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Risk Summary

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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
Industry Insights
Harvey Hall
· 4 min read
· Updated on

“Swap stocks for startups” why the Prime Minister urges investment into early stage companies

Earlier this month Boris Johnson and Rishi Sunak called upon the nation’s investors in an open letter angled towards “seizing the moment” in the midst of a growing shift towards investing in early stage companies.

Following investment into UK startups hitting a record £5.1 billion in the first three months of 2021 alone, the Prime Minister and Chancellor have published an update encouraging UK investors to “Ignite an Investment Big Bang” as a result of increasingly favourable market circumstances.

Inviting investors to “recognise the quality other countries see in the UK”  by investing in the promising early stage companies that helped the UK attract 63% of its total VC investment from overseas in 2020, the letter puts forth why a re-adjusted investment portfolio may be key to harnessing Britain’s burgeoning startup landscape - both on an institutional and individual level.

 

A focus on early stage investment

Less than eight weeks on from the Business Secretary’s update that reaffirmed the £22 billion of  R&D funding set to be injected annually across Britain by 2024-25, the new open letter by the Prime Minister and Chancellor looks to have further cemented the government’s future focus on early stage innovation and those investing into it.

Written with the goal of encouraging further economic growth by supporting the UK’s flourishing startup sphere, the open letter suggested that - now more than ever - UK investors are faced with the potential to benefit from considerable long term growth whilst contributing to real, measurable social impacts by investing into early stage companies post-pandemic.

The letter, cosigned by the Chancellor and Prime Minister wrote:

 “To seize this moment, we need an Investment Big Bang, to unlock the hundreds of billions of pounds sitting in UK institutional investors and use it to drive the UK’s recovery.”

Following data released earlier this year that showed more than two thirds of the £11.3 billion invested in UK tech companies in 2020 came from overseas investors, the letter highlighted the popularity of the UK’s dynamic startup ecosystem to international investors, and encouraged UK investors to share the benefits others outside of Britain are noticing as a result of it. 

 

Read more: Investing in UK tech: why Britain leads the way for European tech investments

 

“It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country.

Currently, global investors, including pension funds from Canada and Australia, are benefitting from the opportunities that UK long term investments afford, while UK investors are under-represented in owning UK assets.”

To combat the outsourcing of investment growth, the PM and Chancellor have suggested that a shift in focus from short term assets to long term assets could be essential, with more structured, domestic, tax efficient venture capital routes highlighted as the key to both individual and economic prosperity.

 

How can investors benefit from this growth?

This shift in focus could see investors swap volatile, short term-oriented investments such as stocks and shares for more structured, risk-calculated venture capital options that boast more long term goals.

By investing into the UK’s most promising early stage companies using longer term venture capital vehicles, investors not only have the opportunity to support a new wave of impact-driven startups primed for growth, but can also be reassured with the additional blanket of generous risk-minimising, return-maximising tax benefits they can provide through tax efficient vehicles.

Three of the most popular routes open to experienced investors when looking to do so are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) - with all three highlighted specifically in The Treasury’s recent “Build Back Better Plan for Growth”:

“The Seed Enterprise Scheme (SEIS), The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) effectively target market failures in SMEs’ access to growth finance, and together have supported over £31 billion of finance since their introduction.”

These schemes offer investors generous advantages in the form of EIS tax reliefs and SEIS tax reliefs in particular, which - ranging from up to 50% income tax relief to capital gains reinvestment relief to inheritance tax relief - can considerably minimise downside risk for experienced investors looking to shield their capital from market fluctuations and tax cuts.

 

Read more: How experienced investors can maximise their startup investments using tax efficient schemes

 

Unlike highly popular investments like stocks and shares which, although have the potential realise high returns in shorter periods of time, can be notoriously volatile, government-led schemes such as the EIS and SEIS can give investors the ability to mitigate downside risk and plan for later life effectively with a more reviewed, structured, long term approach.

Though for some a longer term approach than stocks and shares, tax efficient investment schemes have the ability to target equally high money-on-money returns all the while actively contributing to the UK’s diverse startup landscape. 

Speaking on the effectiveness of tax efficient venture capital schemes, the Prime Minister and Chancellor added: 

“We want to see UK pension savers benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements.”

 

Deciding the most appropriate route

Although investments that can be angled with short term gain as a focus (from stocks to shares to cryptocurrency) undoubtedly have their place for investors seeking potentially strong investment growth and instantly realised returns, for investors with longer term growth goals, the often highly volatile nature of such investments can make them problematic.

Recent events such as the cryptocurrency market crash and severe fluctuations in the global stock market have highlighted the unpredictability often attached with such investments especially, and - though preceded with strong performances - have planted a firm question mark on their place in many investors’ portfolios.

Contrasted by the growing encouragement the UK VC market has felt following two consecutively record-breaking years for early stage investment, the recent shift in attention from stocks to startups has come as little surprise to many observing the space, with the recent wave of government support noticed across the last 6 months further consolidating investors’ decisions to rebalance their portfolios’ focuses on stocks and startups.

From Kwasi Kwarteng’s “Plan for Long Term” growth to Rishi Sunak’s “Build Back Better Plan for the Future” and finally Boris Johnson’s “Investment Big Bang”, recent data and government support suggest now could be the best time for investors - both institutional and individual - to benefit from the UK’s burgeoning startup landscape.

And though bearing an obvious level of risk associated with venture capital investments, when heavily mitigated with tax efficiencies and thorough scrutiny into portfolio companies, Britain’s   current, ever-innovating, impact driven generation of emerging startups pose investors an especially fruitful opportunity ahead of what is set to be another strong year for early stage innovation.

 Free Guide: How to invest in startups as a high net worth individual 
Driving Growth.
Creating Value.
Delivering Impact.

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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.