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
Jenna Taylor
· 3 min read
· Updated on

How to conduct due diligence when investing in start ups

Rise of the Online Angel Investor series: #8

First of all, what is due diligence?

“Due diligence” is just the fancy name given to the research process that is carried out prior to making an investment. It usually involves an investigation into a person or people, a business, or a marketplace.

Why does it need to be done?

As an investor, you want to know that the money you put into a business will be used in order to deliver whatever plan has been set out in the company’s business plan, investor presentation, etc.

Sometimes, start up, early stage, and even some established businesses fail for reasons outside of the business owners’ control. These things, unfortunate as they are, are usually the result of a sector crash or more general economic downturn.

This is why due diligence is carried out. So that you, the investor, can gather all the facts and information you need in order to decide whether or not the product, service, or venture you invest into is right before you part with your money.

Although investing online through an equity crowdfunding platform is still a relatively new process, investors of all types, from the new business angel to experienced angels, and those in networks, have found ways of utilising the web in order to conduct their own due diligence.

Download our 'integrating property investments into your portfolio' guide

How is due diligence conducted online?

In a number of different ways. Just as finance is crowdsourced on an equity crowdfunding platform, so too is due diligence. Although GrowthFunders would always suggest that you take responsibility for conducting thorough due diligence for yourself, using the crowd is a great addendum to the research process. Let’s look at how the internet can aid you in carrying out due diligence:

  1. Director checks
    Prior to listing on the GrowthFunders platform, the owners of the business looking to raise equity finance, are required to undertake a director check. This is a background check into the people themselves, rather than the business. The main reason for this is that in a lot of the cases we see at GrowthFunders, the company either isn’t running yet or if it is, it hasn’t been operational for very long.

  2. Pitch page
    This is where you can overview of the business: watch their video pitch, meet the team, and download resources such as their business plan, investor presentation, and financial forecast.

  3. Ask questions
    On the GrowthFunders platform, there is a Q&A section on each pitch page, where you can ask questions directly to the business owners. We have a diverse investor base with specific industry/sector knowledge (lawyers, accountants, marketers) who may ask relevant questions that you hadn’t thought of / wouldn’t know to ask. The idea is that these different perspectives will mean that every angle is covered. You’ll be able to see both the questions and answers on the platform and use them as part of your own due diligence.

  4. Cyber Sherlock
    This is where you get to play detective. You can check business owners out via their social media channels (both professional and personal. On each pitch page, you’ll find links to a number of the social media accounts of the business owner(s). Use Twitter, Facebook, LinkedIn, Google+, and Pinterest, etc to see how they interact with their audience. You can often get a fair sense of who a person is and what they’re like by looking at their social media activity.

  5. Do it face-to-face
    Contact the business owner to arrange a Skype or telephone call, or enter into an email exchange with the business owner. If you’re making a larger investment, you may like to arrange a real face-to-face meeting, which can easily be done via the GrowthFunders platform.

Crowdsourced due diligence

What are the two most important things you want to know before investing online using an equity crowdfunding platform like GrowthFunders?

1) Whether, or not, you can carry out the same level of due diligence as an institutional investor

2) If the people behind the businesses are who they say they are

Crowdsourcing information on the Internet can go a long way to providing both answers and results. You have access to a variety of information about the business owner, both personally and professionally, as well as a number of fellow potential investors who can ask the questions you hadn’t even thought of asking.

Always trust your gut...

...on an initial impression before even bothering to embark on due diligence. If the business doesn’t appear attractive to you from the start, then there has to be a reason for that.

GrowthFunders: Home of the online angels.

  1. What is online angel investing?

  2. How online angel investing in important to the UK economy

  3. What is the risk v. reward profile.

  4. How to invest online

  5. What tax benefits are available to investors?

  6. The 5 ”M”s of investing

  7. The “what”, “how”, and “why” of building a diversified portfolio

  8. How to conduct due diligence when investing online

  9. Co-investment and syndication opportunities in equity crowdfunding

  10. Making money: exit strategies

Are you ready to build your investment portfolio? Why don't you head over to our pitch pages and take a look at our selection of tax efficient investment opportunities all with high growth potential.

View our live tax efficient investment opportunities
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.