Why invest in startups?
Investing in startups has a reputation for being high risk, and with good reason: the majority of early-stage startups will fail in their first five years. That's why it's important to conduct rigorous due diligence on any opportunity before you decide to invest.
However, industry data suggests that investing in early-stage companies could also be highly profitable if done responsibly.
We commissioned an independent research agency to examine the performance of 519 UK startups that raised seed round funding in 2011.
Between 2011 and 2017 the cohort grew at a compound annual growth rate of 30%, and was worth more than 5x its original value by 2017.
STARTUP VALUATION INCREASE 2011–17
Data from Beauhurt used in SyndicateRoom's Early-Stage Equities report suggests that if you had invested £10,000 into this group of 519 startups in 2011, by 2017 you would have seen:
Overall portfolio now worth: £63,848.
Net cash returns to date: £22,719 without EIS (£23,745 with EIS).
Capital still at work (and appreciating at 30%): £38,394.
Capital lost through failures: £1,367 (reduced to £341 with EIS tax and loss relief).
You'll notice those figures reference EIS tax relief. Qualifying investors could be eligble for 30% income tax relief on their investment, up to a cap of £1m per tax year (or £2m per tax year if at least £1m of this is invested into knowledge-intensive companies).
Risk Warning: Investing in startups and early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. SyndicateRoom is targeted exclusively at sophisticated investors who understand these risks and make their own investment decisions.
How to invest in startups on SyndicateRoom
SyndicateRoom's Access EIS tracks the performance data of over 1,000 active startup investors. It then selects and co-invests with some of the best-performing “super angels” with the aim of replicating their collective success. Our super angels' notable investments include:
- Horizon Discovery (£221m market cap).
- Magic Pony Technology (sold to Twitter for a reported $150m).
- Swiftkey (sold to Microsoft for $250m).
- Household names like Secret Escapes, Bloom & Wild, and Simba Sleep.
The fund aims to diversify your investment across at least 50 super-angel-backed startups to minimise risk and capture as many potential “blockbusters” as possible. The minimum subscription for Access EIS is £5,000.
Because it's an EIS fund, eligible investors could benefit from generous EIS tax relief on their investment. SyndicateRoom's dashboard aims to make light work of EIS paperwork with easily downloadable summaries that can simply be attached to your HMRC self assessment tax return.
Automatically invest alongside super angels - the UK's best-performing startup investors.
Diversify across 50+ startups to replicate the super angels' collective performance.
Get started in 10 minutes and invest from £5,000 with clear, transparent fees.
Get digital EIS certficiates with easy export from HMRC self-assessment.
Other ways to invest in startups
Angel networks and syndicates
Wherever in the world you are, there'll be an online directory of local, regional and national angel groups available: the UK Business Angels Association and US Angel Capital Association are two good examples.
There are many advantages to investing as part of an established group, not least of which is combined experience, and for novice investors it can be a very good way to learn. There are, however, also some disadvantages. Angel networks and offline syndicates only have so much visibility and reach; regardless of how many you belong to, there will always be opportunities that aren't covered.
On the other hand, with online investment platforms anybody can introduce an investment opportunity: individuals, small groups, and large networks/funds can leverage the crowd both for capital and to source new deals.
Venture capital funds
Venture capital funds are made up of money raised from private investors with the expectation that the fund will return investors more than they put into it. For every 1,000 leads a VC fund looks at, it'll invest in maybe five ventures.
Investors in the fund fall into two categories of partners: general partners (the actual partners of the firm who will typically invest 1% of the fund) and limited partners (typically pension funds, endowments of universities and hospitals, charitable foundations, insurance companies, very wealthy families or ‘family offices' and corporations).
Once sufficient money has been raised, the fund will make a number of investments in high-growth early-stage companies in return for an equity stake in the businesses. Alongside this investment the venture firm organising the fund will often provide guidance, mentoring, network connections and a plethora of other benefits. It is normal for the fund to set aside a portion of its funds to pitch in on follow-on rounds.
Ultimately, the goal of the fund is to exit the companies in which they have invested via either a trade sale or an initial public offering (IPO). VC funds tend to operate in seven-to-ten year cycles, aiming to exit and pay the profit out to the partners and partners before that period ends.
In the UK there are special types of venture capital funds that allow eligble investors to receive tax reliefs from the government: SEIS funds and EIS funds.
Startup accelerators run set courses and offer investment with the aim of growing small businesses in a short space of time. They tend to take a small amount of equity in the startup in exchange for initial seed funding. Accelerators can offer you certain services, such as conducting due diligence and helping to negotiate deals on your behalf.
And you needn't be monogamous about it: as an investor, there's no need for you to limit yourself to one accelerator. Keeping an eye on several different programmes can help you maintain an up-to-date view of the greater fundraising ecosystem.
Equity crowdfunding platforms allow people (the ‘crowd') to invest in unlisted companies in exchange for shares in that company, and can be a good way of diversifying your portfolio since they tend to offer diverse opportunities over an undesignated number of sectors. Plus, as all the action takes place online, information can be updated and disseminated quickly to members, and there will often be opportunities for investors and entrepreneurs to discuss prospects in an open forum.
Some platforms run pitching events that give you the chance to meet the entrepreneurs raising capital in person and speak with them one-on-one. Take advantage of such opportunities to get up close and personal with the company's founders (and chew things over with your fellow investors) before staking your money.
But remember: equity crowdfunding platforms are not all the same, and there are several factors you should consider when shopping around.
Investor-led vs entrepreneur-led platforms
This is a fundamental difference in the way that platforms approach investors. With an entrepreneur-led platform, the entrepreneurs set the investment terms, including share price and the amount of equity given away. Naturally, the entrepreneurs will put their interests first. Investor-led platforms have an experienced ‘lead' investor negotiate the terms of the investment with the company, both for themselves and for the ‘crowd'. As the lead investor is staking a significant portion of their own money in the round, it stands to reason that they will negotiate terms with the investors' interests in mind.
Direct shareholding vs nominee structure
With direct shareholding, investors hold their own shares and the company liaises directly with them. While most experienced investors prefer this arguably more ‘hands-on' structure, it can put off companies and add to their administrative burden. Indeed, some companies will only deal with platforms operating a nominee structure. Under a nominee structure, a nominated individual holds the shares of a group of investors. Companies like using a nominee structure as it makes administration of their shareholders far less cumbersome since they only need to deal with a single person – the nominee – which frees up more of their time to concentrate on making their business work.
This is the general difference between the two structures, but every platform will have its own nuances – as always, be sure to do your research when determining which one is right for you.
Only invest through platforms that are regulated by the financial regulators of the country in which they operate. In the UK, this is the Financial Conduct Authority (FCA) and in the US, the Securities and Exchange Commission (SEC). If a platform is not authorised by the regulator, you cannot be confident that your money is being handled correctly, or that it is safe during transactions, and it's best to steer clear.
Useful links & further reading
If you're interested to learn more about investing in UK startups, you may be interested in the following resources. These are provided on an informational basis only. SyndicateRoom is not responsible for the content of any external websites linked to from this page.
- UKBAA - The Basics of Angel Investing
- TechCrunch - Angel Investor Due Diligence Checklist
- EIS Association website
- HMRC policy paper on EIS and knowledge-intensive companies
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