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Investing in startups – equity crowdfunding risks and returns – preliminary results after 2 years

In June 2018 I made my first investment in a startup. I’ve joined Crowdcube with big hopes and invested 50 GBP in Graphene Composites, a small UK company building all sorts of products based on, you guessed it, graphene. Since then, I’ve invested more than 20,000 EUR in more than 200 European startups, hoping one day I’ll win big, get rich, and live happily ever after.

Published:  Friday, 15 January 2021
Author:  Daniel

After 2 and a half years, I’m taking a pause to reflect on the merits of this investment type.

Why I’m into equity crowdfunding

Equity crowdfunding gives me the opportunity to act as a venture capitalist. It’s the poor man’s alternative to traditional private equity. It’s a good alternative to something systemically wrong in the private funding market.

In the traditional private equity market, I’m not allowed to invest not because my money is not, but under the pretext of protecting me. Being poor makes me stupid as well, according to traditional thinking. Once I have 500,000 EUR/USD/GBP in my account, I suddenly become “sophisticated” enough to invest in anything I want.

Being able to invest only 10 GBP into a startup comes with some tradeoffs:

With all these downsides, I can also reap many benefits:

The world of equity crowdfunding

I only learned about equity crowdfunding in 2018, but this sector is a lot older and pretty large.

There are hundreds, if not thousands, of equity crowdfunding platforms across the world. The latest data I could find, from 2018, estimates the size of the market around 4.7 billion USD. Just by looking at a few platforms I know I can count more than 7 billion USD already invested.

In Europe, I know about these platforms that amount to more than 3 billion EUR in funding:

In North America, these platforms amount to more than 3 billion USD:

This is all data taken from the platforms’ website and it’s far from complete market research. It only gives me an idea of the size of the equity crowdfunding market and its potential for disruption.

What returns I should expect

Typical exits from an equity crowdfunding investment include one of the followings:

There are various small studies related to return on investment from equity crowdfunding. They all use very small data points and results range from an annual return of 10% to 30%. Based on a page I found on Seedrs from 2018, their investors had an annual return of 12%.

One of the more recent success stories from Seedrs is Senta, which just got acquired, bringing its investors a 120x return on their investment. But Senta is a small example in a see of smaller returns and many failures.

The idea is I won’t get rich as I secretly hope, and I should expect more down to earth returns. Annual returns of 10% - 30% seem just fine to me.

So far, I haven’t seen any returns from my investments, but the time horizon needed is much larger than the 2 years I’ve been invested in this industry.

The only palpable result I've seen so far was 4 bankruptcies, wiping out 250 GBP from my portfolio:

Not really encouraging.

What I’ve invested in

I’ve realized after a year there’s a pattern in the investments I make. Almost all my investments fall into one of these categories:

All of my investments were done through Crowdcube and Seedrs, while recently I’ve also invested in a few opportunities from Funderbeam.

My portfolio

I’ve split my portfolio into 5 different groups:

Finance and payments

This is the largest group in my portfolio, amounting to more than half of my portfolio.

I can split it further down into a few different categories:

Crowdfunding platforms

I am or have been invested in all of them, and they seemed interesting, so I also bought equity. It wasn’t their financials that convinced me, but their potential for market disruption.

Investment platforms

I envy the UK’s market financial sector and the ease with which UK residents can invest in all types of investments. I wish Romania had the same mindset, but we’re far from there. This doesn't stop me to invest in platforms that I like and can join.

Payments and cards

Out of this group, I’m most interested in Rooster Money and GoHenry. They tackle children’s finance, a really undeveloped sector. I’m also interested in all those companies providing cheap currency exchange: WeSwap, Curve, Paysend, TransferGo.

Crypto

I’m no big fan of crypto, but some of its potential applications of it are really cool, so I keep an eye on it. I also invested some small amounts into some of the companies that might become more established tomorrow.

Insurance

It was DeadHappy that convinced me I should invest some funds into the insurance sector. Its ads were smart, funny, and talked about real issues they’re solving. Then I added a few more companies to my portfolio.

Electric and hydrogen transport

It’s really interesting how Tesla changed the EV market. Will Sono Motors or RiverSimple ever rival Tesla? I doubt it, but it’s still fun to check out how they’re doing from quarter to quarter.

Green energy and recycling

The UK market has a plethora of green energy-related companies. From energy-producing to distribution, to storage and optimization, there are hundreds of companies to invest in.

Food and beverages

Food industry

The first company I’ve invested in was Oddbox, which delivers fruits and vegetables that don’t get to supermarket shelves just because they don’t look perfect. Since then, it tripled its valuation.

The companies I put my most hopes in are THIS, developing chicken substitutes, and Miso Robotics, a cool company that builds robotic arms that mainly do one thing: flipping burgers.

Alcohol

I’m not sure if I should put too much hope in this sector. However, investing in small beer producers is sort of a statement for me. I hated it when Heineken came to Romania and bought all local beer producers and then all beer started to taste the same (and bad). Having options is great, and the wave of small producers that invaded the European market in the past 10 years can only be beneficial.

Disruptors

This is a more generic sector and I’ve included under its umbrella many things. The general theme being companies that take a problem that was solved in one way traditionally, and through technology, it makes it better.

Shared economy

AgTech

EdTech

Conclusions

I have yet to see any return on my investments after 2 and a half years, but I’m playing the long game here. Certainly, equity crowdfunding is not for everyone.

One thing I have to constantly remind myself is that I really could lose all my investments here, as they’re all very risky ventures.

I see this post as an anchor in the past, to use it in 3-4 years and see if my bet paid out. Would I come to see these investments as a failed experiment, or would it strengthen my belief in this sector?

It will also help me to step back a bit and realize I’ve already invested enough, and I should focus my attention to somewhere else. 

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