Just a tenner to invest in a start-up?
PUBLISHED: 09:18 20 November 2017 | UPDATED: 09:27 20 November 2017
One of my nephews, a bright lad, recently graduated from a highly-rated red brick university with a first class degree and landed a job working at what he refers to as a ‘crowdfunded start-up’ in London.
Having spent three years away from home and, presumably, enjoyed all of the opportunities that entails, he couldn’t wait to get down to ‘the smoke’.
I understand this desire to sample the capital. I did the same, though I suspect our respective working conditions are markedly different.
Whereas my first post-university job was in the London office of a huge American corporation where a suit and tie was compulsory; where senior managers bagged their own office and secretary; where the accounting department was a maze separated by six foot-high room dividers; where there were no computers and the only noise to be heard was the constant rattle of typewriters (ask your parents) and the furious clatter of calculators, I imagine life at the ‘start-up’ is a little less formal.
At a family function last week, I collared the nephew, who confirmed that yes, his office was open-plan and boasted a pool table (and table tennis); there was no dress code; managers bought the staff freshly-baked pain aux raisins every Wednesday and he and his co-workers enjoy quiz, craft beer and gin-tasting nights, paid for by the company. I’m sure he’s trying to grow a beard and become a fully-fledged hipster.
“There’s a buzz of excitement about the office,” the nephew told me. As he’s only been there a few months and his previous work experience was working the night shift at a regional mail sorting office during university vacations, I interpreted this as an unintendedly euphemistic description of a company either on the verge of collapse or spectacular growth.
And London? He loves it.
Thanks to the remarkable growth of crowdfunding, start-ups are not only sexy but big business, especially as the return on paltry interest rates continues to drive investors towards the sector.
Spreading risk among investors is a well-established concept with which most business owners are familiar, especially as many small firms launch with the help of money invested by family and friends. Crowdfunding has formalised this process, beginning in the United States around a decade ago following the arrival of Kickstarter and IndieGoGo, then fairly simple, reward-based platforms seeking pledges in return for a reward rather than a formal return on investment.
Ordinarily, platforms such as Kickstarter focus on new businesses operating in the music, film, video and publishing sectors, though enterprises involved in gaming, technology and design tend, on average, to raise greater levels of funding, many of them successfully attracting investments running to seven figures.
From an investor’s perspective, equity crowdfunding, ie buying a small share of what is usually a start-up, is extremely popular, with Crowdcube the UK market leader.
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The platform boasts 460,000 potential investors. Since it started in 2011, Crowdcube has helped almost 600 small firms successfully raise more than £350 million with which they can develop and grow their businesses. In total, the UK crowdfunding sector has been responsible for raising over half a billion pounds in the space of six years, most of it in the form of equity.
However, while the level of investment return can be spectacularly good, crowdfunding is not without risks. Start-ups and small companies in particular can burn through funding in double-quick time; lucrative contracts promised by potential clients often fail to materialise and, on occasion, the market for their goods or services may simply not exist.
According to the Crowdcube website, “The reality is that most investors in the equity crowdfunding sector are investing across multiple businesses in the knowledge that 60% may not earn them any return whatsoever, 30% may earn them their money back or a small return and they hope 10% can earn them a far larger return.”
None the less, investment levels are often very modest and investors can usually buy a tiny stake in a fledgling enterprise for as little as £10, although would-be investors anticipating a rapid return on their money are likely to be disappointed; taking a five-to-ten-year view is recommended by responsible crowdfunding platforms. It’s for this reason that most crowdfunding investors heed the recommendation to diversify and spread their investment across a minimum of around a dozen businesses in order to shield themselves from the impact inevitable failures will have on their portfolio.
It’s also worth noting that small businesses operating in a wide variety of sectors are eligible for tax relief, a benefit which may result in investors receiving tax relief of between 30% and 50% on their investment. The intention here is to reduce the risks associated with investing in start-up and other fledgling enterprises.
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Peter Sharkey read economics at the University of Bristol. He worked as an accountant on three continents and has been a company director and investor for more than 30 years, building and selling three different companies.