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How to Invest in start-ups with equity crowdfunding

Posted 6 months ago

How to Invest in start-ups with equity crowdfunding
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If you want to see your money build and create wealth over time, potentially investing in businesses could be the answer.

Aside from the possibility of earning profits, investing in businesses can be very rewarding.

NextFin’s Mission is to introduce investors & entrepreneurs to alternative investment platforms, help investors make more of their money and help entrepreneurs get the funding they deserve.

Broken down this means:

  • Investors can view all the UK equity crowdfunding pitches in one place on NextFin
  • Investors can compare businesses they want to invest in and peruse their ratings
  • Entrepreneurs’ businesses can be marketed to more investors via our aggregation platform and have their investment opportunity validated by our rating service
  • Entrepreneurs can be introduced to lenders and equity crowdfunding platforms

NextFin rates equity crowdfunding pitches based on their Management, Product and Investment so that investors can make informed decisions. As a regulated company, NextFin must ensure its information is clear, fair, not-misleading and factually based.

investing in businesses gives you the opportunity to be a shareholder in an industry you are passionate about. You are also helping create jobs and some businesses products and services are making big social impacts – you are literally changing the world whilst investing.

Investing in equity crowdfunding businesses means you invest money in exchange for a share of the business’s equity. The shares that you own in the business could be worth more than you originally paid for, if the business is successful. You may even be able to sell your share for a profit on a Secondary Market or if the business exits, likewise you could lose part or all of your investment if the business fails.

Even if a business is successful, you may not see any dividend. Start-up and growth businesses can often take several years to release investments. This would mean you may not be able to sell your shares until the business exits. 

If a business you have invested in decides to raise more funds after your initial investment, it could lead to your share of the equity to decrease. Something to be aware of but may not necessarily be a negative.

Don’t put all your eggs in one basket 

This saying is absolute when it comes to investing in businesses. In order to grow your money, you need to invest it where you can earn a high rate of return.

However, there is always the risk of losing your investment and nothing is guaranteed. To mitigate the potential losses is to diversify your investments. You often see Venture Capital firms working on the basis that one out of ten of their business investments will succeed. And Fund Managers will often diversify across multiple investment schemes from bonds to equity investments to commodities and even property to mitigate risk.

The businesses that succeed could make up for the losses seen in those that have failed. As an investor you will need to do your homework to ensure you are backing the right horse.  You have to understand that you could lose your entire investment – there is always that risk. When a business is in its early stage of development it is at its most riskiest time. Detailed, well researched and presented business plans are often a good indicator that the management team is good and the business is going to be successful but in no way does it guarantee success. As the business grows companies usually need further funding which means your equity share could be diluted, this is not necessarily a bad thing as often it will mean that the business value has increased and you now have a smaller piece of a much bigger pie. However, this does not apply to down-rounds. If the business requires further funding at a lower valuation you now have a smaller piece of an even smaller pie.

An investment in a start-up is also an investment in the management of the business. This is why NextFin rate equity crowdfunding businesses on their management. Executing a business plan/model successfully and viably is often an important factor. We have rated this for investors already but you should carefully review and consider the knowledge and experience of the management team.

Whilst considering your investment it is worth investigating who are the professional investors. Some businesses have professional investors, such as Angel Investors, who have resources, experience and contacts to assist with executing their business plan that those who are backed by individuals may not.

Valuations in start-ups can often be a finger in the air exercise. However, it is important to make sure you are not paying over the top for your shares. Compare valuations of other businesses in the industry you are looking to invest in on NextFin. Most start-up valuations are based on a multiplier of the turnover at the same rate a business has raised capital on or exited in their industry. For example, Just Eat valuation may be seven times their turnover. If you have a food delivery business, you may base your valuation on the same calculation. This would be too high because Just Eat has a proven business so you should expect a reduced valuation to represent the risk of investing in a start-up.

Investigating the business competition is very important. A good entrepreneur should have already have done this. Carry out your own competitor analysis with the tried and tested SWOT formula to check the management team know their market place and the risks the competition poses. Ask yourself what UPS, copyright, patents, contracts and processes the business has put in place to combat the competition.

All investments, including those made in start-ups or growth-driven businesses, can be risky and should not be made by anyone who cannot afford to risk their entire investment. You should carefully consider any associated risks with the business before making your decisions. NextFin have provided the tools to help investors but we always advise that professional financial advice is sought.

Tagged: equity crowdfunding investment Start-up

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