax relief. However, it is worth noting that these investments are ‘locked in’ for a minimum of three years.
SEIS relief is even more generous, with relief of up to 50% on investments up to £100,000 per tax year in qualifying shares. SEIS is for earlier, ‘seed-stage‘ businesses, and the higher relief is due to the associated risk of investing at businesses at this stage.
The availability of any tax relief, including EIS and SEIS, depends on your individual circumstances and the company you’re investing in.
If you’re in any doubt about the availability of any tax reliefs, you should seek independent tax advice.
4. The Importance of Due Diligence…..
Whilst reputable crowdfunding platforms will conduct their own due diligence on the investment opportunities on their site, you should also do your own before deciding to invest.
Once businesses have passed the platform’s due diligence they are then open to another layer of scrutiny from investors. You can participate in the discussions on the forum, request the business plan, talk to the entrepreneurs behind the business and scrutinise the finer detail of their pitch.
If you’re investing your hard-earned money, you should ensure you have done the necessary due diligence to enable you to make a fully informed investment decision.