In the second of the popular series of outside investments, I’m going to tell you a bit about another of my money making schemes: crowdfunding investment.
Now, this won’t tell you what is the best crowdfunding website in the UK, or even what is the top 5 crowdfunding sites. I’ll keep that short and sweet: I’ve used two of them Seedrs and Crowdcube. I’ve found them both to be much of a muchness in terms of their usability and the quality of companies they attract. A friend of mine raised some money through Seedrs and he said that from the company’s perspective, they were a bit disorganised, but they had a successful campaign nevertheless.
As I say, this is not to speak of the quality of the platforms, this is all about making money and is crowdfunding a realistic means to do so?
What is crowdfunding?
What is it? You might have heard of it, but aren’t really sure…in a nutshell, I have come across two main types of crowdfunding investment (I am sure better men and women than I will tell me there are a gazilion other types), but for the purposes of this article, we’ll be focusing on the type I have used: the type where we buy shares in a company rather than giving for philanthropic reasons/getting a nice postcard from the owner thanking you for giving them £20. I am not in this for philanthropy, I am in this to make money.
Without doubt, of all the investments I hold, this is the most risky and while it carries a very high probability of failure, what I like about it, is that it is fairly transparent:
These are companies pitching for your investment, so information is all provided and in at least three cases I’ve had direct contact to the CEO or equivalent at the company looking for funding and have spoken with them directly before making a decision to invest or not. It is much like Zopa was when it was worth using.
There are other motivating factors beyond money too. Of course the aim is to make some cash, I am not a charity and don’t do this for the fun of it, but I have to accept that not all the businesses I have invested in will ever come to something. I like that there are people out there trying things, making things better and refining – it is one of the greatest tenements of capitalism that resources are allocated efficiently and I like to think that this helps that to happen.
Now, don’t get me wrong, not all the ideas on the various websites are any good. A lot of them are downright mad and there are more apps than you can shake a stick at. They seem to be the slightly more sophisticated version of being an Instagram “Influencer” and regarded as the route to untold riches.
Investing in physical products
Personally, I prefer to invest in companies who make a physical product rather than something with such a low barrier to entry, such as an app. I would like to list them here, but in the interests of fairness, I will not as I don’t want this to be seen as pitch for the products I have a financial interest in, but in total I have invested around £3500 across a number of different start-ups. As much as I would like to think of myself as the next Warren Buffet and an absolute genius at picking the next big thing, I have calculated that 80% of the investments will come to nothing. I don’t have an equal amount invested in each company, so the weighting is a bit off, but reflects the risk I was willing to take on each company.
My initial investments have ranged from £20 up to £1100. In one instance, I made an additional investment when the company came back to their initial investors for more funds to push through a new project they were working on. I have also been close on a couple of occasions of making additional investments under similar circumstances in other companies I invested in, but bailed out due to personal cash-flow issues (at the risk of sounding like a broken record, the house refurb absolutely wiped me out. I would have dearly loved to, but again, given the higher risk nature of these type of investments, my bottle went. I am sure I will live to regret it, but that’s the way the cookie crumbles – I had invested my resources elsewhere.
I know I said this wasn’t a review…but I do need to draw attention to one of the features on Seedrs which I like: they show you the value of your initial investment and the value of your investment today, i.e. how the value of your shares has grown (or fallen). Crowdcube doesn’t offer this.
This does bring me neatly to my final point…how am I going to make money out of this??? For that to happen the company needs to start paying me a dividend (none have to date), which is generally not in the plans for a start up where cash is reinvested into the business in order for it to grow; or someone has to buy the shares, preferably at a higher price than I paid for them. This could be through selling the company, maybe to a competitor or a venture capital fund, or perhaps even listing on the stock exchange. One of the key pieces of research when deciding which companies to invest in is to find out their exit plan. If they don’t give the info as part of the pitch, you have the means to ask the owners of the company what their plans are; here again, I’ve walked away from companies who haven’t given me a satisfactory answer to the question as much as I loved their ideas.
It is HUGELY risky. It is completely UNKNOWN to the average investor. I have no idea what will happen, but I have rolled the dice and having looked at it tonight, I have probably invested more than I should’ve done relative to my other investments. I made my first investment in September 2016, so it will probably be another couple of years before I see any actual return in my investment, although according to Seedrs I have made a paper return on that particular company i.e. the share price has increased.
As with Peer-2-Peer lending, there is no doubt that this is risky and it is not for the faint-hearted; your money disappears into the ether and you trust that someone with an idea developed in their shed turns it into more money. There are nice touches through it all; tax relief is available on certain types of investment (SEIS and EIS) which cushions the blow of any losses which may occur, but again, I am not doing this for a laugh and just sticking some money on red or black – these investments need to need to generate a return, maybe not individually, but overall.
I wish you well if you decide to give it a go and would welcome any questions you have about it. I am quite enthusiastic about it as a means to invest.
*as usual, this article doesn’t constitute any advice and if you decide to invest through crowd funding platforms or indeed any of the platforms we talk about on The Money Mountain, we strongly recommend that you take professional financial advice before you do so