More often than not, startup investment is the preserve of angel investors and venture capitalists. So, how can everyday people participate?
Interest rates have been at historic lows since the 2008 financial crisis. This means that retail savings products have offered little opportunity for ordinary people to maintain or grow their wealth. Ordinary investors have fared better in terms of return with equities purchased through stock market share trading platforms.
In contrast, investment in startups is much more high risk. More than 90% of European startups fail. However, a successful startup investment achieves an average return of 27%.
It’s easy to see why ordinary investors have wanted to gain access to this investment channel for some time. Angel investors, venture capital firms, and family and associates of startup owners account for the vast majority of startup funding. Nonetheless, demand from retail investors is being answered more and more, allowing them to invest in startups in a number of ways.
Equity crowdfunding: investing for the internet crowd
Equity crowdfunding is one such means for everyday people to gain exposure in startup investment. The funding method involves a company selling shares in the firm to the wider public online. From an ordinary investor’s point of view, they stand to profit from this type of investment if the company grows. This is because rather than annual trading profits distributed through dividends, investors collect rewards from the value appreciation of the company
For the company, the advantage over other means of fundraising is that it gains potentially hundreds of brand ambassadors.
SeedInvest is one company that provides an equity crowdfunding platform. The firm connects investors with startups that have been vetted beforehand. Over six years, SeedInvest has facilitated 250,000 investors in funding 150 startups, totalling $150 million.
In Europe, similar platforms have sprung up in Britain – including Crowdcube, Seedrs and Funding Circle UK. Elsewhere, France, Belgium and the Netherlands host platforms like Ulele, MyMicroinvest and Symbid. As a result, the equity crowdfunding sector has grown from a small initial base. There are some shortcomings in terms of transparency, legal clarity and a need for greater investor protection in Europe. But, if these issues are addressed, this investing and funding sub-sector will be even better equipped for use by everyday people.
Tokenisation and initial coin offerings (ICOs)
An Initial Coin Offering is a fundraising mechanism through which new tech startups offer an underlying cryptocurrency token to investors. Unlike equity investment, the investor is not buying an ownership stake in the company.
The idea is that the startup uses funds raised to drive its business offering. In turn, the startup uses its own cryptocurrency token as a means for users to access the company’s services. An example would be Filecoin – a decentralised cloud storage platform that raised funds via ICO and enabled customers to use the token to access the platform.
Although startup investment is generally very risky, ICOs take the risk to a new level. The funding method peaked in 2018 and since then, projects have been mired in regulatory red tape. Not without good reason too. Many of the token offerings back in 2018 were out-and-out scams. Initial Exchange Offerings (IEOs) have followed with limited success. Alternatively, IEOs attempt to improve upon ICOs with the cryptocurrency exchange platform vetting startups prior to funding.
Pension fund choices for startup investment exposure
Probably the easiest choice for retail investors opting into startup investment is via pensions. Often, people have a choice in terms of the pension funds their pension is based on. There may be an option to change to one that has greater exposure to startup investment.
Startups are increasingly looking to pension funds for investment. Most people can switch to a more investment-friendly plan and not have to go to the trouble of participating in ICO financing or equity crowdfunding separately.
Regulators exist to protect the public. Yet, the argument could be made that regulators had previously deprived everyday people by limiting startup investment opportunities to accredited investors. However, everyday people now have a number of options to access startup investment. What’s more, the situation is mutually beneficial as startups and the greater economy benefit from the funding, while retail level investors diversify their investment portfolios.