Yes, but in very small size, and only what you can afford to lose.
Crowdfunding is a great innovation. It allows normal people the opportunity to invest in private companies, where previously private equity – and other forms of private capital – was a very exclusive club.
However, investing in start-ups and other small, unproven, companies, is very risky. Most new businesses fail within a short time after inception, and that’s true in every type of business, everywhere in the world. Many of them never make a profit. On the flip side, if you manage to invest in the next Facebook when it is still a start-up, you’ll end up a billionaire. The range of outcomes is huge, but the bottom line is you’re likely to lose your money, and probably all of it.
Investment in private, unlisted companies is extremely illiquid. That is, once you’ve invested, you can’t get your money back until a liquidation event occurs or under extreme circumstances. A liquidation event can be good or bad: it could mean the company is winding up and closing down, or it could mean that it is being bought by another company or listed on a stock exchange. The latter two are known as ‘exits’; a large part of private equity is simply looking for the exit, (although that is a cynical way to think about it).
Like all your investments, you should weigh up the risks and rewards of investing in crowdfunding opportunities. But with private equity, you must consider the additional characteristic that you can’t usually change your mind after investing – seriously, even in emergencies you will probably not be able to get your money back. You must wait for a liquidation event.
You also need to consider the possibility of total loss, which is rarer with publicly listed companies, because with the latter you can usually sell your stock before the company goes completely bust.
By all means, dabble in crowdfunding. It can be fun to be a part of an exciting start-up and follow the founders on their journey of entrepreneurship. You might get free products and other perks and get to attend special investor events. The experience alone can be worth paying money for. It can even be a learning opportunity. But consider that word: ‘paying’. It is more likely than not that you will lose your entire investment – meaning you’ve effectively paid for the experience of investing in a start-up. So, what would you pay for an unusual experience not normally open to the public? £100? If you’re comfortable with the trade-off, go for it. But you should not be investing large sums of money in start-ups, through crowdfunding or otherwise. And you should not be investing more than you’d be comfortable losing in a flash.
Think of it as spending, rather than investing. You may get a lot of value from it; it just probably won’t be monetary value. In case you’re wondering, at To the pound we’ve invested in loads of start-ups (over 50 of them) over the years, but the amounts we’ve invested in a given start-up have ranged from £100 to a few grand. Some might say we’re destined to lose money, but even if so, we’ve gained in other ways, so we’re very happy with our crowdfunding experience.
As a final note, some of you might have friends that have started a business and need investment. They may even be raising money through crowdfunding. A start-up owned and run by someone you know is more risky, not less risky than a start-up run by a stranger. There is a wealth of reasons for this, but just consider the statistic we mentioned earlier: 60% of new businesses fail. Most of those entrepreneurs probably had friends too; your friend’s business is no more likely to succeed, just because they’re your friend. Don’t get sucked in. Treat it like any other crowdfunding opportunity; how much would you pay for the experience? £100? We’re comfortable with you investing £100 in your friend’s business.
We refer to lots of linked posts in this post. We hope that by following the links you can answer any questions you might have, but if anything is unclear in this post, or you have any questions relating to anything investment-related, please submit comments or questions in the section below and we’ll do our best to answer them.
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