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.

Investing Capital

Startup investing: how strong do business models need to be?

Beneath every startup’s polished exterior is the business model which drives its progress. How well it has been engineered is a vital consideration of the savvy investor.

Initially, they may hear about it via a swift startup pitch or neatly presented brochure. At this surface level, the model could be instantly appealing to the investor.

A revenue-generating model that seems well-oiled and certain to succeed is potent in itself.

If the market it will be applied to is in desperate need of disruption, the attraction may be even stronger.

This is just the start of the business model assessment process, however. Sophisticated investors must cross-examine those behind the startup, probing for potential deficiencies in the model.

Of course, the model must be strong enough in itself to stand up to scrutiny. But so too must the many factors that feed into the model dictating its performance.

All the assumptions it depends on, like customer numbers, conversion rates and the ability to compete with incumbents, should be questioned thoroughly.

Many startup investors consider the business model as one of five overriding areas of focus. The other items in this ‘5 Ms of startup investment’ are Management team, Market, Money and Momentum. Every element is inter-linked, making evaluation of the model somewhat pointless if the other Ms aren’t also analysed.

Download: how to invest in startups as a high net worth individual

For example, a finely-tuned model in a lucrative market breaks down if the management team is not equipped to keep it running smoothly.Similarly, the money-making machine stutters if there aren’t the marketing funds needed to win paying customers.

So the business model influences - and is influenced by – all other parts of the business. But what about the model itself? Are there any startup business models that are guaranteed to succeed?

Startup business models come in many guises and, if the entrepreneurs are innovative in any way, will have their own nuances that separate them from others.

The classic categories of retail, franchise, manufacture and distribution remain relevant today. Numerous sub-divisions and re-imaginings of these basic models also exist.

A few examples are:

  • Subscription: while long established in many consumer markets, recent years have seen this approach disrupting previously untapped territories such as software, in parallel with the rise of Software as a Service (SaaS).
  • Customisation: think bespoke or opulent additions to cherished products like Land Rover Defenders or Mulberry handbags. Both third party businesses, and fashion giants such as Nike, which allows customisation of its own products, are getting in on the act.
  • Marketplace: eBay is the poster child of this model, which puts supply and demand in the same room, and takes a cut of the transactions that ensue. The rise of the so-called ‘sharing economy’ has seen more recent successes surface, including Airbnb.
  • Freemium: offering services for free, with a paid-for premium option on top, has worked well for the likes of Spotify, Dropbox and LinkedIn.

Clearly presenting investors with a lot to consider even at this stage, delve deeper into signs of strength within the business model and there’s a lot to investigate.

Signs of business strength

Most sophisticated investors are well aware that building a business is much harder than planning it on screen or paper.They are therefore looking for indicators that the model will work in practice, rather than hypothetically, and that the business can thrive in the real world.

Is the idea well protected from replication? Is the cost of customer acquisition realistic? Is cash-flow healthy enough to maintain the progress needed to succeed? Is there strong demand in the market for the product or service?Also, investors are looking for signs of what will happen when unexpected challenges emerge. How will the people behind the business react? Do they have what it takes to turn their idea into profitable success?

These are just some of the many considerations that can point to a strong business model, and every investor has their own criteria to work through before backing a startup.

Evolving model

Now it’s quite common for business models to evolve over time as the company matures. But the ability to adapt to this is key.Adaptability is important to investors. The stereotypical entrepreneur passionately believes in their idea and will do whatever it takes to make it a reality.

Certainly, passion is an essential ingredient in the startup tonic. But what if the market and customer behaviours don’t play out as expected? What if exposure to real trading conditions reveals a gaping flaw in the business model? Will the entrepreneur willingly change their business model to respond?

Flexibility is arguably just as important as passion in establishing successful startups.

Is the investment prospect likely to rigidly stick to its plan, even if all evidence suggests it should change? Or, is the model adaptable to the shifting dynamics of the wider world?

One way to test this is to question whether the business is actually monitoring the wider market.Is there a continual dialogue with real or potential customers through focus groups or market research? Does the model allow for the performance of customer acquisition methods to be scrutinised and adjusted accordingly?

A commitment to ongoing research and development, with adequate resources assigned to it, also suggests an adaptable startup.Instead of an unswerving belief that its product is the definitive solution, regardless of what the market is saying, an R&D-focused firm is striving to keep moving forward, tweaking and improving along the way.

Read more: 11 reasons angel investors choose to invest in startups

A lesson in the dangers of business models that are not adaptable comes from the collapsed video rentals empire Blockbuster. After unbridled success from its launch in 1985, the 21st Century brought with it a new up-start called Netflix, which even offered to buy Blockbuster for a reported US$50m in 2000.

By 2008, the video chain still hadn’t recognised the need to respond to this growing threat. Blockbuster CEO Jim Keyes told financial services platform the Motley Fool in 2008 that Netflix wasn’t “even on the radar screen in terms of competition”.

The company collapsed two years later, having failed to adapt to the age of digitisation. Netflix, meanwhile, continues in its push for global domination today, despite a recent dip in performance.

There are, of course, plenty of counter case studies of entrepreneurs who changed their business model to succeed. Twitter was borne out of a startup that had simply planned to syndicate podcasts via the blog-reading tool RSS. Facebook started as ‘FaceMash’, a site where Harvard students could judge whether their fellow campus peers were ‘hot or not’. The revered jewellery institution Tiffany & Co actually started life as a stationer.

Being able to adapt is essential in building businesses, and the startup model should reflect that.

The importance of the startup’s business model

The strength of a startup’s business model is extremely important - but only as part of the bigger picture.

The model is one of several considerations for the investor. We’ve talked in-depth about the ‘5 Ms of investment’ previously and listed the other vital areas to examine, but you may also have some additional items on your investors’ checklist – perhaps based on personal experiences in business or investment.

Ultimately, only once the startup opportunity has been analysed from every angle - and you feel confident the opportunity is right for your portfolio - should you think about investing your hard-earned funds.

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.