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Why is investing in startups so appealing to new investors?
Making financial investments is something that the vast majority of people understand at the highest of levels. You give money to a party with the aim of receiving more back in return after a specific period of time.
Whilst the investment landscape has developed heavily over the last century, and particularly in the last couple of decades, the concept dates back nearly four millennia - the code of Hammurabi is from around 1754 BC and amongst other things, provided a legal framework for investments at the time.
With the considerable development of the investment landscape, we've seen more opportunities become available than ever before. Whilst new investors may have once only looked at buying shares on the stock market, a Buy-To-Let property or investing into a bond, for example, today there are opportunities for almost every investor regardless of their requirements and preferences.
And investing into startups is undoubtedly one of the most attractive options for new investors, for some very clear reasons.
Take the accessing of them. At one time, investing into a startup meant seeking out opportunities privately, talking directly with the startup and investing your money in a behind-closed-doors way.
Today, a quick Google search will present a vast number of opportunities, and this is largely due to the considerable rise in popularity of equity crowdfunding.
The process of investing into an opportunity or project directly alongside other investors - the crowd - the use of online platforms has meant the process has been opened up hugely. If you can connect to the internet and have a bank card, you have all of the technical aspects needed to invest.
Low investment thresholds
But as simple as this is, there are other reasons that complement this ease of use process that make startup investing attractive. Just having the technical elements alone is only part of the equation - in theory, if you have an internet connection and a bank card you could also buy a brand new car, but obviously not everyone does.
One of the most important of these reasons is the low investment thresholds that are so often in place within the startup investing sector today. For example, at GrowthFunders you can invest into startups from as little as £100.
Whilst it's appreciated not everyone will have £100 available to invest into startups, in comparison to other assets - take the Buy-To-Let property option as an example, which can need you to have tens of thousands of pounds in available capital - the threshold is one of the lowest across all investment assets.
Particularly for a new investor who is just looking to get started in the world of startup investing, having the flexibility to essentially determine how much they wish to invest can be hugely appealing.
High reward potential
And with it possible for a couple of hundred pounds invested into a startup to several thousand pounds in return, it can't be denied that the higher risk/higher reward strategy of startup investing is an attractive aspect.
It's important to point out the 'higher risk' part of the above phrase, as startup investing is regarded as a riskier form of investing in comparison to other asset classes. The primary reason behind this is the startup has limited trading history (if any) and so you're basing your decision to invest purely on the information presented, much of which can be projections or assumptions.
It's for this reason why completing your due diligence is critical. We've talked about the 5 Ms of startup investing previously, but understanding them and basing your investment decision on the outcome of them is truly important. They provide a framework for your decision to be made and can help you to discover any areas that may require further investigation.
Importantly, if you do follow the 5 Ms, decide an investment is a wise decision and the investee company goes on to achieve the levels of success it plans, the rewards can be plentiful - it's not uncommon to see early stage startup investors targeting 20x money-on-money returns.
Although the tax reliefs available with many startup investments unfortunately aren't generally known about by new investors (purely because they're not yet as common knowledge as, for example, the tax free wrapper of ISAs), as soon as you do become aware of them, it becomes clear how attractive startup investing can be.
Take the Enterprise Investment Scheme (EIS) as an example. A scheme provided by the UK government, it offers an array of tax reliefs and incentives, the most notable of which is 30% income tax relief to the value of your investment.
And if you look to the EIS's sister scheme, the Seed Enterprise Investment Scheme (SEIS), this income tax relief increases to 50%. That means for every £1,000 investment into a SEIS-eligible opportunity, you can claim back £500 off your income tax bill.
With each scheme having set criteria, whilst not every startup will be eligible, they have gone a long way to achieving their goal of increasing investment at this level - looking at the EIS alone, the scheme has seen over £18 billion invested into it since its launch in the 1993/94 financial year.
And whilst the schemes don't entirely remove the risk of investing into early stage companies, they do help mitigate it considerably, and this is something that isn't generally found in most other investment asset classes.
Investing into startups as a new investor
Every asset class has a level of appeal and it largely depends on the requirements of the investor. Whether you're looking for comparatively 'safe' long term investments or shorter return timeframes from investments that have higher levels of risk associated with them - and everything in between - there's an investment asset class for you.
With startup investments, as mentioned, it is one of the higher risk asset classes, but the potential for higher rewards, generous tax reliefs and low investment thresholds all combine to make for an asset class that's particularly appealing for new investors who are looking to start putting their money to work.