How to maximise chances of profit in the early stage equity asset class

This is one of the most high-risk areas of investment that you can put your money into, writes Thomas Davies

 How to maximise chances of profit in the early stage equity asset class

‘Like any high-risk asset, the rewards can also be high. But if you expect to make big returns by trying to pick the one or two winners, you are likely to be disappointed’

 

Every day startups pop up all over the world looking to transform one area of our lives or another, only to disappear into obscurity, or worse insolvency, just as quickly as they arrived.

Those startups that do survive for the first few years (what we call “growth companies”) still face a barrage of challenges, each one of which could end the company in a heartbeat, before finally becoming an established and valuable business which hopefully provides a return to their investors through dividends or a cash lump sum upon a sale of the business.

So should you invest in these high-risk startups and growth companies?

The European Commission’s SME Performance Review estimates that these companies contribute to approximately 50% of the UK’s economy. That is a huge amount of money that is being generated by companies that you have never heard of.

They often won’t appear in the stock market roundup on TV or on the front page of the Financial Times and yet they are the backbone of the economy, generating huge amounts of revenue.

Each company that you do hear about on TV or see in the financial press has begun its life as a startup and then survived to be a growth company. They were the businesses that once faced adversity, and survived, who continued to grow in size and value until they eventually floated on a stock market or were acquired by a much bigger company. And those companies provided huge returns to their investors who backed them when they were just starting out. In addition, there are many more profitable sales of businesses that you never even hear about.

The investors who were able to access these types of investments were, in the past, a very small group of elite angel or VC investors. It was reserved for the few as a result of the time it took to source these deals, the large investment ticket sizes that were required to be able to participate (sometimes in excess of £100,000) and the fact that most people were not even aware that this asset class even existed.

We launched Seedrs five years ago to democratise this asset, allowing anyone who understands the risks to invest as little as £10. Investors can invest in multiple companies with little effort or hassle. Seedrs takes care of all of the paperwork and manages the rights of the shareholders after the investment has been made.

One of the most important results of this structure is the ability to create a hugely diverse portfolio of investments quickly and efficiently. Some investors have over 250 investments in their Seedrs portfolio, and this type of diversity is key to maximising chances of successful returns.

Like any high-risk asset, the rewards can also be high. But if you expect to make big returns by trying to pick the one or two winners, you are likely to be disappointed.

A few months ago we also launched the Seedrs Secondary Market. This is a place where investors who have invested in a company on Seedrs can look to sell their shares to another investor. If the buyer of those shares is willing to pay more for them that the original investor paid, then the seller will make a profit, deposited directly into their Seedrs investment account.

In the last two trading cycles, investors have made up to 18x returns (when factoring in SEIS and EIS tax relief), and now investors have the opportunity to make a return without having to wait for the business to be sold or floated on the stock market. We believe this innovation will transform the industry, providing much needed liquidity to a traditionally illiquid asset class.

This asset class is high risk, but can bring high rewards for those investors who maximise the diversity of their portfolio.

 

Thomas Davies is chief investment officer at Seedrs

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