Should you invest in Seedrs?

Seedrs allows investors to back start-ups, and has sold equity in its own business this week. Is it a smart investment?

Crowd-funding business Seedrs has raised over £1.3 million in little more than a day, after opening itself up for investment. 

When Seedrs launched its latest funding round on Monday morning, it had intended to raise £500,000 by selling a twelfth of the shares in the business. However, this fund-raising has been a massive success. The round has been significantly oversubscribed, raising £1.3 million so far. Even though it has long passed its target, it is still open for investors

So what are the investors getting for their money? And should you join them?

Buying into start-ups

Seedrs is an equity crowd-funding platform. Founded in July 2012, it matches entrepreneurs seeking start-up capital with private investors keen to buy shares in exciting new businesses.

The firm's name reflects the fact that investors are 'seeding' new businesses with their own cash, helping start-ups to grow. When investors put money into a fund-seeking firm, they receive equity in that business. They become part-owners of that venture, no matter how large or small the sum they invest via Seedrs.

You can invest from £10 to as much as £150,000 in a single business and build an online investment portfolio by investing in a number of different businesses, diversifying your risk.

Ventures currently seeking investment on Seedrs include a Happy Days musical, Times Place Brasserie (a restaurant venture from leading fund manager Nicola Horlick) and Ready, Steady Mums, a virtual personal training and community training project for mums.

Initially, Seedrs was open only to UK-based investors, but this week it has thrown open its doors to investors and entrepreneurs throughout Europe. This makes it the first UK-based crowd-funding platform to allow Europe-wide participation in start-up funding.

In addition Seedrs is the first crowd-funding website to be authorised by the Financial Conduct Agency (FCA), the UK's primary financial regulator, while it's also the first crowd-funding platform to join the UK Business Angels Association. These give Seedrs seals of approval that similar sites lack.

Risky business

Investing in start-ups and early-stage businesses is highly risky. History suggests that you're more likely to lose 100% of your investment than discover the next Facebook or Twitter.

What's more, Seedrs is an 'all or nothing' service, which means that companies seeking funds get nothing at all unless they reach their investment target. Fairly often, ventures fail to raise even 5% of their target and therefore don't receive a penny. In fact, 80% of Seedrs offers are withdrawn because they failed to hit their target.

On the other hand, when a fund-seeking firm reaches (or exceeds) 100% of its target, then it becomes fully funded. At this point, Seedrs takes its slice by charging successfully funded start-ups a one-off fee of 7.5% of the sum raised. Seedrs also takes a fee from investors of 7.5% of the profits (capital gains and dividends) they make from funded firms.

Top tax breaks for investors

As well as giving investors direct access to buy shares in new businesses, many crowd-funding investments qualify for generous tax breaks.

Under the rules of the Seed Enterprise Investment Scheme (SEIS), investors in qualifying start-ups (including those investing via crowd-funding) get various tax reliefs. SEIS investments qualify for individual income tax relief of up to 50%, plus capital gains tax relief of up to 28% on their profits and reinvestment relief.

Democratising investment

By cutting out the middlemen and matching investors directly with small businesses, Seedrs and its rivals are teaching banks a lesson. Instead of paying through the nose for expensive bank loans, new ventures can go straight to investors, handing over a stake in their future success for quick cash now.

Going indirectly to the public to fund ideas and start-ups is big business. In 2010, crowd-funding websites raised around $890 million from investors. Last year, that total had more than tripled to $2.66 billion, and it is expected almost to double this year to $5.1 billion. The largest chunk of these sums - around a third - comes from North America, which leads the world in crowd-funding.

With banks still reluctant to lend to small businesses in this post-crash era, and with savings rates at their lowest in history, the sky seems to be the limit for crowd-funding. Then again, as crowd-funding expands explosively, more and more similar sites will spring up, increasing the competition.

In time, a handful of leaders will emerge, gobbling up almost all of the profits from crowd-funding, while blowing lesser rivals out of business.

With Seedrs itself only 16 months old, it's not possible to say at this stage whether it will survive and thrive in the great combat for crowd-funding. That said, I would bet my own money on Seedrs becoming a profitable enterprise.

What do you think? Did you invest in Seedrs? Have you invested through any crowd-funding sites? Let us know your thoughts in the comments box below.

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