The barriers to entry for investing into venture capital funds have historically been high. But today, Seedrs is democratising access, allowing individual investors to invest in venture capital Funds directly, from as little as £100.
Excuse the pun; but what’s the big deal? Well, there are numerous benefits to letting the fund managers – commonly referred to as General Partners, or “GPs’” – working at VC funds do some of the work when it comes to sourcing and due diligencing underlying investments.
We’ve broken down the benefits and risks for the individual investor.
Access To High Quality, Vetted Deal Flow
Let the professional investors do the hard work when it comes to sourcing individual deals — it’s their day job after all. VC’s often have a whole team of analysts with industry expertise who will be vetting each and every deal. They’ll often be industry or sector specialists, investing in just a handful of select startups from a long list of hundreds. That means investors can take advantage of the hard work and experience of those who do this all the time.
Most venture capital funds have a clearly defined investment strategy and thesis. A fund’s investment thesis is the strategy by which the fund makes money for its investors. The thesis will typically identify the sector, stage, and geography of target investments.
We spoke to the team at SuperSeed about how the due diligence process works:
“We meet and assess hundreds of talented founders for every time we make one investment. We then partner with the best, and help them accelerate the journey to the first million in revenue. We find that this is the best way to build a great portfolio of seed stage B2B tech startups”
Dan Bowyer, Partner, Superseed
Diversification With A Single Transaction
At the core of every good investment strategy is diversification. By investing in shares from companies in a diverse range of industries, business stages, and even geographies, investors can lower their overall risk profile.
When investors invest in a venture capital fund, they’re spreading the investment across all of the companies that particular fund invests in. That gives investors diversification via just one transaction, rather than having to personally find, diligence and invest in multiple companies themselves.
In the past, high minimum cheques for VC Fund investments has often kept this asset class exclusive to institutions and ultra-high-net-worth, well connected investors. But, with a minimum investment size of just £100 on Seedrs, eligible investors can spread their investment across a portfolio of startups and industries with ease.
Get The Value Add Of Skilled Industry Operators
When investing in a company through a platform like Seedrs, investors don’t get the chance to be an ‘active’ investor as Seedrs doesn’t take a seat on the company’s board. Investors are trusting in a company’s management team, board and advisors.
One benefit of investing via a VC is that they will often provide additional, hands-on support to the startups they invest in. They (and their partners) share in the success of each of the startups in their portfolio, and with that vested interest they’ll typically offer:
VC Funds offer founders industry insight, best practise and stakeholder introductions. They have extensive experience operating alongside startups and high growth companies, and many specialise in specific verticals. JamJar, for example, is run by the founders and operators of Innocent Drinks, and today they share their expertise to help scale consumer brands such as Babylon, What3words, and Popchips.
Many VC Funds, especially when investing in early rounds, will take a board seat at the company when they invest. That gives them direct influence and insight into the growth of the company, and alerts them quickly to companies needing additional support or funding.
Hiring and Networking
Early hires, especially at exec level, are key to a startup’s success. VC Funds are typically well-connected and will often be able to assist founders in finding the right people when the time comes to grow the team.
Access To Different Deals
It’s common for individual investors to invest more heavily in B2C companies — likely because they’re more applicable to raising funds from a business’ community of customers, and are therefore seen on platforms like Seedrs far more regularly.
B2B companies, however, make up a significant part of the market, with particularly exciting potential. Data from Beahurst and Triple Point suggests that for high-growth company exits between 2011 and 2021, the number of B2B businesses that participated in either an acquisition or IPO is more than double that of B2C companies.
By investing in funds like Super Seed II through Seedrs, investors are getting access to some of the best deals in the B2B game.
Loss of Capital
VC funds invest in early stage startups. For example, Passion Capital tries to invest in the very first round of funding that a company raises, often alongside friends and family investors. Investing in such early stage businesses involves a very high level of risk, and many venture-backed startups go on to fail.
Investments in VC funds should not be made unless investors can readily bear the consequences of a complete loss of their investment.
Illiquidity of investments and interests
All VC funds that raise on Seedrs invest in private businesses. Investments in private businesses are inherently illiquid and returns are likely to only be realised when a company exits.
When an investor invests in a fund, the investor hands control of their funds over to the fund manager. This means that the fund decides how and when to invest the capital, and how and when to exit investments. The fund manager also decides when to distribute returns to investors.
Each fund will have a different policy on the distribution of returns which will be included on their Seedrs campaign page.
Rights to control operations
When investors invest in a VC fund they rely entirely on the management entity of the fund to conduct and manage the affairs of the fund. This means that investors don’t have the right to choose the companies that the fund invests in, or withdraw their funds as they wish.
What Should Investors Consider Before Investing In A VC Fund?
As with any investment, investors should do their own research and weigh up the risk profile based on their own situation. VC Funds invest in startups and scale-ups, which have an inherently higher risk profile than established and publicly traded companies — but with that risk also comes higher growth potential.
VC Funds invest in a broad portfolio of businesses with each fund, which spreads the risk profile over multiple businesses. By investing, investors get access to the investment decisions made by their skilled team of analysts and managers. The startups also receive expert guidance and support, potentially increasing their chances of success.
When investing in a fund, investors are backing a firm to pick startups rather than choosing a business to invest in themselves. The process of evaluating the investment is different, and there are other factors to consider, including the firm’s investment thesis, team, and fund structure. We’ve created a short guide to help investors get started on evaluating venture capital fund investment opportunities.