Investing in Startups in the UK: How to Invest and Where to Start

If you are looking to diversify your investment portfolio further, have you considered a plan to invest in startups in the UK, sometimes also referred to as early-stage businesses? It’s something that may well prove of interest. If you’d like to learn more about a startup investment UK strategy, this Moneyfarm blog will be an interesting read.

What is a UK startup business?

Some people think of early-stage companies or startups as small businesses. However, many global hi-tech giants also wear the “startup” badge. A startup is a new emerging company. It might or might not operate in an emerging market, but as a new entity, it needs capital which is where startup investment opportunities in the UK are to be found.

The risks of startup investment opportunities in the UK

Suppose you invest in startups in the UK or anywhere else. It would be best if you accepted that there is a significantly high chance of losing some or all of your investment in the pursuit of a good return.

Although a business idea might sound good, many factors could go against it, including whether or not potential customers think that the product or service that startups are offering will be of interest.

Another risk is the people behind the startup. What business experience do they have? Are they likely to be able to navigate and surmount any of the problems early-stage companies might be faced with?

If you are considering startup investing in the UK, you must do your due diligence comprehensively.

For example, you might be approached by a talented chef who wants to launch a restaurant. But more than being a skilled chef is required. How much does it cost to open or start a restaurant, and how quickly will it be before it breaks even and returns a profit?

In the same way that as an investor, you must analyse your short vs long financial needs, so must our chef. Even if they haven’t done their due diligence accurately, you must do yours if you’re going to invest in a startup in the UK.

How startup investment opportunities in the UK can benefit your portfolio

It goes without saying that when you invest in a startup UK business, you hope it will be successful. If it is, you could see a handsome return on your investment. But there are also other advantages to investing in startups in the UK. There are generous tax reliefs.

The tax relief and incentives if you invest in a startup business in the UK

If you’re asking yourself, how do I start investing? – one of the most important pieces of advice is to build a diversified portfolio. When you invest in startups, it involves risks, including losing your entire investment.

It’s one of the reasons that the UK government launched the EIS (Enterprise Investment Scheme) initiative. It’s to encourage you to invest in what might prove a higher risk than normal when you invest in tech startups in the UK that are still in the early stages of their growth.

If you are a knowledgeable, sophisticated investor, you can take advantage of the 30% discount in terms of income tax relief on the shares you purchase.

Then there is the SEIS, short for “Seed Enterprise Investment Scheme.” As the word “seed” suggests, these are businesses in their earliest stages of development. Investing in these will win you 50%-worth of tax relief. There are other benefits available, too – for both schemes.

Startups to invest in, in the UK – what to look for

To briefly summarise some of the points discussed, plus a few new ones, here is a short list of what to check out before you invest in a startup business in the UK.

• Look for how much cash the venture needs and how long it will be before the new venture runs out of cash – the burn rate.
• Check out who owns the business – its capitalisation table
• Research the quality of the team who is running the business
• Look for social proofs – endorsements, reviews, brands they partner with, and their sales metrics.
• Check the company’s startup date. If they are still in the early stages of formation, they may not be ready for investments and might need to learn how to upscale.
• Look to see if the business has any quality angel investors on board – people whose judgement you trust.
• Does the company have plans to announce an IPO (Initial Public Offering) date? This will indicate when you might expect a return on your investment in startups in the UK.
• If appropriate, ensure that the company has registered any patents, protections and trademarks.

If you are going to invest in UK startups as part of your investment strategy, referring to the above checklist is the place to start.

Investing in startup companies in the UK via crowdfunding

There are many ways on how to invest money, and using a crowdfunding platform appeals to many investors. It’s a way to invest in UK startups with relatively little exposure as you are but a small part of a much larger investment pot.

However, you need to take care if you invest in startups in the UK via crowdfunding, as there is no real protection. It may be challenging to withdraw your investment early. This type of investing is considered long-term and high-risk. To make a decent return (if the investment is successful), you may have to wait until the company goes public or is bought by a new owner.

It’s worth checking that any crowdfunding platform you use has Financial Conduct Authority approval and offers FSCS (Financial Services Compensation Scheme) protection. Still, even if it does, it won’t cover poor investment performance.

Do startups pay dividends?

Generally, startups do not pay dividends to their investors. Instead, they will more likely reinvest any profit to grow the company. Also, you have to bear in mind that shares in startups are not quoted on the London Stock Exchange, so no, startup investors in London or elsewhere will not receive dividend payments.

According to review42.com, less than 50% of startups make it to their 5^th year. So with the high risk and the probable long-term wait for returns, a startup investment in UK companies might not suit your investor profile.

Nonetheless, many investors with a general investment account might decide to invest in startups in the UK to diversify their portfolios. SMEs are still the main driving force in the UK economy, so it’s just as well that many investors still champion their cause when starting up.

Investment gateway with Share Investing

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FAQ

What is a startup investment?

Startup investing refers to the practice of making investments in companies before they reach the profitability stage. It consists of making an early-stage investment (usually a seed) in a startup. In addition to the funding from the founder(s), some startups may seek additional funding at some point during their lifecycle.

How can I invest in a startup UK?

An individual can invest in a startup in the UK through direct investing by buying shares of the company as a business angel investor. Investors can also use online co-investment platforms or equity crowdfunding platforms to invest in a UK startup. With indirect investments, an individual investor can use SEIS, EIS funds or VCTs, which are professionally managed funds in the UK, to invest in startups or small businesses.

What to look for while investing in startups?

Investors looking to put some money into a startup business in the UK should consider several parameters. These include a comprehensive business plan, product uniqueness, investor fit, market potential and size, management team capability, business scalability and traction, and market opportunities and competitive advantage.

Do startups have to pay back investors or pay dividends?

Usually, startup businesses do not pay dividends in their early stages, as all earnings are reinvested until they are profitable, stable, and self-sustaining. However, a startup company is not obligated or required to repay investors or pay dividends.