By Declan Blackwood, Investment Manager at Funderbeam
Technology has enabled millennials to have a 360-degree view of their lives, so why should equity investment be an exception?
In a world of abundance, of instant everything, cross-border living, and fast fashion, there is pressure to achieve, but also a necessity to save.
Millenials are a generation of goal setters, but there is a fluidity in how we achieve those goals. The ‘job for life’ mindset is long gone, with the 2008 financial crisis teaching us that even a ‘secure’ job is far from stable.
Instead, we proceed with our careers in conjunction with interests that add value to our lives or our communities, and instil a sense of purpose. It is fair to say this shift has led us to be more mindful of where we put our hard-earned cash.
Millennials vs. High Net Worths (HNWs)
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As a result, we’ve seen an exponential rise in sustainable and impact-focused venture capital funds. Many of these typically qualify for the Enterprise Investment Scheme (EIS), offering individuals significant tax breaks in return for putting their money into private, high growth companies – although often with a high possibility of failing. But, although high risk, these can be lucrative investment opportunities.
One drawback when investing in these opportunities is that they’re not an option for the everyday millennial with a bit of spare cash. You really have to be a high-net-worth (HNW) individual to get involved in these funds as they often require significant initial investments as well as onerous fees. Investments are additionally often ‘locked in’ for long periods of time, making them highly illiquid, which can discourage even the most well-meaning investor.
So, investing in venture capital funds is out. But there are other options for the average millennial investor who wants to invest in pre-public companies and brands they believe in or even already use.
Armchair investing is an option. With a vastly different attitude to savings and investing than the previous generation, more millennials want to use their money to help the companies they believe in operate for the greater good, and make a positive impact. For example, of the 10,000 verified investors on the Funderbeam platform, 4,225 are millennials looking to invest in mission-driven, private companies.
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Equity funding platforms
The popularity of crowdfunding – raising funds from the general public without a minimum threshold – has grown significantly, particularly following the introduction of the Seed Enterprise Investment Scheme (SEIS) in 2012. This scheme provides tax relief of 50 per cent on equity investments into early-stage companies. Even so, not all crowdfunding campaigns are created equal.
On the other hand, equity funding and trading platforms allow millennials to back high-growth private companies they care about, and, in a similar way to public markets, receive a stake in them in return.
Equity crowdfunding gives this new generation of investors the same opportunities as HNW investors, making this possible by lowering the minimum investment amount. The initial investment for most platforms are £1,000 – £2,000. Investors are further afforded the liquidity to move in and out of their investment positions as required. It’s important to remember that many startups fail, and it’s important to understand the associated risks and how these types of investments should fit within your financial planning.
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Risk vs. due diligence
It is perfectly possible to realise significant double digit returns from investing in early-stage private companies, but equally it carries risk.
We have seen scare stories about failure rates of more than 40 per cent and several cases of companies raising on crowdfunding platforms at inflated valuations. Last year, an online estate agent raised nearly £2m on a popular crowdfunding platform without informing investors it was close to administration.
Admittedly, there are many different reasons why equity crowdfunding campaigns fail. So in order to minimise risk, would-be investors should do their own due diligence in advance. They should find out as much as possible about the company, the problem they are trying to solve, the market size and potential, but equally the quality of the leadership team and what they plan to do with the raised funds.
It’s also helpful to speak to existing investors and, once they have taken the plunge, to stay close to their investments to follow their progress – this is definitely not the time to ‘invest and forget’. Also, investors would be wise to avoid putting all their eggs in one basket, and incorporate equity crowdfunding options in a well-diversified investment portfolio instead.
Liquidity of investments
Whereas high-growth companies used to be in a race to what was sometimes an early IPO, founders are increasingly choosing to stay private for longer periods of time. Equity crowdfunding platforms will continue to play a pivotal role in enabling the everyday investor to access the potential gains of their contributions.
While the initial investment is illiquid, equity platforms with a secondary market enable investors to trade their equity – the key for a liquidity injection. Investors can trade shares on the platform directly with other investors, so rather than waiting for a company to exit, they can sell at a point that suits them. Although the option to trade equity makes investing even more appealing, turning a profit still depends on the potential of the inner mechanics of the company, and the timing of the sale, meaning investors are nonetheless vulnerable to losses on their initial investments.
Investors shouldn’t be putting a significant proportion of their income in to equity funding and trading alternatives. They may consider a cash ISA or investing in listed stocks alongside these types of investments to balance their portfolio. No more than five per cent of your income should be put into investments and, with that, no more than three per cent should be invested in private unlisted companies. Early-stage, high-growth companies have a lower rate of success than their listed counterparts, so it’s important that investors aren’t seduced by their portfolio becoming the next Uber or Bloom & Wild.
A successful investment will always have its roots in thorough research into a company’s business model, market opportunity, and scalability, amongst other factors. If you’re looking to invest in these types of companies, it’s crucial to do your own research.
Find out for yourself how much they raised in their latest funding round, who they keep company with in terms of partners and suppliers, and what’s been written about them in the press. The forward-thinking millennial investor really does have all the tools they need at their fingertips to make an impact as well as strong returns.