Who doesn’t wish they could have invested in the early days of Facebook, Twitter or WhatsApp?
There seems to be no end to the success stories of two guys in their garage, creating billion dollar companies. And with governments increasingly recognising and supporting the vital role of early-stage and growth investing in propelling economic growth, these businesses are increasingly – and rightly – seen as quite an attractive asset class.
Historically, the opacity and transaction costs involved in this asset class meant that, angels and venture capitalists (VCs) often had to spend thousands of pounds (and dozens, if not hundreds, of hours) to execute a single investment. Because of this, investing tended to be open only to the big players on the scene. Thanks to equity crowdfunding platforms like Seedrs this is no longer the case.
But for new or nascent investors it can be a bit daunting.
Here are a few things to consider before making your first few investments. Think of it as a primer to becoming a mini-angel investor or VC.
How much have you got to invest?
We’re talking about investable capital. Boring but necessary when investing in long-term assets like early-stage and growth-focused businesses. The first thing to stress is that you shouldn’t invest money you can’t afford to lose. Think about how much money you’d be very comfortable putting at risk and not having access to over a 5-7 year (or longer) period. Then divide that by a certain number of companies and that gives you a sense of how much money you might want to invest in each business. Never invest what you can’t afford to potentially lose.
Diversify your investment portfolio (can’t stress this enough)
Early-stage and growth-focused investing is a fun way to stay actively engaged in the vibrant entrepreneurial ecosystem. There’s so much to learn, be a part of and contribute to when you’ve invested (even a small amount) in a business. It’s a high risk asset class, as the majority of businesses do not succeed. This is why you should always diversify across a portfolio of investments and not put all of your eggs into one basket.
You really shouldn’t invest in a single business and hope to make a big return – you should try to invest in a varied selection of businesses. The average number of investments in a portfolio on Seedrs is nine businesses, but we also have a number of investors with more than 100 investments!
Other risk factors
So what are the other risks? It’s also worth noting that this is not a buy low, trade high type of investment. You’re in it for the long haul as the business grows. You’re not going to be trading your shares in a few months and cashing in on your investment. It could be years before you potentially see a return.
It’s also likely that you won’t be receiving any dividends, as you might do in public companies. Early-stage and growth-focused businesses re-invest profit and investments into the company to hire new employees, develop their products and, ultimately, grow (hopefully). Plus, it might be quite a while before they turn a profit. So returns tend to be paid upon a successful exit – like when they are bought or go public.
How will you pick your investments?
Now you have your financial plan of action, how are you going to decide which businesses to invest in? What do you want to see at the end of the day? Every investor has a different way of identifying which opportunities they want to get involved with. Finding your own strategy is key. Are you a more rational investor who wants to invest in sectors you know well, ask a lot of questions and log in regularly to ensure that you don’t miss “a good deal”? Or are you a more emotional investor who wants to invest in businesses you may already use and love, in teams you believe in, and in industries you think are really interesting (though you may not know much about them)? Maybe a combination of the two?
Once you’ve made a handful of investments, you’ve got the beginnings of a crowdfunding investment portfolio. But don’t just invest and run. You’re now financially invested and a shareholder in those companies and have a vested interest in whether or not they succeed – join the crowd in helping them grow.
For early-stage businesses, it is very unlikely that you’ll see an exit for many years so you may prefer to become more involved in helping the business get off the ground. For later-stage growth-focused businesses you may just prefer supporting them from afar.
How can you add value as an investor?
- Become a customer. Not every company you invest in will have a product or service that you can buy, or it might not have gone to market yet. But if they do – become a customer. Every sale helps. And if you have feedback based on your experience let them know so that they can make it better.
- Become an advocate. Refer friends, family and colleagues to buy their product or service. Can you help grow their market? Perhaps you can help establish a market in a country where they’re not yet trading?
- Be a connector. Perhaps you know a good web designer who can help them with their e-commerce site. Or an old school friend who is in commercial property and can help them find their first office. Maybe you’re a lawyer or accountant who can offer some advice. Perhaps you know a journalist who might be interested in profiling them. You may not be able to offer any introductions, and that’s fine too.
- Promote them on social channels. Follow them on Twitter, connect on LinkedIn, +1 them on Google+. And not just their corporate accounts, but those of the management team too. Help spread their message to your online network and build up a relationship that is outside of the actual investment.
- Become a mentor. A lot of investors not only enjoy the thrill of backing exciting new companies financially but really getting involved with helping them flourish. This could be simply sending them an email with suggestions for their business. Or you may feel that you can really add value to their business by going in to meet them. It’s about finding the level of contribution that suits you and the business.
- Be responsive. Some startups reach out to their investors for help from time to time. This could be to let them know their product has gone on sale and to see if they want to buy it. It could be that they want help with recruitment or to see if anyone has any spare computers they can donate. If you can help you may find it rewarding to do so.
- Connect with other investors. See who else has invested in your portfolio of companies. You could club together and see how you can help collectively – or simply swap investment tips and ideas among like minded individuals.
Becoming an online investor in early-stage and growth-focused businesses doesn’t have to be so mystifying. Take it step-by-step, dip your toes in and think about how you want to strategically approach it as an asset class.
If you’d like more information on how Seedrs works and why angels and VCs invest, take a look at our guides to learn more.