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.
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.

Industry Insights

How important is it that we invest in startups?

Any sophisticated investor eyeing a move into startups this year has an abundance of options to choose from.

Between 2013 and 2017, around 1.9 million new businesses were formed in the UK, making it Europe’s third most entrepreneurial country, perhaps surprisingly behind Turkey and France. Britain, however, had more tech startups than elsewhere in Europe, with 392,000 firms launched in the period, Companies House data shows.

More recent studies point to various potential hotspots for UK startup investors in 2019.

Throughout 2018, investors put a record £200m into UK-based enterprises in the cryptocurrency and blockchain space.

The Design Museum, meanwhile, recently reported a 70% increase in the number of design businesses in Britain between 2010 to 2018. Its research suggests that Britain’s population of design-focused startups has grown 2.5 times more quickly than the average sector.

Other startup bright spots this year include mindfulness and mental health enterprises, food and drink, and sustainable fashion, according to the New Entrepreneurs Foundation.

With so many exciting markets giving rise to high volumes of startups, investors have an array of opportunities before them.

And their investment could be pivotal to the success of enterprises they choose to back.

Economically vital

Startup investors provide the vital funds needed for entrepreneurs to unlock potential and achieve goals. The startups that overcome the tough first few years in business are the employers of tomorrow. Angel investment, therefore, is not just hugely important for the enterprise community, but also the wider economy.

Jobs creation is an obvious by-product of investing in startup management teams, with the ability to turn their ideas into profits.

And this positive impact of startup success is increasingly being felt across the country in the UK, and not just in the global investment epicentre of London.

Benefitting the whole country

A national network of startup hubs is maturing, helping all regions to benefit from enterprise activity. While London remains the focal point of startup investment, would-be investors anywhere in the country theoretically have a wealth of opportunities on their doorstep - or at least an hour or two’s drive away.

Oxford, for example, has given birth to nine US$1bn ‘unicorns’ – more than double that of Berlin and four more than Paris.

Read More: Why do so many investors invest in startups?

In fact, Cambridge, Manchester, Edinburgh and Leeds have all produced at least two unicorns, while London has produced 36, according to the government’s Technation initiative.

Most of these successes would not have been possible without investment in their early stages - startup investment, then, is clearly crucial for a growing and diverse economy.

Enabling innovation to flourish

Startup investors can also play an integral role in supporting innovation.

In the UK, research and development (R&D) funding as a proportion of GDP is eclipsed by many other major economies.

As a result, the government is currently on a drive to increase total R&D spend from around 1.7% of GDP in 2016 to 2.4% by 2027; and startup investors have a key role to play here.

Their investment may be the only funding source available to an innovative enterprise with a game-changing idea – and an essential force in realising its plans.

Tackling global issues

By supporting innovation, angel investors can also have a hand in solving the world’s problems.

Solutions to environmental or social challenges are often only possible with the support of an angel investor, and their funds are in high demand.

Plastic pollution, unsustainable food production and the impact of climate change are among the big challenges many startups are taking on. Startup investors are a vital ally in their fight.

Preserving expertise

Startup investment is also a vehicle for passing down valuable industry expertise between generations.

For hands-on investors, backing early-stage businesses enables them to directly influence the outcome of their investments. Their vast career experience in a particular sector can be put to good use helping others to succeed in that field.

Read More: 5 reasons angel investors choose to invest in startups

Startup investors often choose to back entrepreneurs looking to disrupt markets in which they worked. Not only could the investor have useful insights on how to outfox the incumbents, but they may also be passionately in favour of the disruption they are shooting for.

Perhaps they have long recognised flaws in products, services and approaches in the sector and yearned for a new way forward.

The startup’s management team may well have found it, and proven to the investor that they can make it work.

Strengthening portfolios

Of course, startup investment is also important for the individual’s own finances.

It enables investors to better protect their wealth from the many dangers lurking around their existing interests.

Those with only traditionally popular asset classes - like stocks and shares - in their portfolio may be at risk of market-wide downturns and crashes.

By turning to startup investment, they are able to mitigate this risk by diversifying their portfolio.

Startup investment is an opportunity to secure interests in industries not represented elsewhere in their portfolio. When other asset classes dip, these interests may rise.

Lucrative returns

Meanwhile, there is also the enticing prospect of a soaring success emerging from their startup portfolio, towards a lucrative exit.

This is the ‘what if’ factor captured by only a select few investors - like Peter Thiel, an early backer of Facebook, who saw the value of his stake grow by over 2,300 times before the social network’s IPO.

Read More: 26 questions to ask before investing in a startup

Outcomes like this are rare, but offer much inspiration to investors. The average return rate enjoyed by angel investors is around 2.6 times the original investment, according to a 2012 study in the US led by Professor Robert Wiltbank. This is the equivalent of annualised returns of 21.1%, reports, based on the average five-year path to exit.

Many investors will choose to back 20 or 30 enterprises, or even more, to both spread their risk and increase their chances of one of their stakes delivering stellar returns.

Where to start investing in startups?

Often their search for a backable startup involves the so-called ‘5 Ms of startup investment’, a handful of fundamental pre-investment considerations. They include management team, business model, market opportunity, money and momentum.

Investors able to master this approach (covered in more detail here) may well enjoy strong returns from a highly diverse portfolio for years to come.

In doing so they could contribute to creating jobs, speeding innovation, solving problems - and more - all whilst targeting strong financial returns.

Download our Free Investing into Startups Guide

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.