Startup investing is the process of investors buying shares in early stage companies. It differs from traditional stock market investing as startups are typically not listed on public markets, meaning they are still privately owned.
Starting and scaling a business costs money. Founders have a number of options when starting a business:
- Try to start with their own money and not take on investment (known as ‘bootstrapping’)
- Try to raise debt, like a loan from the bank
- Raise grant funding from the government, if available
- Sell shares in the company in exchange for capital from startup investors.
Startup investors come in all forms, from professional institutions like Venture Capital Funds, to individual investors who are gaining access to this market thanks to the rise of private investing platforms like Seedrs.
You can learn more about the different options available to different investors in our guide ‘How To Invest In Startups’.
Why Do Businesses Raise Money?
Building any kind of business costs money. Businesses raise money in order to invest in and fund growth with a view to longer term returns.
If a founder is starting a new drinks brand, they need money to create their first product, test it and bring it to market. Once the first version of the product has been created and the company has found its first customer, they need money to fulfil that order before they can realise the revenue.
In food and beverage, it can be possible to follow the format above and get set up with relatively little capital, but other industries are much more capital intensive. Industries like fintech can require businesses to overcome complex regulatory hurdles before they can generate any revenue. Climate tech hardware businesses can require millions in funding to get even a basic version of the product to market.
There are a few options available to founders to raise money. At Seedrs, we enable businesses to sell shares to raise money from their communities, and our individual investors.
Why Do Businesses Raise Money Through Crowdfunding?
Businesses with large communities of engaged customers may choose to crowdfund to monetise this community. Crowdfunding enables them to raise money from their customers, whilst enabling customers to back a business they believe in and share in the potential success of said business.
The same principle applies for founders of businesses with substantial networks of potential individual investors. Seedrs enables these founders to raise money from individuals, with the administration handled by us.
Thinking of raising funds through crowdfunding? You can learn more and get in touch with our team here.
What Are The Risks Of Investing In Startups?
All investments carry varying degrees of risk, and investing in early-stage and growth-focused businesses is no different. The main risk associated with investing in startups is that the business may simply fail, and investors won’t get their money back. Due to the potential for losses, this asset class is high risk.
You can learn more about the risks of investing in startups in our guide, ‘What Are The Risks Of Investing In Startups?’.
How Many Times Do Businesses Raise Money?
Some businesses will never raise money from investors and choose to ‘bootstrap’. Others will raise once to get the business started then reinvest profits to fuel growth. However, many startups, and the majority of businesses that raise on platforms like Seedrs, will raise multiple rounds of funding.
Money raised to start a business is often referred to as ‘Seed Capital’, so typically the first round of financing that a company raises is called the ‘Seed Round’. The next round is often referred to as ‘Series A’, and subsequent rounds are ‘Series B’, ‘Series C’ etc.
In certain instances, businesses will raise at an even earlier stage, referred to as the ‘Pre-Seed’ round.
As startups grow, they may choose to raise further funding rounds. Typically a startup that is growing will be increasing their share price each time they raise money, so shares that are bought in earlier funding rounds will be worth more than what the investor originally paid for them.
You can learn more about what to expect as a startup shareholder in our guide ‘What To Expect As A Startup (Seedrs) Investor’.
Why Do Investors Invest In Startups?
Generating Outsized Returns
As with most investments, it’s likely that individuals choose to invest in order to make a return on their investments. Investing in startups allows you to invest very early, before companies are considered to be ‘successful’, and the valuation of the startup typically represents this.
As startups grow, their valuation can increase, in which case shares bought by early investors will be worth more money. Investing at low valuations allows for much greater room for growth in value, and enables some startup investors to make large returns.
For example, when Seedrs investors invested in Revolut in August 2017, which was, and still is, a private company, investors paid £8.57 per share and the business was valued at £275m. By April 2018 those same shares were worth £31.65 per share. That’s a 3.7x increase in 8 months. By February 2020 the shares were worth £93.93, and by August 2021 they were worth £439.00. That’s a 51x increase in 4 years.
If you compare that to an investor investing in Apple today, which is publicly listed on the NASDAQ, valued at over $2.5tn, it will likely take much longer than 8 months for that investment to 3.7x to nearly $10tn.
However, a key difference between these investments is the risk associated with them. Revolut is a high growth startup with limited information available to the public, and crowdfunding investors. At the time Seedrs investors were offered the chance to invest, Revolut claimed to have 750k active users, growing at an average of 1700 users per day. Compared to Apple today, which has more than 2 billion active devices, and made over $80bn in revenue in 2022, the two are very different investment opportunities.
You can learn more about how startup investors can make money in our article ‘How Do Startup Investors Make Money’.
Benefitting from Tax Relief
In certain countries tax relief is available when investing into startups. These schemes are typically backed by governments to encourage investment into small entrepreneurial businesses.
In the UK, the main tax relief schemes for startup investment are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). You can learn more about tax relief and startup investing in our guide ‘Tax And The Benefits Of Investing In Startups’.
Interest and Passion
Many investors who invest in business’ community funding rounds through platforms like Seedrs do so out of interest and passion in a particular sector or for a particular business.
Businesses with highly engaged communities and passionate customers can turn those individuals into investors through a platform like Seedrs. Whilst returns are important for the vast majority of investors on Seedrs, many are interested in investing in businesses as they believe strongly in the idea and the founders.
How Do Investors Choose Startups To Invest In?
The motivations of investors differ widely. Some want to support businesses they believe in, others are backing sectors that they see great promise in. The thread that ties the majority together is the desire to generate a return on their investments.
When it comes to selecting businesses, investors will often have particular sectors, businesses, and risk profiles that they are comfortable with and are of interest. Once a business has piqued the interest of an investor, the investor should then complete due diligence on the business before making their investment decision.
Many investors will review the business plan and financials, founding team background, the market and competition, the technology and intellectual property, scalability and growth potential, exit strategy, and much more.
You can learn more about how our investors select startups to invest in in the guide ‘How To Select Startups To Invest In’.
What Happens After You Invest In A Startup?
Once you’ve invested in a startup, it’s time to wait and wait some more. Investing in early stage businesses is a long term commitment – startups are remaining private for longer, and it may take years to reach an exit, if an exit even occurs.
There are a number of ways you can support your investment, including:
- Follow the startup on social media and become a brand evangelist to share the business with your network and help it grow.
- Keep up to date with company progress in investor updates from the founder
- Engage with other investors and the team through discussions
- Invest in follow-on funding rounds via the platform you used to invest.
You can learn more about what happens after you invest in our guide ‘What To Expect As A Startup (Seedrs) Investor’.
How Do Startup Investors Make Money?
Startup investors make money by selling their shares for more money than they paid for them. This typically occurs when the startup ‘exits’. The two common ‘exit’ events are when a business is either bought by another company, or is listed on the public markets (‘goes public’).
You can learn more about how startup investors make money in our guide ‘How Do Startup Investors Make Money?‘.
Previously, an exit was the only way startup investors could make money. Shareholders would be tied into their investment until the company exited, failed, or bought shares back from investors.
Now, with the Seedrs Secondary Market, shareholders can list their shares for sale and exit early to other investors. We are working to solve the liquidity problem of private investing. You can learn more about the Secondary Market in our guide ‘How to Buy and Sell Shares on the Secondary Market’.
Is Startup Investing Safe?
As outlined earlier in this guide, investing in startups is high risk. Most startups fail and money will not be returned to investors.
However, platforms like ours work to ensure that investors are presented with accurate information on the opportunities available to them, and we complete basic due diligence to ensure that the companies are legitimate. You can learn more about our due diligence in our due diligence charter.
What Are Your Rights As An Investor In Early Stage Companies?
Investors in early stage companies have certain rights based on the laws that govern companies and investments. Some of these stem from company law and are set out in a company’s articles of association (a constitutional document that sets out a company’s purpose and the way it is managed and administered), while others take the form of contractual protections which are typically contained in a company’s shareholders agreement.
Seedrs has a dedicated team of experienced and passionate lawyers that review these documents on your behalf, only approving campaigns on the Seedrs platform where the company has put in place an appropriate suite of minority shareholder protections.
You can learn more about your rights as an early stage investor in our guide ‘What Are Your Rights As An Investor In Early Stage Companies’.
How Can I Invest In Startups?
Investors can invest in individual startups through platforms like Seedrs, or angel invest directly into businesses. If investors want to get exposure to a range of startups with one investment they can do so via funds like EIS funds and VCTs.
You can learn more about how you can invest in startups in our guide ‘How To Invest In Startups’.
Want to get started right away? Sign up to Seedrs here.