Investing in start up companies

[chrishumes1978]

Anyone done this and can offer advice?

Is it worth it, how would you investment be valued, ie is a % of the company? How do you know its all above board and the books are handled correctly?

Any one with good news stories about it? Or bad..

[Benbay001]

chrishumes1978 said:

Anyone done this and can offer advice?

Is it worth it, how would you investment be valued, ie is a % of the company? How do you know its all above board and the books are handled correctly?

Any one with good news stories about it? Or bad..

Ive never done it but i have no doubt it would be based on some multiple of predicted future cash flows.

The difficulty is predicting those cash flows.

[pmanson]

We (as in my wife and I) currently have 4 soon to be 5 investments in different businesses.

All of these are set under EIS. 4 have been directly with the companies concerned and one via seedrs

Are you looking at specific companies?

[mike13]

Put £1000 into a small company, who had what i thought was a good product, less than a year later i got £77 back out of my £1000, i'm not naming them but there were discrepancies in the books, they should never have been allowed to crowdfund, it was through a large crowdfund website who i'll obviously never use again.

I have had success though with a large brewery, still got the shares and hoping they float the business in the future.

[dazmanultra]

I've had a lot less success trying to pick winners myself via EIS than just investing in EIS funds (e.g. Draper Esprit, MMC Ventures etc). The funds distribute your money across 8-12 companies each. I've had a couple of complete failures (e.g. Tyres on the Drive) but a few are valued quite significantly higher (Bloom and Wild is one, Podpoint has already exited for a reasonable return).

The institutional venture capital investors get significantly preferential terms compared to investing via Seedrs or Crowdcube in my experience (e.g. anti-dilution, liquidation preferences and so on).

[sideways sid]

chrishumes1978 said:

Anyone done this and can offer advice?

Is it worth it, how would you investment be valued, ie is a % of the company? How do you know its all above board and the books are handled correctly?

The answer is due diligence. However, it costs money so is more suited to larger companies / investments.

If a company is uninvestable, and/or has sufficient problems / regulatory concerns that professionals won't touch it, it may end up available for crowdfunding.

[xeny]

chrishumes1978 said:

Anyone done this and can offer advice?

.

https://monevator.com/what-are-enterprise-investment-schemes/ looks timely and topical - may be some useful experience in the comments?

[Wilmslowboy]

chrishumes1978 said:

Anyone done this and can offer advice?

Is it worth it, how would you investment be valued, ie is a % of the company? How do you know its all above board and the books are handled correctly?

Any one with good news stories about it? Or bad..

I note you said start ups and not small established businesses.

Both good and bad personal experiences.

Invested a 6 fig number in one startup, no employees, no office, no IP, no bright idea, but a super well organised quality leader (that I had known for 10+ years), value was ridiculous (close to 7 fig) so I only got early teens % of equity, many said I was mad.

I got half my money back through SEIS, and then 2 1/2 years on my stake is worth circa 5 times my net stake, and it gave me a very welcome divided last month.

However at least 4 bad investments that went south - lost everything within a couple of years of investing, (a combo of SIES and EIS, made the pill a little easier to swallow)

Just about to top up some more into another, a 12 month old start up, it's going great guns (product launched and winning big deals) however, I still assume 66% chance of losing everything, but equally 10% chance of a 10 fold gain. In essence it is a gamble (and no more SIES to lean on).

I'd don't do traditional DD if it is a start up, gut feel, credibility of the leader (team) and faith in the plan, I also stick to stuff I know (25+ years in tech businesses).

I do apply some commercial DD such as sensitivity test cash burn, likelihood of running out of funding, true ability to attract and win clients, estimates on cost to build and run products.

As far as governance, Ideally line up behind another investor (who represents all shareholders), or be active (weekly calls, establish clear authority matrix, i.e. rules on expenditure etc).


I have been investing for around 20 years, final words are the very high majority will defo fail - get used to it and make sure the tiny minority that win, can win big for you (to cover the losses from the others).

Edited by Wilmslowboy on Friday 9th April 21:34

[Soleith]

Very dangerous territory imo and if you're looking at trying to pick one or two "good companies" at the startup phase I'd go with some kind of fund option as the likelihood of them going under is high, funds spread the risk and of course some of them will go under but a higher chance that you'll get at least one that survives and thrives.

Working in the financial services industry, a hell of a lot of companies are coming to retail punters via non-traditional means and the due diligence requirements on them are next to nothing. Huge red flag imo and I'd rather focus on getting quality companies to market sooner with retail access to those companies at earlier stages so that the high growth period of these early companies isn't all sucked up by PE/VC money before they go public. Plenty of decent small companies to buy into on AIM and the newly rebranded AQSE growth markets which have tax efficiencies and lots of growth in the tank although the RSP model leaves a lot to be desired.

[Mashwort]

Have been doing this for a few years, 8 investments made, 1 exit, the others all still trading and growing despite the last 12 months. My tips would be:

- only invest what you can afford to loose. I look at these investments as very high risk and thus start with the assumption that I won't got my money back
- decide whether you are interested in start-up (SEIS) or slightly more established businesses (EIS). I prefer stuff at the EIS stage, where the model is starting to be proven, revenue generated etc. Relative lower risk but then lower upside (vs SEIS stuff)
- Due Diligence is key but be realistic, there isn't going to be a big data room and loads of history / documents etc. In the end you are investing in the founder(s) so check them out as far as possible
- I would get a lawyer familiar with SEIS / EIS area to review docs (eg articles, SPA etc) - I have one, not the cheapest but has spotted several things that I didn't in potential deals and I've walked from a couple as a result
- decide on your 'strategy' - are you going to focus on an industry you are familiar with, or perhaps spread over several industries to spread you exposure to a specific segment - no right answer here just be clear on you thinking
- decided on how you can source opportunities - is there stuff in your network you can engage with. If not look at the organisations out there that in effect curate opportunities. For instance Angels Den. I've used these guys a few times and its worked well for me.
- I use a 'check-list' when looking at a new opportunity to filter the chaff out - is there a clear problem statement; does the company have a clear solution to that problem; have they articulated how they will monetise that solution; is there clear traction (eg MVP live, LOIs, contracts, revenue etc); have they shown the scale of the market sensibly; is there a clear GTM; are they clear on who the competition is (and why they will win); who is the team (and is their skill / experience relevant); is there a clear financial plan (with sensible assumptions and clarity on what they will spend my money on)
- decide on the level of involvement you want post investment and agree that (in writing) with the founder as part of the investment. 4 of mine I am silent and get updates now and then, 3 of mine I am active offering help, support and advice including stepping in for a few months to sort out specific issues with one of them

Hope that helps