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.
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:
- I have little to say in the decision-making process of the startup I’ve invested in
- Since I invest small amounts in a range of startups, the due diligence I perform is a lot more limited than with traditional private equity funding; I don’t get face to face time with the founders, and I need to trust the limited documentation I get through the crowdfunding platform
- A greater risk of failure: venture capitalists get involved in the startup in the early stages and (usually) prevent them from making the wrong decisions; I can only see the startup failing and complain after the fact on the investment’s page discussion forum
- With every startup I need to ask why it is raising funds through crowdfunding: is it a way to promote its product, it has a strong community or it’s just because it couldn’t find a proper large investor and I’m investing in something nobody else wanted to
With all these downsides, I can also reap many benefits:
- It gives me great satisfaction to invest in products that will shape the world we’ll live in tomorrow; it’s somehow addictive
- I can invest in companies I like and help them succeed
- While some of the investments will fail, it also offers me the potential of great returns, if the companies become successful
- It’s a good learning opportunity for; I get to study many pitches, business plans, across multiple funding rounds and see how a typical startup evolves from year to year
- I get to do all these with a very small investment
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:
- Belgium: Bolero (21 million EUR)
- Estonia: Funderbeam (28 million EUR)
- Finland: Invesdor (160 million EUR)
- France: Anaxago (257 million EUR), Wiseed (250 million EUR), Sowefund (45 million EUR), Lita (44 million EUR)
- Germany: Companisto (83 million EUR), Seedmatch (55 million EUR), Aescuvest (15 million EUR)
- Netherlands: Symbid (33 million EUR), Leapfunder (???)
- Romania: SeedBlink (10 million EUR)
- Spain: TheCrowdAngel (22 million EUR), Startupxplore (10 million EUR)
- Sweden: FundedByMe (71 million EUR)
- UK: Crowdcube (>1 billion GBP), Seedrs (> 1 billion GBP)
In North America, these platforms amount to more than 3 billion USD:
- Canada: FrontFundr (10 million CAD), Vested (2 million CAD)
- US: AngelList (> 1 billion USD), Fundable (615 million USD), EquityNet (500 million USD), Startengine (250 million USD), SeedInvest (250 million USD), WeFunder (203 million USD), Crowdfunder (160 million USD), Republic (150 million USD), NextSeed (10 million USD), NetCapital (???), Fundanna (???), CircleUp (???)
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:
- Listing on the public stock market
- Stock buyback by the company itself or a larger investor
- Acquisition of the company by a bigger fish in the market
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:
- Seedrs: Orca Money, Trillenium, Etergo, PixelPin
- Crowdcube: Emoov Group
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:
- Fintech, alternative banking, and investment platforms
- Electric and hydrogen transport
- Green energy and recycling
- Food and beverages, meaning craft beer, meat alternatives, restaurants automation
- Disruptors (ride-hailing, car-sharing, storage space sharing, EdTech, AgTech)
All of my investments were done through Crowdcube and Seedrs, while recently I’ve also invested in a few opportunities from Funderbeam.
I’ve split my portfolio into 5 different groups:
- Finance and payments (10,500 GBP)
- Electric and hydrogen transport (1500 GBP)
- Green energy and recycling (2000 GBP)
- Food and beverages (2500 GBP)
- Disruptors (4000 GBP)
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
- “Normal” investment platforms
- Payments and cards
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.
- Seedrs: Abundance Investments, Assetz Capital, Assetz Exchange, Axia Funder, BrickSave, Brickowner, British Pearl, CapitaRise, CrowdProperty, Crowdstacker, EstateGuru, FutureBricks, Iban Wallet, Investly, Landbay, Lendahand, Neo Finance, The House Crowd, Seedrs, Yielders
- Crowdcube: Ablrate, Charm Impact, Clim8 Invest, Propio
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.
- Seedrs: BUX, Clima Investments, Dabbl, Dozens, Elfin Market, Evarvest, Kestrl, Oval Money, Plum, Pynk, Smarterly, Tickr, WiseAlpha, Wombat Invest
- Crowdcube: Chip, Finanbest, Freetrade, Nutmeg, Propifi, Strowz, WiseAlpha
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.
- Seedrs: CreditSpring, Currensea, Eversend, GoodBox, Paysend, Rooster Money, Snoop, Thyngs, TransferGo, Trisbee, WeSwap
- Crowdcube: Arival Bank, Bnc10, BNext, B-North, Coconut, Curve, Elfinty, Fingopay, GoHenry, ID Finance, Money Dashboard, Muniy
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.
- Seedrs: Coinrule, GeoDB, HubrisOne, Nebeus, PayRue, Ziglu, Zumo
- Crowdcube: Babb, GeoDB, Stark Payments, Wirex
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.
- Seedrs: DeadHappy, Equipsme, Laka Insurance, Pluto, Rnwl
- Crowdcube: Equipsme
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.
- Seedrs: Conigital, Equator Aircraft, Magway, Nevomo, RiverSimple, Sono Motors
- Crowdcube: Andersen EV, Carnot, Dash Labs, Hybrid Air Vehicles, Uniti, Urban Electric
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.
- Seedrs: Grid Duck, Hycube, Igloo Energy, Marine Power Systems, Nova Innovation, Radbot, Ripple, Solivus, Wavepiston, Zeigo Energy, Antaco, GoneWest
- Crowdcube: Celtic Renewables, Gravitricity, PolySolar, Sunstone IP Systems, Symmetrical Power, Elemental Digest, Stroodles
Food and beverages
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.
- Seedrs: allPlants, Cook+Thief, FarmStand, Fetch, Harvest London, Oddbox, Square Mile Farms, StadtFarm, THIS
- Crowdcube: Bang Curry, Daily Dose, Harts Group, Pack’d, Miso Robotics
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.
- Seedrs: Eebria, Innis&Gunn, Love Lane Brewing, Sullivan’s Brewing Co
- Crowdcube: Bedlam Brewery, Brew Monster, Crate Brewery, La Catarina Craft Beer, Unity Brewing, Winchester Distillery, Wooha Brewery
- Funderbeam: Tanker Brewery
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.
- Seedrs: Camptoo, GuestReady, easyHire, HireHand, Houst, Karshare, PassTheKeys
- Crowdcube: Happy Box, JustPark, Mammalo, Workclub
- Seedrs: Agroop, Hectare, Vultus
- Crowdcube: Drone AG, Smart Robot Company
- Seedrs: Sophia Technologies
- Crowdcube: Zzish
- Funderbeam: Stemi
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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