By Wil Benton is the Co-founder and Director of Metta, an organisation supporting startups, industry and governments with sustainable technology-driven innovation.
Investing in startups is an exciting (but risky) endeavour. While offering a range of opportunities that go beyond the potential for high financial returns, this is an investment area that needs to be done with extreme caution – after all, according to a report by Startup Genome(https://startupgenome.com/), 90% of startups end up failing. I started investing in early-stage technology businesses in 2014 while on a startup accelerator as a founder and, in the decade since, have invested in (and sometimes advised) more than 40 companies. I’ve invested through crowdfunding platforms, I’ve invested directly into companies, I’ve invested in startup accelerators and, most recently, I’ve started investing in VC funds.
Know your What
Over the last ten years, I’ve learned some important lessons from my investing that I’m excited to share. As flagged above, while investing in startups comes with its benefits, it’s important to recognise that this investing activity comes with inherent risks – I am not a financial advisor and would encourage anyone looking at investing for the first time to talk to a professional before making any decisions. This is also my first recommendation: only invest once you have done your due diligence. Try to connect with other investors at the stage you’re looking to invest at, ask potential investees to connect you with their lead investor(s), and so on. Secondly, if you’re based in the UK, explore the tax relief on offer.
Before you start investing, you should also understand your obligations as an investor. In the United Kingdom and Europe, the term “Experienced Investors” is synonymous with the United States term “Accredited Investor”. While the two terms differ in relation to the actual rules, both serve to protect investors from risky investments.
According to the UK Business Angels Association, “Before receiving business plans or beginning to make angel investments, you should ensure that you are self-certified as either a High Net Worth or Sophisticated Investor, as defined by the FCA under the Financial Services and Markets Act 2000 (FSMA)”.
Don’t invest what you can’t afford to lose
Understanding the risk with this asset class is a crucial part of your investment journey. Given startup failure rates (even well-funded startups are likely to fail), as an investor you should be ready to lose 100% of what you invest.
Conventional wisdom is to put no more than 10% of your “total net assets in high-risk investments, with the remainder diversified across a range of mainstream investments”. Having a diversified investment portfolio is also a good way to get started on this journey.
Another thing to be mindful of is the timeline of your startups investments – some might take a long time to get to the potential of a return, so don’t invest expecting a quick win. Be prepared to have your money tied up for 5-10+ years. That’s why it’s also a good idea to be aware of the liquidity options – e.g. secondary sales – you have before the investee potentially does.
Know Your Why
Once you’re comfortable with what you’re doing, my next recommendation is getting comfortable with why you’re investing. I always suggest a new investor to start where you’re comfortable – put your money where your interests (or experiences) are. Startup investing is not an easy (or quick) ride, so I’d always suggest investing in companies that align with what you’re passionate about. The added benefit is, if you’re investing in a company you can support with experience as well as money, you have more to offer the investee (early-stage businesses are always looking for ‘value-add investors’) – which can help make the relationship more interesting and useful for both parties. Lastly, never – and I cannot stress this enough – invest from a position of fear of missing out (FOMO). The startup and investor graveyard is littered with horror stories where things haven’t worked out because FOMO has resulted in the right things not being done at the right time.
Start small
There are some useful platforms – look at Seedrs (http://seedrs.com) and Crowdcube (http://crowdcube.com) (as I did in the early days!) – where you can learn the investing ropes without having to invest large amounts of money. My investing journey started like this; beginning with what I was comfortable with (e.g. £10+) and, once I started to get a feel for it, I slowly started to increase the value of my investments and how I made them.
When investing through crowdfunding platforms, however, it’s important to be conscious of where you are in the equity/ shareholder food chain. In other words, don’t invest £10 and expect the same level of access, information or oversight to the investee as someone who’s invested £100,000 (or more). Founders have a tough enough time running their businesses, without having to deal with retail investors overstepping!
Networking is key
Investors, particularly those who take an active role in their investments, have the opportunity to offer their advice and mentoring time to the companies they invest in. This can include providing strategic advice, helping navigate growth challenges, and leveraging their network to provide added value for the investee.
Having a wide and deep network as an investor is a great perk you can offer to prospective investees. That’s why I always recommend developing your own network – of fellow investors, support structures (or potential customers) relevant to the stage or theme you invest in, as well as a strong pipeline of potential investees. These connections can go a long way throughout your investing journey. Go to events and meetups, and engage with the ecosystem beyond startups – make connections with accelerator programmes, venture capitalists, and tech journalists. These connections can prove priceless during your investing journey (and you never know who can be useful when).
Investing in early-stage businesses is exhilarating and terrifying. A bit like being a startup founder (but without the existential dread)! There are many varied opportunities presented by being an investor, and these can vary depending on industry, company size and stage of investment. Be aware of the risks, do your due diligence, have a network you can lean on if needed and enjoy the journey. I have!
