Startup investing

londoninvestor

Malthusian wrote: »

Crowdfunding is mostly a scam targeted at people who have nowhere near the due diligence expertise for angel investment

Yes, and adverse selection is a major problem here. Not only are crowdfunding investors not in a position to do the due diligence that angel investors would do - they are picking from the set of investments that angels / VCs have seen and have passed up! So you'd expect to do worse than if you just stuck a pin in the list of all startups looking for funding.

I've invested in various VCTs and a little EIS (which was effectively a managed portfolio, not my stockpicking) but I can't see myself going for crowdfunding.

bowlhead99

johnathanmdavies wrote: »

Do you reckon you could get a good deal on these secondary markets?? If they ever get going...

Secondary deals for private equity investments are scarce enough 'in the real world' of institutional investors, as information crucial to the valuation process is hard to come by when you are not at the primary funding stage with the company opening their books and engaging in constructive dialog with the prospective investors.

It's hard enough to come up with a fair value for the investments when you have the latest financial information, let alone a couple of years down the line when information flow to the public is sparse, and delayed, due to the company's privacy/ competitive concerns. So, parties looking to buy or sell a private investment or a participation in a pool of private investments can have quite a gulf between them on what the fair value is. And that's institutional valuation professionals, not punters on a crowd website who don't know one end of a balance sheet from the other

So, when you throw a few thousand investors together who don't have adequate due diligence on the underlying assets and don't really know what they are doing with valuation techniques, then sure, you can make a market but it won't be an efficient one like LSE or NYSE with clear and adequate information flows and analysts and brokers which help to ensure the market results in a fair price.

With a low number of market participants per company and an assumption that those participants don't have many shares to sell (because typically the larger investors in a funding round get a different class of shares which isn't administered by the crowd cube nominee) it is basically just a matching process of who will pay what for shares which were once issued at a few hundred quid.

You will get some people desperate to unload their shares at any price because Christmas is coming and they want to buy presents rather than hold the shares another few years; meanwhile you will get some people who will pay anything for the shares because they read a newspaper article which implied that the company could be the Next Big Thing and they didn't hear about it when the company was first doing their pitch.

Depending on the ratio of one to the other, you may get a short flurry of trading and then long periods of quiet, with all the transactions taking place at a price that is quite far from a sensible price that a professional investor would buy or sell in a private deal with a founder or in an arm's length transaction on an orderly market.

You might think this is good because if the pricing is all over the place there can be times when it is way lower than it ought to be, allowing you to pick up "a good deal on these secondary markets". However what you will possibly find is that there are some more sophisticated people with more spare time and better information and deeper pockets than you who pick up all the decent bargains, leaving all the crapola for mugs who don't realise they are gleefully buying into garbage at a worse than compelling price.

Some sites for peer to peer investing have established their own markets with reasonable success. However, with places like Ablrate and others the underlying investment is a loan with a certain fixed coupon and certain declared security and you can see whether it is currently being paid and what comparable loans are listed at on the platform - and from external sources, what the UK and global market interest rates are for different types of credit. You might still get stung by overpaying for your secondary purchase, or having too much faith in the borrower's creditworthiness or quality of the security for the loan, but credit models can be quite simplistic because the interest payments are fixed.

By contrast, places like Crowdcube offering predominantly equity ownership-based investing (rather than fixed interest debt-based lending) would be expecting the buyers and sellers to make a market by establishing through supply and demand the fair value of an ownership share of a private business. The model to sense check an equity valuation (especially in the absence of reliable up to the minute financial information and newsflow from the company) is likely to be more complicated than sense checking the value of a contracted stream of cashflows from a borrower.

So, some people will get ripped off by buying into a terrible company days before it goes into liquidation, or paying twice the value of a subsequent funding round, and will seek to blame the platform even if the platform is only trying to do the investors and the company a favour by offering a market to those that want to use it. Others on the other side of the trade might make a lucky escape or might snap up a bargain through sheer luck. Some people say the London Stock Exchange's AIM market is the Wild West of investing and subject to terrible market manipulation, pump and dump scams etc. A Crowdfunding version of that could be a blood bath.

Open question to anybody who has invested in one of these things already: If you could get your money out (maybe via one of these secondary markets from seedrs or crowd cube) would you?

For the investments I have more faith in, I wouldn't want to sell (especially before reaching the minimum holding period to keep the EIS benefits). All the venture capital things I invest in, I'm willing to do that for the longer term without being desperate to get my money back any time soon.

There are some cases where it could be tempting to cash in part of my holding at a profit rather than see what transpires. But for example, I invested in Grind via crowdcube not much more than a year ago and having hit their growth targets they are back doing another funding round at 60% higher value. Which on paper sounds great, and the upside will probably be slower from here, so I might like to hop off. But if there was a secondary market, it would be of no use to me right now. As the company is back offering new shares right now, a new investor can buy from the company at the 1.6 value, but get 30% income tax relief for participating in the new issue. So the investor would only really pay 1.12 net of tax relief, and probably wouldn't want to pay me more than that. And by cashing out without holding the full three years I would lose my own tax relief, so the shares would have cost me 1.0 instead of 0.7. So I might be able to sell for about 1.1 having bought for 1, for a 10% profit even though the headline says Grind are successfully fundraising at a 60% higher valuation than last time...

Long story short I'm not looking to exit any of my better-looking investments via a secondary market now.

Then for the investments I have less faith in, I am not confident I would be able to get a 'fair' price on the secondary markets if they existed, because illiquid markets in companies with negative or no newsflow typically have a gulf between what buyers are willing to pay and what sellers like me really want to get. Some will be willing to get out at a lowball fire-sale price and drag the price down for the rest of us, with the markets not being very orderly. If I hold for longer I will get to keep the tax relief to soften the blow, although that can be a reckless waiting game if the company is going bust and you miss the chance to have exited with something.

Fortunately I don't have any deals that are definitely dead as a dodo, other than a spare £700 I put into Emoov /Tepilo group last summer as a short term punt with a binary outcome. They raised a couple of million at a high valuation ahead of a mooted and abandoned IPO and went into administration after only about 4 months. Glad I only had two thousand shares to Sarah Beeny's three million

And/or do you think a punt is worth it

It's more about whether *you* think a punt is worth it, as only you know whether you will enjoy the fun of picking an investment and the potential of a high return if you wait long enough, balanced against the chance of losing all your money.

If you go to the casino and play a hand of blackjack or a spin of roulette, you can double or lose all your money while sipping a pint, and you'll find out within a minute or two what the outcome was. None of this sitting around waiting five years to see whether your £100 won or lost.

A portfolio of crowdfunding high risk startups together with a VCT investment fund portfolio, and a self select ISA and SIPP using individual companies, investment trusts and funds is quite interesting to me as a bit of a hobby while trying to build wealth for later life and retirement. Whereas a punt for £100 on a single company over three to ten years would not be of any interest to me really, I would probably lose my login details and forget I had it.

londoninvestor wrote: »

Yes, and adverse selection is a major problem here. Not only are crowdfunding investors not in a position to do the due diligence that angel investors would do - they are picking from the set of investments that angels / VCs have seen and have passed up! So you'd expect to do worse than if you just stuck a pin in the list of all startups looking for funding.

To be fair, you do see companies which have raised seed capital privately or through VCs use crowdfunding as a legitimate way of raising further finance, and the VCs or founders may be topping up on the same terms to avoid dilution. This can add some credibility to a pitch although sometimes you might guess that the VC is only trying to protect their existing investment by putting in a token extra bit of capital to help the pitch get some traction, and avoid having to fund all the company's capital needs themselves.

Nardge

johnathanmdavies wrote: »

Open question to anybody who has invested in one of these things already: If you could get your money out (maybe via one of these secondary markets from seedrs or crowd cube) would you?

And/or do you think a punt is worth it? Do you reckon you could get a good deal on these secondary markets?? If they ever get going...

I encountered 'Crowdfunding' as a result of being a very satisfied savings customer of CHIP, who then invited savers to invest into their second round via 'Crowdcube'. As I'd only ever had an A1 experience with CHIP, I went on to invest a four figure sum, aware of the risk. The stellar success of Monzo and Revolut were in mind at the time, together with the prospect of 8% returns on their-soon-to-be launched CHIP X P2P community-lending platform.

I was not aware that 'Crowdcube' had a secondary market? If they did/do, I don't think I'd sell at this point in time, as I've no reason to. It might be 'blind faith', but I do think CHIP are gong places. That said, and having taken on board peoples' commentary and deliberations on this thread, I would likely avoid 'Crowdfunding' again unless of course CHIP were to pull it off. CHIP for me was a one-off, which is sad as I'm really wanting to invest into all the little 'Green' technologies and prospects of an environmentally-friendly future which seem to be accumulating on 'Crowdcube' nowadays! Given the current 'Global predicament', now might be the actual very best time to invest in them!

Besides CHIP, and moving forward now, I might well pursue 'Londoninvestor's avenue: "I've invested in various VCTs and a little EIS (which was effectively a managed portfolio, not my stockpicking)".

With Kind Regards

P.S. I aim to find my 'sources' detailing 'Revolut' and 'Monzo's successes for this thread, though these should clearly be read in conjunction with the balancing information/guidance shared by both 'Masonic' and 'Malthusian' previously.

londoninvestor

Nardge wrote: »

As I'd only ever had an A1 experience with CHIP, I went on to invest a four figure sum, aware of the risk. The stellar success of Monzo and Revolut were in mind at the time, together with the prospect of 8% returns on their-soon-to-be launched CHIP X P2P community-lending platform.

I should say that while I wouldn't personally have invested in Monzo or Revolut, my "adverse selection" comment can't logically be applied to cases where the company is mostly funded by VCs, and then a token amount is done in crowdfunding as it's seen to build customer loyalty.

steampowered

When individuals invest into start-ups, it is usually only a good idea if you are leveraging the tax benefits.

EIS and SEIS tax reliefs are very attractive for higher rate and top rate taxpayers.

For example - if you are a top rate taxpayer - and you invest £10,000 into a company through EIS and the company becomes worth nothing - you would only actually lose £3,150. You get £3,000 reduction in your income tax bill on investment and a further £3,150 income tax relief on the loss.

If you had invested £10,000 and the shares doubled in value - you'd end up with a £13,000 profit - £10k tax free on the shares, and £3k in income tax relief on investment.

short_butt_sweet

londoninvestor wrote: »

Yes, and adverse selection is a major problem here. Not only are crowdfunding investors not in a position to do the due diligence that angel investors would do - they are picking from the set of investments that angels / VCs have seen and have passed up! So you'd expect to do worse than if you just stuck a pin in the list of all startups looking for funding.

this puts private investors at multiple kinds of disadvantage when trying to invest in unlisted shares.

PIs are in a much better position when investing in quoted shares. everybody is working with the same universe of listed shares to choose from. informational asymmetry is lower, because of greater disclosure requirements for listed companies. market prices are relatively sensible. and if you fear that more professional investors will profit at your expense, there are practical ways to opt out of competing with them and get the average result instead (e.g. buy a world equity tracker fund).

this all makes me think it makes more sense for PIs to stick to listed shares. or to get exposure to unlisted shares by holding shares in some of the investment trusts which include unlisted shares among their own holdings.

Malthusian

steampowered wrote: »

For example - if you are a top rate taxpayer - and you invest £10,000 into a company through EIS and the company becomes worth nothing - you would only actually lose £3,150. You get £3,000 reduction in your income tax bill on investment and a further £3,150 income tax relief on the loss.

Only if you have an additional rate tax bill to set it against in both years (which can be the year previous). Which applies to very few people investing in hoverboard manufacturers on CrowdCrap.

EIS reliefs are easier to use as a marketing tool than to fully utilise.

nrsql

Problem with these sorts of companies is that they are small and easy to restructure.
The people that run them aren't going to care much about small investors and you won't have control over what happens.
Even if the startup is successful then you could find that you aren't part of it.

bowlhead99

Malthusian wrote: »

steampowered wrote: »

For example - if you are a top rate taxpayer - and you invest £10,000 into a company through EIS and the company becomes worth nothing - you would only actually lose £3,150. You get £3,000 reduction in your income tax bill on investment and a further £3,150 income tax relief on the loss.

Only if you have an additional rate tax bill to set it against in both years (which can be the year previous). Which applies to very few people investing in hoverboard manufacturers on CrowdCrap.

He made a typo in saying in that example "you only actually lose £3150" ; actually you would lose £3850, after spending £10000 on the investment, getting £3000 reduction in income tax on investment and then £3150 reduction in income tax (if additional rate taxpayer) to compensate you for the £7000 remaining loss.

Still, it's not true that you only get those glorious reliefs "only if you have an additional rate tax bill to set it against in both years". You don't need an additional rate tac bill in both years. For the £3000 income tax relief in the year of investment (or the year before investment), you only need a tax bill of £3000 to offset, which is the sort of tax bill you would get from a £27k salary. You don't need a £150k salary for the initial relief as it's a flat 30% relief gardless of your income tax bracket.

The second relief mentioned, where losses can be set against income taxes, *is* related to your marginal tax bracket, but even if you're not additional rate tax bracket, you can get 40/45ths of the amount steampowered suggested if you're in the 40% bracket - and a lot of people in this forum reach that at some point in their working lives.

Thrugelmir

johnathanmdavies wrote: »

Open question to anybody who has invested in one of these things already: If you could get your money out (maybe via one of these secondary markets from seedrs or crowd cube) would you?

Start-up's more often or not require further rounds of capital raising. As rarely are profits made in the early stages of the business. Scaling up is costly and requires investment in additional staff etc.