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.
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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.
Insights
Jenna Taylor
· 2 min read
· Updated on

What stage of funding do I need? Pre-seed

What is pre-seed funding?

There's a lot of jargon buzzing around the world of start up businesses. Sometimes, it's hard to keep up with everything.

Especially when you decide to raise money for your business. How do you know what type of capital you need? Pre-seed? Seed? Growth?

It all depends on what stage your business is at on its journey, that's all. Once you've established that, you should have more idea of the type of funding you need. In this post, I'll keep things as simple as possible, with the aim of eliminating excessive "jargon".

I'll go into more detail in later posts, where we'll look at more specific terminology, including series A and B, Mezzanine, and IPO funding stages.

But for now, we'll look at the different stages of growth your business might currently be at and the corresponding level of capital.

This post will concentrate on pre-seed and we'll look at later stages in later posts. For the purposes of simplicity, I'll keep the name of both the same as each other (eg "pre-seed" will refer to the growth stage of your business, as well as the level of capital). 

All I have is an idea

This is what is known as the "pre-seed" stage, where you usually have little more than an idea and need money in order to set about turning it into a reality.

Pre-seed is the earliest form of funding and usually comes from you, your family, and friends. It's very difficult to raise the money from external sources as you currently have no traction, revenue, or impact in the market place.

At the pre-seed stage, you need to build and create as effectively and inexpensively as possible. How can you do that? This is where Lean Start up Methodology comes into its own.

You don’t have to be a Silicon Valley tech start up to use the lean start up method when starting a business.

The methodology encourages a "build-measure-learn" feedback loop and can be applied to most start up business, especially those intending to manufacture a product as part of their business model.

Start to raise investment for your company today  

This leads us to what you could use pre-seed funding for

How do you know that your idea will work? Or if it's even what people want? Proof of concept (POC) allows you to test an idea or assumption, either through market research or product testing.

You will be able to test feasibility and demonstrate the real world potential of certain concepts or theories.

Therefore, if you're a manufacturing company, pre-seed capital would be used to build a protoype in order to allow you to discreetly dip your toes in the water and gather feedback. A tech business would use the capital to build a Minimum Viable Product (MVP).

Remember: building a prototype and allowing people to give their feedback serves to de-risk the product, and ultimately, the business venture as a whole.

This could be instrumental in helping you to attract external investment or finance at a later stage.

Four steps of building a prototype:

  1. Identify basic requirements - carry out targeted market research

  2. Initial prototype creation - take the market research and build a prototype which incorporates it

  3. Review - question your target audience and take on board their feedback.

  4. Revise and improve - make any necessary changes, based on end-users’ feedback.

The pre-seed stage is all about finding your footing during the transition from business idea to execution.

The capital you require at this stage needs to allow you to find the right direction and set about validating your idea. 

 

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