Chances are, you’ve read stories about startups that have become successful and wished you’d invested early before the share price shot up. We take a look at why professional investors are building early-stage investment portfolios:
- The potential for high returns
Startups that succeed have the potential to deliver returns that blow most asset classes out of the water. The rewards can be significant because you’re investing into a business in the early stages – when the business has a lower valuation because it hasn’t had the opportunity yet to demonstrate impressive growth or execution by the team, which enables your investment to potentially grow along with the business.
Once the company has had time to flourish, it may deliver something truly innovative or scale significantly. A startup may deliver a service or product that’s quicker, cheaper or better than is currently available in its respective market. It may even create a sector that simply didn’t exist before. The returns for early-stage investors can be significant.
So, how can investors realise returns from investing in early-stage equity? Well, there are three common ways:
Sometimes a startup will become attractive to a larger organisation or a competitor that’s looking to either enter a market or solidify their position.
An acquisition is most commonly made with cash, shares or a mixture of both. This could mean a windfall for anyone holding shares in the company being bought out.
Secondary share sales
Secondary sale opportunities enable investors to have the opportunity to buy or sell shares without waiting for the business to be acquired, or floated on the stock market.
At Seedrs we recognised the value in creating liquidity with a secondary market, so we created the Seedrs Secondary Market, the only fully functioning early-stage private equity secondary market in the UK, where investors can buy and sell shares from each other.
Note that not all shares will be eligible for the secondary market and, even if they are, the ability to buy and sell shares will depend on demand. It can be difficult to find a buyer or seller, and investors should not assume that an early exit will be available just because a secondary market exists.
Initial Public Offering (IPO)
An IPO is when a business goes from being a private company with relatively few investors, to a public company with shares trading on a stock market.
An IPO may take some time but we’ve already had a company that raised on Seedrs, Freeagent, go on to to become listed on a public market – meaning its shares are publicly available.
Diversifying investment activity across an asset class and within wider investment strategy spreads risk, reducing volatility and potential negative movements. As well as spreading risk, it also has the potential to increase returns by allocating a portion of an investment portfolio into a high-risk and potentially high-return asset class, such as early-stage equity.
Diversifying within early-stage equity
Investments in early-stage private equity are within the high-risk profile. Yet there are potentially meaningful returns to be made, but the way to spread the risk is through diversification. Consider looking at various ways to diversify your portfolio such as across:
- Sectors (from Finance and Payments to Food and Beverage – there are 15 sectors to choose from on Seedrs).
- Digitisation (digital and non-digital).
- Customer Type (B2B, B2C or both).
- To maximise UK tax relief opportunities
To encourage investment into early-stage companies, the UK Government created two tax relief schemes: Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
Both offer some of the world’s best tax reliefs for when new shares are purchased in a company, along with significant capital gain reductions on the sale of shares, that generate a profit.
So, if you’re a UK taxpayer, you could take advantage of generous tax reliefs, including up to 50% of the investment cost back in Income Tax Relief if you invest in SEIS eligible shares or 30% in EIS eligible shares.
We hope that you found this quick overview useful, but tax relief is a complicated subject and what applies to you will depend on your individual circumstances, so please be sure to get independent tax advice.
- You can invest on a full-service platform
Seedrs is a full service platform, so we’re there for the lifetime of the investment and ensure professional grade investor protections and rights as standard, irrespective of how much you invest.
Structuring for success (The Seedrs Nominee Advantage)
Having lots of individual shareholders registered on the shareholder register (cap table) can make it harder for a company to raise further down the road – so it can be difficult for the company to get to the next level – and for the investor to see significant returns.
That’s one reason we use the Seedrs Nominee Advantage to hold the shares. This means that we act as legal shareholder for investors, but they are the beneficial owner of the shares with full economic interest in them.
We enter into a suite of professional contractual protections with each company that raises on Seedrs, including warranties that provide a level of legal protection against a business providing inaccurate information.
Payment, administration and documentation
Our team handles all documentation, admin and payment for both investors and businesses. On completion of an investment we take care of all the paperwork, including subscription and shareholders agreements, articles of association and IP assignment documentation.
Due diligence: The Seedrs Standard
We conduct due diligence on the company, its legal structure and its directors before we close an investment. Our investment team performs a number of key checks and searches on every company that raises on the platform.
- Drive innovation
Unlike most types of investment, investing in startups provides the chance to invest in innovation and to feel real ownership in the companies you buy shares in.
Investors in startups can also feel positive about creating potentially life-changing products and services.
As well as providing capital, investors in early-stage equity have the opportunity to feel involved with the companies they put money into.
- Engage with entrepreneurs
Many early-stage investors like to live vicariously through entrepreneurs, with many having been former business owners themselves. Others always wanted to be an entrepreneur, but for one reason or another, the circumstances were never quite right to open a business of their own.
Either way, investing in early-stage companies can feel like the next best thing to being an entrepreneur. Especially when we make it so easy to engage directly with the entrepreneurs behind any business raising with us.
- You can start building a startup portfolio today
It’s simple to invest on Seedrs and share in the success of businesses you believe in:
- Become an authorised investor
Set-up your investor profile in a couple of minutes. As part of the regulatory process that all financial services firms must carry out, we’ll need to verify your identity to help prevent against money laundering and other financial crimes.
- Review pitches on Seedrs
Check out the business pitches, ask questions to entrepreneurs and even request further information if needed.
- Make your investment
- Just confirm your investment and pay.
- You become a shareholder once the campaign closes and final due diligence is complete.
Now that you’ve seen why professional investors are building early-stage investment portfolios, why not take a look through our latest campaigns to see which ones resonate with you?
Investing involves risks, including loss of capital, illiquidity, lack of dividends and dilution, and should be done only as part of a diversified portfolio. Investments should only be made by investors who understand these risks. Note that not all shares will be eligible for the secondary market and, even if they are, the ability to buy and sell shares will depend on demand . It can be difficult to find a buyer or seller, and investors should not assume that an early exit will be available just because a secondary market exists. Past performance is not a reliable indicator of future results. Tax treatment depends on individual circumstances and is subject to change in future.