BLOG: Is now the time to consider equity crowdfunding?
Many of us have turned to food for comfort this year, from the banana bread-making phase of early lockdown to the lifeline of takeaway apps.
And there’s one group of hungry investors for whom it’s delivered tasty triple-digit returns.
More than 600 early investors in Mindful Chef are set to realise a 350% return on investment after the online recipe box business was bought by Nestle.
Those returns aren’t just reserved for an elite group of wealthy investors. With equity crowdfunding, everyday investors have profited. Mindful Chef raised £2m in 2017 via Crowdcube as investors were attracted by its mission to make healthy eating easier.
Equity crowdfunding offers the opportunity to invest in private companies before they go public and support innovative ideas. Often these are start-ups in their early stages but as crowdfunding has grown, so has the range of investment opportunities, and investors can now back late-stage companies that are more established and robust too. There are also Private Equity Representation services that can help small businesses and startups with their financing needs.
Monzo and Brewdog are among the more familiar names which have been backed by everyday investors and hot on their heels are firms like what3words, Freetrade, Chip, Wirex and Moneybox.
Almost 50,000 investors have backed these businesses alone, with a combined £35m raised since the pandemic hit.
What we’ve seen since March is that crowdfunding can be counter-cyclical: the worse the economy is doing in some areas and the less in control people feel, the more we are seeing them taking an interest in participating in crowdfunding campaigns.
Not only has the environment of record-low interest rates and market volatility sent savers searching for alternatives, but the nation’s personal finances have come into much sharper relief during the pandemic.
Spending has drastically reduced for some, leaving them with more to save, while others are looking at how to make their money go further and increase their safety net with a downturn at the door.
And there’s also a growing appetite for supporting businesses that align with our own personal values, whether it’s because it’s helping a local community, or because it’s making leaps forward for sustainability: people are putting their money where their morals are.
If you already have an ISA, a pension, and are invested in stocks, bonds and property, adding higher risk equity crowdfunding investments to your portfolio may be something to consider. It can increase a portfolio’s diversity, balance against lower risk investments, and enable you to access companies at an early stage.
No investment is without risk
Of course, no investment is without risk. While stock markets have yo-yoed, the pandemic has also seen property funds frozen and banks already offering meagre returns on cash savings continue to slash rates further.
And so too in crowdfunding there are certain things investors should consider before making the leap.
Understanding the valuation of a private company is different from that of a publicly listed firm.
Crowdfunding platforms foster an open dialogue between investors and the company fundraising to help everyone understand the thinking and processes behind valuing a business.
Companies should explain the rationale behind their valuation, respond to questions and take on board feedback. Now, it’s often the retail investor who decides if the valuation is right.
Often, and particularly with later-stage start-ups and businesses, valuations will be set by a lead investor or venture capital firm also participating in the funding round. Platforms perform due diligence on companies seeking crowdfunding too.
Routes to liquidity are also something to consider: knowing how and when you can sell your investments is important.
Generally, crowdfunding investors must wait until a company lists its shares on a public market, or it is bought by a larger firm as in the case of Mindful Chef. However, many crowdfunding platforms offer secondary liquidity opportunities where investors can buy and sell their shares.
Certainly, investing in early-stage companies is a risk: the Office for National Statistics estimates that half of all new UK businesses fail after three years.
Potential returns and tax benefits
By comparison, over 85% of the 960 businesses funded on Crowdcube over the last eight years are still trading.
Plus, the higher up the risk curve you go, the higher the potential return. So far, more than 36,000 investors have had the chance to realise returns of over £50m from 58 of our businesses.
In addition to the potential returns, there are tax benefits for investors too.
The enterprise investment scheme (EIS) offers income tax relief of 30% on investments up to £1million in a given tax year, meaning a maximum tax reduction of £300,000. And the seed enterprise investment scheme (SEIS) offers 50% relief. These shares are also currently exempt from capital gains tax and inheritance tax.
Crowdfunding platforms are throwing open access to investment opportunities that have traditionally been reserved for high-net-worth investors.
Everyday investors now have a golden opportunity to back the businesses that drive innovation and the UK’s economy, sit alongside personal values and purpose and offer potential returns that can add much-needed diversification to any investment portfolios.
Matt Cooper is chief commercial officer at Crowdcube