Investing in early-stage and growth-focussed businesses can be very rewarding, but it involves a number of risks and challenges. If you choose to invest in businesses displayed on Seedrs, you need to be aware of and accept five important considerations:
1. Loss of Capital
Most early-stage and many growth-focussed businesses fail, and if you invest in a business displayed on the platform, it is significantly more likely that you will lose all of your invested capital than that you will see any return of capital or a profit. You should not invest more money in early stage and growth-focussed businesses than you can afford to lose without altering your standard of living.
Almost all investments you make in businesses displayed on the platform will be highly illiquid. It is very unlikely that there will be a secondary market for the shares of the business. This means that you are unlikely to be able to sell your shares until and unless the business floats on a stock exchange or is bought by another company; end, even if the business is bought by another company or floats, your investment may continue to be illiquid. Even for a successful business, a flotation or purchase is unlikely to occur for a number of years from the time you make your investment.
3. Rarity of Dividends
Early-stage and growth-focussed businesses rarely pay dividends. This means that if you invest in a business through the platform, even if it is successful you are unlikely to see any return of capital or profit until you are able to sell your shares. Even for a successful business, this is unlikely to occur for a number of years from the time you make your investment.
Any investment you make through the platform is likely to be subject to dilution. This means that if the business raises additional capital at a later date, it will issue new shares to the new investors, and the percentage of the business that you own will decline. These new shares may also have certain preferential rights to dividends, sale proceeds and other matters, and the exercise of these rights may work to your disadvantage. Your investment may also be subject to dilution as a result of the grant of options (or similar rights to acquire shares) to employees of, service providers to or certain other contacts of, the business.
If you choose to invest in early-stage or growth-focussed businesses, such investments should be made as part of a well-diversified portfolio. This means that you should invest only a relatively small portion of your investible capital in early-stage and growth-focussed businesses as an asset-class, and the majority of your investible capital should be invested in safer, more liquid assets. It also means that you should spread your investment between multiple businesses rather than investing a larger amount in just a few.