It’s fair to say that we at Symbid are advocates of investing in unlisted businesses (start ups, early-stage and established companies). We like the idea of supporting entrepreneurs. Whether it’s a young tech start-up with a disruptive business model or a more established business with a tried and tested business model. We also like the fact that investing in a portfolio of unlisted companies can potentially offer excellent returns.
Investing in unlisted businesses is a high risk and high reward investment strategy, particularly if investments are purely in start-up businesses. It’s really important that we point this out and that investors understand this. Investors should only invest in unlisted businesses as part of a diversified investment portfolio.
Can the risk be managed?
Investment crowdfunding platforms like ourselves try to facilitate this by not just listing start-up businesses. We also list early-stage and more established companies who are seeking investment. There is a reason for this: we want to offer investors the opportunity to invest in different businesses, from different sectors at different stages of growth and maturity. The common theme is that all businesses are vetted for growth potential by our team of crowdfunding campaign managers, while their financials are approved by an accounting partner. What’s more, by expanding into loan crowdfunding we enable investors to diversify their portfolio with fixed returns in the form of interest. Only businesses with a positive cash flow and 3 years of financial history – such as CareRate – can seek peer-to-business loans on Symbid, meaning the risk is reduced.
Is equity crowdfunding similar to angel investing?
The equity crowdfunding industry is essentially an extension of traditional early-stage investment; a space traditionally occupied by angel investors, angel networks and early-stage VCs. All these forms of investing are based on the same principle: capital is invested in return for a share of equity in an unlisted (private) company in the hope that it will secure a successful exit and generate a reasonable return for both the entrepreneurs and investors. There are lots of different mechanisms employed by Angels and VCs. Investment strategies and target returns will differ, as will the level of support offered by potential investors.
What are the potential returns from angel investing and equity crowdfunding?
What kind of returns do angel investors and VCs aim for? It depends on the individual, their level of experience and their financial clout. Some experienced angels we work with invest in six businesses at any one time. They invest in sectors they understand and in businesses based nearby so they can visit regularly and take a hands-on approach. The theory behind this kind of strategy is that hopefully at least three of the businesses will succeed to some extent. The investors accept that the others may fail or never generate significant returns. Overall, the target return is an IRR (Internal Rate of Return) in excess of 20%. Essentially, they are looking to double their investment in three to four years.
Other angels invest smaller amounts of capital in ten or more companies and take a less involved approach. They expect one business to achieve significant success, two or three to perform averagely while accepting that six or seven may fail. If this sounds like a recipe for disaster, bear in mind that the returns generated by one successful businesses have the potential to far outweigh the losses on the seven failed businesses. However, there’s no doubt that this is a high risk investment strategy. The same principle applies to equity crowdfunding. We strongly recommend that you invest only what you can afford to lose and diversify your portfolio in the same ay angel investors do.
How do venture capital firms invest?
Again, target returns and investment strategies differ for all sorts of reasons. Depending on the type and size of the firm, the amount of capital invested can range from tens of thousands to tens of millions. Expected returns can vary, but VCs will generally seek to at least quadruple their investment. The average VC firm will generally seek a return of ten times their investment. VCs target high returns because they have larger running costs to cover, and they also anticipate that some investments will fail. After all, this is risk capital and not all businesses will succeed.
What about the potential returns from equity crowdfunding?
Our industry is still relatively young and – remembering that successful exits can take anywhere from three to ten years – there isn’t a lot of data to analyse. Nevertheless, there have been a few examples of businesses paying out dividends right here at Symbid. Because of the similarities between equity crowdfunding and angel investing, the expected returns are comparable too. It’s no coincidence that angel investors are becoming increasingly active in the equity crowdfunding space. Online investment platforms are opening up the early-stage investment market to a wider audience of private investors, but the underlying principle of return remains the same.
If you’re interested in learning more about the returns involved with angel-like investments, download the research report Siding with the Angels from the British Business Angel Association.
Here’s a brief summary of the report:
- 56% of businesses fail to return capital;
- 44% generate positive returns that are larger than the initial investment;
- 9% actually generate returns in excess of ten times the capital invested.
The report indicates that, given a holding period of just under 4 years, the average return is approximately 22 per cent gross IRR. That’s a pretty impressive ROI for any angel investor. Of course, this level of return is not guaranteed. Previous returns don’t always indicate future performance and, when investing in start-ups, experienced angel investors will always diversify and make a number of investments to ensure they spread the risk.
Diversification is essential
We at Symbid recommend a diversified investment strategy. Riskier start-up investing should only be considered alongside safer investments in more established business. Aim for a portfolio of at least ten investments in businesses at different stages of maturity (start-ups, early-stage and established businesses).
Diversification is an essential part of investing – whether you’re a VC firm, angel investor or equity crowdfunder.
Are you ready to start building your diversified investment portfolio? Review a range of investment opportunities on the Symbid platformhere.