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Investing in startups with equity crowdfunding

 

Innovation charity, NESTA, and the University of Cambridge have published an update on the UK’s alternative finance industry.

Authored by Peter Baeck and Liam Collins of NESTA in collaboration with Bryan Zhang from the University of Cambridge, the report showcased evidence that the amount of capital raised in the alternative finance sector has more than doubled in recent years and is predicted to reach £1.74 billion by the end of 2014.

The alternative finance marketplace is made up of:

  • peer-to-business lending (P2B)
  • peer-to-peer consumer lending P2P
  • invoice trading
  • rewards-based crowdfunding
  • donation-based crowdfunding
  • equity-based crowdfunding

As GrowthFunders currently operates in the equity crowdfunding marketplace (we will soon be introducing the option of P2P lending), this post will look at some of the findings of the equity crowdfunding survey.

The rise of the new online angel

The study found that 62% of investors questioned didn’t have previous experience of investing. The introduction of equity crowdfunding platforms means that everyone can get involved in this exciting asset class – you don’t have to be a high net-worth individual or traditional angel investor.

As long as you understand the associated risks and rewards, you can start building a diversified investment portfolio and support the growth of the next wave of Great British businesses. Many of the investment opportunities listed on equity crowdfunding platforms offer exciting tax incentives for investors, such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

Introduced by the UK government in 2012, SEIS offers investors up to 78% relief on their investments into compliant businesses, subject to personal circumstances. Similarly, EIS offers up to 30%, again, depending on the circumstances of both the investor and the investee-company. To find out more about these tax reliefs, please download our free SEIS or EIS ebook.

Ease of the investment process

No one wants to encounter complications when it comes to making decisions that involve money. The simpler and more transparent the process, the happier and more confident investors feel when making transactions online via equity crowdfunding platforms.

This streamlined approach and associated transparency, along with being able to retain control over their own investment-making decisions, was seen as “important” or “very important” to more than 75% of respondents to the NESTA survey.

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Making a return

Perhaps unsurprisingly, one of the main reasons given for investing into start up, early stage, and established businesses was for the potential returns that investors could receive. In fact, 61% of people who took part in the NESTA survey rated making a financial return as “very important”.

As a high risk, high reward investment strategy, if done correctly, investing into early stage businesses can provide some fantastic returns as it is the best performing asset class. A previous report carried out in conjunction between NESTA and the British Business Angels Association, “Siding with the Angels” delivered some interesting takeaways on the potential returns anticipated by investors. Some key points are that:

  • 44% of businesses generate positive returns that are larger than the initial investment and
  • 9% of them actually generate in excess of 10x the capital invested.

This earlier report suggests that if shares are held for a period of at least 4 years, the overall return could be a 22% IRR (internal rate of return). It is important to point out that this level of return is not guaranteed and that previous returns don’t always indicate future performance.

What else makes you invest?

The graph below show the reasons respondents gave for investing and as you can see, the prospect of financial returns came top. We’re wondering – what makes you invest? If you had to rate each of the following as “very important” through to “very unimportant”, where would each reason rank? Leave us a comment at the bottom of the page.

nesta_graph_1

Awareness of equity crowdfunding as a form of investing

The NESTA report looked at the geographical location of the majority of funders / investors. According to the graph included below, London and the South East are leading the way when it comes to awareness and use of online equity crowdfunding platforms as a way of making investments.

nesta_report_2

The stats also indicate that other regions are a little further behind the curve at the moment.  The report suggests a lack of overall awareness in many other regions in the UK.  As a whole, crowdfunding and the wider sector of alternative finance, “remains off the radar for almost half the people in Britain, with 42 percent unaware of it.”

However, things are changing and there is a now an opportunity for more people to learn and spread the word on the merits of investing through online equity crowdfunding platforms. The rise of alternative finance as a viable way of investing capital now means that there is a brilliant opportunity which exists for the sector as a whole to drive awareness, democratise investment and fuel further growth. 

Alternative finance and perhaps more specifically crowdfunding, is increasingly finding itself entering the mainstream, as stories of business and projects who’ve successfully raised capital through a platform, now appear in the media on an almost regular basis.

As public awareness increases, so too does new online angels’ awareness of the available tax reliefs, including SEIS and EIS. Crowd investors, who are becoming increasingly-comfortable with making their own investment decisions are able to co-invest in opportunities alongside experienced angel investors and VCs in deals which are co-ordinated on the online platforms.

As an FCA-regulated (Financial Conduct Authority) activity, equity crowdfunding platforms are a transparent and cost-effective way to both invest and raise capital. This means that more businesses are choosing to use them to raise finance, more investors are using them to place investments, and the word is being spread, resulting in an increased awareness of the benefits of equity crowdfunding and the alternative finance sector as a whole.

 

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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.