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
Investing Capital
Craig Peterson
· 2 min read
· Updated on

Thinking About Online Angel Investing?

Before you do...check out our top 10 tips.

Technology has opened up investing in start up, early stage, and established businesses to a wider audience of aspiring angel investors. It’s no longer reserved for high net-worth individuals.

Once you’ve indicated that you understand the risks associated with equity investing, you can become an online angel and start investing. So what do you need to do?

 

1. Learn as much as possible about this exciting asset class before investing.

There are some great resources available - including downloadable ebooks etc. Read them to make sure you are suitably experienced and qualified.

 

2. Understand the risk / reward profile 

Investing money in unlisted companies (particularly start ups and early stage businesses) can be very rewarding, however it also involves a number of risks.

 

3. Find out how to invest 

There are two ways to invest: directly, where you buy shares in the company, usually A or B shares depending on your level of investment, or indirectly via a nominee structure.

Make sure you understand the nuances of each. Check out how you are protected as an investor with regards to voting rights, pre-emption rights, drag and tag clauses.

 

4. Use the tax benefits 

Two of the Government’s best-kept secrets: the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). Taking personal circumstances into account, you could receive up to 64% tax relief on investments made into SEIS-compliant businesses. For more information, download our free eBooks.

 

5. Make sure you know how to identify decent investment opportunities 

The 4 Ms of investing are a great starting point...consider the following:

  • Management (entrepreneurial, visionary, technical capabilities, sales and marketing, ability to              execute),
  • Model (innovative disruptive breakthrough)
  • Market (size, top down/bottom up analysis, competitors)
  • Money (cash flows, profit and revenue potential).

 

6. Understand your motivations 

You have to know what your motivations are for choosing to invest, and if they are the right ones. If making money is your main (or only) priority, you have to be aware of the likelihood that of the businesses you invest in, a lot more will fail than succeed.

It might be about more than the money; perhaps you want to give something back and act as a mentor to a start up team. Make sure that you are passing on sound advice to those who will use it properly and benefit.

 

7. Build a diverse investment portfolio

Spread your risk. Investing in unlisted companies is a high risk / high reward investment strategy. Some of your investments will fly, some will do “ok”, and many will fail.

Understand the risks and build a diversified portfolio of at least 10 investments. Choose businesses from a range of sectors at various stages of growth.

 

8. Do your homework 

Most equity crowdfunding platforms have built-in private forums where investors can engage with entrepreneurs prior to making an investment.

The forums are a brilliant way to carry out due diligence. Crowd-sourced due diligence: lots of potential investors asking lots of different questions.

Connect with the entrepreneurs on social media channels too. Arrange a Skype call or, if you are planning to invest a larger amount, then perhaps it does need a face-to-face meeting

The GrowthFunders platform offers investors the chance to carry out their own due diligence via a forum, where they can interact directly with the entrepreneurs.

Having other investors requesting further details they feel they need, and access to other potential investors who are conducting due diligence of their own.

 

9. Consider investing alongside more experienced business angels 

If you are relatively new to angel investing then it may be worth investing alongside more experienced angel investors and angel networks.

Syndication is a great way to spread risk and preserve some of your investment capital for follow-on rounds.

 

10. Exit Plan 

Ensure the business you are looking to invest in has a clear exit strategy. It can take between 3 and 10 years for successful businesses to achieve an exit.

Look for investment opportunities that may offer you the potential to exit at different stages of the journey. If you can exit early, your multiple may be less, but a quicker return is sometimes better.

Now you've read the blog, why don't you download our free eBook on how to make money from online angel investing?


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