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

Why is there more interest in investing in startups today?

As an investor with a solid portfolio of stocks and property interests, why would you consider getting involved in what's often seen as the turbulent world of startup investment? The perils of backing early-stage businesses are well evidenced, with various studies putting a startup’s chances of survival at somewhere between 10 and 50 per cent.

Yet sophisticated investors continue to flock to the angel investment game, despite the very real prospect of capital wipe-out.

Most startup backers are fairly pragmatic about their ‘why’ - the opportunity for sizeable returns makes the risks worth taking.

A 2016 study by the Angel Resource Institute suggests startup investors can expect an Internal Rate of Return in the region of 20% to 25% which makes venture investing on of the best performing asset classes - if done properly.

Discover More: Considering investing in startups - take a look at current and completed investment opportunities

Serious startup investors will often back 20 or more enterprises in search of such returns.

Smaller amounts of investment fed into a larger number of businesses help them to mitigate the failure rate of startups. Exponential gains from one or two bright spots in their startup portfolio can offset losses elsewhere.

Then there is the lingering prospect that your next startup interest could be a multibillion-dollar ‘unicorn’ in the making. Imagine if you’d backed music streaming site Spotify from day one, for example. An IPO earlier this year put its value at US$26.5bn at the end of its first day of trading.

Diversification is another major pull factor for business angels. Although volatile themselves, startups are not directly exposed to the threat of market turmoil, unlike public stocks and shares. Startups are an extra asset class to add to your portfolio to give it more balance.

Tax breaks have also intensified interest in startup investment in recent years.

UK investors who back certain unquoted, small firms can benefit from the Enterprise Investment Scheme (EIS). Meanwhile, those investing in very small, early-stage businesses with high growth potential may find the startups are eligible for the Seed Enterprise Investment Scheme (SEIS). Through Social Investment Tax Relief (SITR) there are also tax breaks for angels involved in social entrepreneurialism.

On top of financial incentives, startup investment is an opportunity to make a positive impact within up-and-coming businesses, and in the wider world.

On his website, Richard Branson says he invests in startups because “they are the job creators and innovators of the future”. For savvy investors, often with a wealth of experience in a particular sector behind them, angel investing can be a hugely fulfilling pursuit. Having achieved their own entrepreneurial success, they can impart their expertise to help others do the same, creating new opportunities in the process.

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

There are other sirens to the risky-but-exciting startup game too, however. Since the nineties, the image of entrepreneurialism as a high stakes thrill ride has spread ever more widely.

The dot-com boom ignited a global wave of entrepreneurialism. Broadcast time and column inches devoted to going it alone then increased exponentially. Business tycoons assumed rockstar status, while TV dragons taught us how to fly in the startup world.

And, under the watch of Lord Sugar, winning investment became a gameshow where fortunes can turn on the wag of a finger.

Compared to the stock market, with its never-ending cycle of ups and downs, startup investment offers an exciting world of opportunity to newcomers.

Throw in the chance to meet and work with innovative thinkers, and an alluring prospect awaits.

Government and quango intervention has also contributed to heightened interest in startup investment. While Silicon Valley remains the startup mothership, venture builders and startup accelerators can now be found in most major cities including the UK.

Networking events, training and mentoring help to prime new enterprises for investment and nurture them towards success. For investors, they make startup opportunities more visible and easier to access.

The growing interest in startup investment may also be partly due to the ongoing rise in startup populations. Various studies show the number of businesses, and therefore the opportunities to invest, continually increasing in the UK.

UK government figures show there were 5.7 million businesses in the UK in 2017 – up from 4.2 million a decade earlier. The Department for Business Innovation and Skills (BIS) stats show that the business birth rate in the UK has edged up over recent years, while the death rate has remained relatively flat.

At the last count in 2016, the birth rate – the proportion of active businesses that were formed that year – was 15 per cent. This compares to 11 per cent in 2011. The death rate in that period rose only marginally, from 11 to 12 per cent.

And more recent figures suggest the technology sector is where most new startup investment opportunities are arising.

There were 10,016 software development firms launched in 2017, representing a 59 per cent surge from the 6,300 launched in 2016.

This study, based on RSM’s analysis of Companies House figures, also shows that new technology startups in London in 2017 hit 4,238, which is a remarkable 76 per cent climb from the previous year.

With rising startup numbers comes soaring investment levels. According to research by London & Partners, 2017 was a record year for UK tech investment.

UK tech scale-ups, those businesses with an average annual growth rate of more than 20 per cent over a three-year period, attracted £2.99bn in investment. This is almost double 2016’s figure of £1.63bn.

These numbers may well continue to increase in the coming years, as more and more investors switch on to the benefits of backing startups.

Read more: what do successful private investors look for in a startup?

In the longer term, startup investment opportunities could reach new levels, partly influenced by UK education policy.

Over the last decade, enterprise and entrepreneurship education have become increasingly prominent in school curriculums.

A landmark 2014 report, ‘Enterprise for All’ by Lord Young, set out a number of recommendations to embed entrepreneurship in the classroom. It came amid recognition from the government that the days in which schools needed to generate process-driven skills required by mass employers were over.

With 95.5 per cent of businesses employing less than 10 people, young people need to learn more about self-reliance and creativity, and less about conformity. Various measures have since been put in place, including injecting enterprise into lessons and exams, getting entrepreneurs into schools to inspire and advise, and various startup competitions and schemes.

And so, the first generations of school leavers whose education has been steeped in entrepreneurship will soon make their way in the world. Many will be dreaming of a career at the helm of their own business.

The long-term gain for the UK economy will hopefully be an army of exciting new enterprises – some of which will have what it takes to survive. For investors, it means more opportunities to broaden their portfolio, share their expertise with emerging talent and enjoy the startup journey.

Discover more: Investing in startups - current and completed 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.