In recent years, new vehicles for investment have made investing in start-ups something that most people can do. No longer the preserve of the wealthy, start-up investments can be accessed by almost anyone with a little capital in the form of crowdfunding. You can find a definition of crowdfunding in the PDF attachment to this post.
Volker Hartzsch is an entrepreneur with a long history of multiplying his investment in more than 20 start-ups. In the past decade, equity crowdfunding in the UK has changed from an alternative source of funding to a mainstream funding source, with more than 600 fundraisings in 2021 alone.
Risks and Returns
Equity crowdfunding has the potential to deliver substantial returns to investors if they choose the right start-up. For example, BrewDog, a Scottish craft brewery, recently delivered a return on investment of 2,765%. However, the potential for risk is also high, with approximately half of all start-ups failing to make it beyond the first three years of operations.
Successful start-ups grow on average around three times faster than the wider economy, according to a spokesperson from Wealth Club. They have also been responsible for a tenth of all employment growth in the world since 2017. As with any investment, investors need to weigh the potential risks against the possibility of high rewards.
Time and Energy Investment
Serious investors know that, even before any financial commitment is made, they will have to invest time and energy into researching where to put their capital. When investing in start-ups, this can be harder, as there is no previous sales data to let investors know how they are performing. Instead, investors need to look at aspects of the business such as its primary goals and objectives, to see if they align with those of the investor. They also need to evaluate their own tolerance for risk and research the market the start-up will be entering. The embedded short video explains how to calculate the ratio for risk vs. reward.
Ways to Invest
Equity crowdfunding is a popular vehicle for investment in start-ups, as it allows investors to get a slice of the pie without needing to front as much capital. Investors could also look at options such as venture capital funds, another form of pooled investment typically managed by a company. High-net-worth individuals could also explore angel investing, where they invest directly in a start-up.