Start-ups offer exciting potential, but does Seedrs' new investment fund holding crowdfunded start-ups do enough to reduce the risks?
Your best chance of beating most other private investors and professional money managers without massive risks is to spread your money among dozens or hundreds of investments at the lowest possible cost.
Thanks to a new fund from Seedrs you can invest your money into a range of start-up firms, all through a single investment.
One investment, ten start-ups
You can read about the basics of crowdfunding in Crowdfunding: how to invest in start-ups with as little as £10.
Now, Seedrs has taken crowdfunding to its next inevitable stage with what could be the first ever fund of crowdfunds. With this fund, you make one investment that is spread equally across ten start-ups.
It's rather like venture-capital funds that invest your money in several start-ups, but because it's through a crowdfunding website it's accessible to Joe and Jane Bloggs, not just rich investors.
Seedrs states: “Everyone from first-time investors to established angel investors will be able to back a carefully selected group of entrepreneurs, all aiming to build the next internet giant – diversifying the inherent risks of backing unproven web start-ups in the process.”
The inference in this clever sales copy is that you're going to back the next Google, and that even wise and experienced investors (“established angels”) will sign up.
And people have - 134 investors, putting up an average of £1,126, meaning the fund is already fully subscribed within a week of launching!
What they get for their investment
The ten internet start-ups in the fund – which are yet to be chosen – will have ten weeks of business mentoring from WebStart Bristol.
The total investment sought for all ten was £150,000, in return for owning 10% of the businesses.
So, if you invested £15,000, you'd own 1% of each of those 10 businesses, before dilutions.
The start-ups will be in the Seed Enterprise Investment Scheme. You can read about that tax-saving scheme (and about Seedrs' costs) in Seedrs: Earn 22% a year on a £10 investment.
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Small chance of finding Google 2.0
Lots of venture-capital firms haven't made their clients rich. Finding fantastic start-ups just isn't easy.
How do you know WebStart Bristol will choose wisely? How can amateur investors possibly know they're getting value for money on their investments? After all, the higher the risk, the larger the slice of the company you should expect for the cash you hand over, so is your slice of 10% enough for the risks you're taking on these 10 specific start-ups? Most people don't have the skills to make that judgement and yet you're expected to invest now without knowing what funky web name the entrepreneurs have opted for.
It's got a bit of a '10 items for £10' feel to it, when you could probably buy each one individually, or a similar item, for £1 each, or even less.
Failure rates and costs
[SPOTLIGHT]Most start-ups fail. Plus, in the article Seedrs: Earn 22% a year on a £10 investment, my colleague Ed Bowsher shows that, of 1,080 start-ups funded by angel investors from 1998 to 2008, just 9% provided almost all the profit.
The investors involved were members of angel-investing groups. Start-ups seeking money from the rather more clueless “crowd” will, on average, surely be lower quality. Even if WebStart Bristol is pretty good at choosing entrepreneurs and business ideas, it won't be easy to get a big winner from just 10 start-ups.
Add to that the fact that investors also ultimately (either directly or indirectly) pay the considerable charges asked by the crowdfunding websites themselves, as well as WebStart Bristol's costs.
As any even slightly informed investor knows, such costs seriously reduce your prospects.
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Testing your idea
Imagine you have exactly £150,000 in hard-earned savings. This is all your life savings. Would you risk all your life savings in those ten companies to take the full 10% stake in all of them?
If the answer is “No” – and regardless of the future outcome of this fund, it really should be “No” – it means you shouldn't invest all your savings in this fund of crowdfunds.
That is still true if your entire savings amount to just £1,500.
You shouldn't even invest half or probably even one fifth of your total savings in a fund with just 10 start-ups. The risk-reward balance only starts to look more reasonable when investing an even lower proportion of your savings.
Pushing the boundaries of risk
Start-ups are at the very edge of the risks that investors should ever taking. Anything more risky is probably a scam of some kind.
The higher the risks, the more widely you should spread your cash. Ten internet start-ups is hardly enough in my view
If you're interested in investing in start-ups, you should read and learn avidly about the industries you want to invest in, about business in general, about accounts and investing, and about starting up a business. You should also spread your money extremely thinly.
I'm an experienced stock-market investor with an above average record over 15 years, and more than a passing knowledge in start-ups and the modern management methods that are most suitable for brand new business ideas. However, I still feel I have more to learn before I could buy individual start-ups with confidence.
If I was to begin investing in start-ups today, I would take no more than half my spare cash and spread it out between at least 50 start-ups and quite possibly closer to 100. That means investing at most an average of 1% of my investment cash in a single start-up, and perhaps just 0.5%.
If you know next to nothing about business and don't have a long record of dealing with your emotions during the highs and lows of investing, I think, as a very rough rule, you should diversify even more widely than me, and use less of your savings pot to do so.
What do you think? Would you be tempted to put your cash into the Seedrs fund? What are you doing to get a return on your cash at the moment? Let us know your thoughts in the comments box below.
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