Crowdfunding, an overview

(James Flavin) #1

James is an investment manager and analyst with over 20 years experience, as well as an investor in Freetrade. Now, he’s bringing that insight and knowledge to the Freetrade community.


Investing in start-ups and early stage businesses is fun, accessible and can be a great compliment to investing in in your favourite stock exchange listed companies.

There are many benefits, most notably the tax breaks but also the learnings and fun that go with it. And through a combination of judgement and luck, you might back a future ‘Unicorn’ and make multiples of your original investment.

However, you should only invest what you can afford to lose (e.g. no more than 10% of any money you have available for investing in any one year; https://www.moneyadviceservice.org.uk/en/articles/crowdfunding--what-you-need-to-know)

The tax breaks exist for a reason; to encourage investment in companies at an earlier/higher risk stage of their evolution. Success rates are lower and so an investor should consider taking a portfolio approach, across a diversified portfolio of start-ups.

Myth no.1: Crowdfunding is the preserve of the rich and the experienced

In fact, you can invest from as little as £10 and invest alongside professional Venture Capital Firms:

Simply sign up to the leading UK crowdfunding sites, the three best known are:

https://www.crowdcube.com/

https://www.syndicateroom.com/

Myth no.2: You have to be in Silicon Valley to earn outsized returns (the big winners)

A unicorn is the term given to a start-up that achieves a valuation >$1bn

image

According to high profile US Angel investor Jason Calacanis:

“Over the past five decades, Silicon Valley has emerged as the driving force not only in technology but also in Media, Transportation, Advertising, Health and Lodging”

” You can largely forget Europe, with its socialism, red tape, and generally anti-entrepreneurial policies, the one notable exception is Sweden, which has produced recent unicorns like Spotify, King (Candy Crush), Mojang (Minecraft), Skype & Soundcloud”

Jason’s book is a great summary of early stage investing by the way, https://www.amazon.co.uk/Angel-Invest-Technology-Startups-Timeless-Investor/dp/0062560700/ref=sr_1_1?ie=UTF8&qid=1553506680&sr=8-1&keywords=angel+jason+calacanis

However, you do NOT have to be in Silicon Valley to earn outsized returns!

  • The UK has created 35% of all unicorns from Europe and Israel (60 out of 169)
  • Oxbridge beats Paris and Berlin creating nine unicorns, compared with Paris’s five and Berlin’s eight
  • Manchester has produced five unicorns, putting it on a par with Amsterdam

image

You can also see some of Britain’s fastest growing businesses in the most recent Syndicate room report, ranked by lift in valuation between 2015 and 2018. Deliveroo and Monzo, despite being up nearly 30-fold in valuation during the period, only rank no.13 and no.14 on the list!

See the report along with some great Founder profiles here:

Sadly, not all these great businesses choose to go the Crowdfunding route and so not all will be accessible to you via Crowdfunding. Your job is to hunt out those that do!

UK investors could have invested in Freetrade, Monzo, Revolut, Brewdog, Justpark, Grind and a whole range of great businesses at a very early stage.

To get started you should register with the leading sites and start checking in intermittently to check out the latest campaigns. Get familiar with the sites and maybe one of the investment pitches will grab your interest and you might stumble across the next unicorn.

For those who subscribe to the Financial Times, here is a recent article on Crowdfunding:

Sahil Bahl, a 24-year-old digital consultant from London, has invested £2,500 in four businesses via crowdfunding websites, ranging from tech start-ups to a coffee chain. The prospect of losing all his money does not worry Mr Bahl. He is in search of a business unicorn.

https://www.ft.com/content/f8942cae-35e0-11e9-bd3a-8b2a211d90d5

What are the benefits of Crowdfunding?

Attractive tax breaks; effectively you get 30% of your investment back as income tax relief (and further income tax relief if the business fails). And, should the investment prove successful, it will be free of capital gains tax if held for three years. See detail here: https://www.crowdcube.com/pg/eis-tax-relief-for-investors-44

Learning. You will learn a lot about different industries. Typically, the companies in your Crowdfund portfolio will provide quarterly updates allowing you to track their progress.

It is fun being involved in the early stages of a company’s growth. You can play a role in helping to promote your company’s products and services, ideally because you truly believe in them. I know that early Brewdog investors have been keen evangelists and indeed consumers of the product along the way :blush:

Your portfolio will make for great conversation when meeting new people from different industries and backgrounds. No doubt one of your portfolio companies will be of mutual interest.

The potential for high returns. Backing a future winner at an earlier stage in its company life cycle means grabbing a greater part of the value creation curve. However, I put this point last given the higher risks associated with investing at earlier stage.

A little background on the different stages of growth investing:

There are various points of a company’s life cycle at which point different investor types choose to specialise; from the earliest ‘friend & family/pre-seed’ round, to Angel/seed round, to series A (where typically a company has product market fit and looks to raise a substantially higher amount to scale the business), B, C & D all the way to the company listing on the stock market.

The big Venture Capital (VC) firms typically operate from Series A onwards because the company will have been materially de-risked if it has made it to this point and because the big VC firms have big pots to invest and the amount being raised will typically be much larger from series A stage onwards.

Often though, a lot of the value creation curve happens from the earlier stage. By the time a company has proven itself worthy of a larger series-A round, the valuation might have risen significantly from the earlier seed round. Hence many big VC firms have started to invest earlier in the company life cycle, or have launched dedicated seed funds to capture the earlier part of the value creation cycle curve.

Most of the Crowdfunding deals are companies raising capital at the earlier stages. They have not yet reached a point in their evolution where they can command a series-A round. Although, increasingly, the leading Crowdfunding sites are starting to include larger, later stage investments.

Podcasts - Learn from the experts!

There are many podcasts dedicated to start-up investing which feature interviews with legendary VC investors and successful founders. They are a huge resource for learning! I would start with:

https://choice.npr.org/index.html?origin=https://www.npr.org/podcasts/510313/how-i-built-this

So, in summary…

Crowdfunding can be rewarding and fun. To quote respected VC investor Peter Fenton, ‘There is no substitute for practice’. You learn the most when you start writing cheques. But start small, only risk what you can afford to lose and have fun!

Good luck

23 Likes
(Leonard Burger) #2

Great post! Indeed I found Crowdfunding to have been highly interesting given the great innovative companies I’ve now connected with (and the people that work there).

I’ve written a short post on my own experience and views on crowdfunding in case anyone is interested:

medium.com

Democratising private equity

The life of a micro-investor Imagine being part of the numerous of exciting business journeys that change the shape of the world and which are improving upon existing products, services and/or processes. This is possible through equity crowdfunding,…

3 Likes
(James Flavin) #3

Hey Leonard, thanks for sharing! I like your post. Particularly that you make the distinction between the different kinds of crowdfunding; equity, lending, rewards, donation. I dedicated my post to equity crowdfunding where investors own a small piece of the underlying company vs lending based or e.g. Kickstarter, where the crowd funds the development of a product but typically don’t have any ownership of the company.

Also interesting to hear about the leading European platforms you mention. Investors should should also consider signing up to Angelist in the US which is a leading source of opportunities there.

3 Likes
(Leonard Burger) #4

Thanks for reading, @Qualityinvestor! :grinning:

Indeed, big fan of equity crowdfunding given its accessibility and democratising powers. Totally agree on Angelist, even if it is just for their highly informative weekly emails :slight_smile:
Another US one that might be of interest is SeedInvest, recently bought by Circle (interesting as this might bring us to tokenised equities in the near future :eyes: ), they have partnered with Crowdcube on some raises.

2 Likes
(asdfsadfasfd) #5

Thanks for this this. Information provided really save me!

2 Likes