The very real risks of investing in start-ups have come to a head after the announcement Bubble & Balm, the first company to raise money via crowdfunding site Crowdcube, has ceased trading.
The news is a blow for crowdfunding which has become one of the fastest growing investment sectors in the country.
The Financial Times reported this week that the fair trade soap manufacturer asked Companies House to be struck off. Its website, Twitter account and Facebook page have been taken down.
Crowdfunding works by sidestepping the banks to directly connect businesses and investors – and has been praised for its role in helping to plug the funding gap for start-ups and small firms in the UK.
As with other types of shares, if it is successful the value goes up. If not, the value goes down and you could lose your money completely.
Bubble & Balm had been operating since 2011, when it raised £75,000 via a pitch on Crowdcube in return for 15 per cent of the company’s equity. Investors were also promised free soap.
Luke Lang, co-founder and director of Crowdcube, said he was disappointed for investors and for Sue Acton, the founder of Bubble & Balm, but was keen to stress that in 2011, when she raised the funding, the company had secured a contract with Waitrose and was in a strong position.
After the Waitrose contract dried up Bubble and Balm became a victim of the economic downturn, he added.
He said: ‘The news is a blow for crowdfunding. Every business that fails is a deep disappointment and very sad.
‘But ultimately it is part of the nature of investing in start-ups. What happened to Bubble & Balm is a good example of the need for people to diversify their portfolios and spread their money around.
‘Around 55 per cent of angel investments fail to get a return. But overall as an asset class you can make 2.2 times the capital you invest as long as you do diversify correctly.’
He recommended spreading shares across different sectors in businesses at both early and growth stages.
Peter Adcock, managing director of independent financial advisers, Adcock Financial, explains: ‘Investing in start-ups is not for the fainthearted and should only really be entertained by sophisticated investors who know the risks and can afford to take a hit when companies fail — which more often than not they do.
‘Remember that while some start-ups will provide exceptional returns, many more will come unstuck. They are more likely to lose you money than make you money but when they do come good there’s no doubt that the returns can be very strong indeed.
‘Clearly the failure of one company does not mean investors should run a mile from this type of investment but it does underline the risks attached to crowdfunding platforms. Never invest money in start-ups that you can’t afford to lose.’
Crowdfunding has experienced a surge in interest in recent months. Financial heavyweight and venture capitalist Jon Moulton backed new platform Investing Zone, while fund manager Nicola Horlick dominated headlines this week after she raised £150,000 in just 22 hours through crowdfunding website Seedrs.
The crowdfunding sector is currently unregulated, although some firms, including Crowdcube, are authorised by the FCA, which means they must abide by strict compliance rules.
[Source: Amy Andrew @ This Is Money UK]