As with any investment, there are risks associated with crowdfunding investments, particularly when investing in startups and early-stage businesses.
The three main risks to consider when investing in equity are:
- The business may fail or won’t grow enough to deliver a return to investors
If this happens, you won’t receive any of your money back.
- Even if the business succeeds your investment is likely to be illiquid
This means your investment will be locked into the business for a long time – often several years – and you are unlikely to be able to sell your share or withdraw your investment quickly, should you need to. You also may not receive dividends on your investment as the business looks to reinvest any profits to facilitate further growth.
- Your holding in the business may be diluted
If the business raises more funds at a later date (which most startups and early-stage businesses do) the percentage of equity you hold in it may decrease relative to what you originally bought. Dilution in itself is not a bad thing, but it is something you need to be aware of.
You can somewhat mitigate the risks attached to crowdfunding investments by investing in a diverse portfolio of business. Many startups don’t succeed, but having a diversified portfolio means that even if just a few of your investments are successful, they may deliver a large enough return to make up for any potential losses. To date, only 14% of businesses that have raised money on Crowdcube have failed, demonstrating the sophistication of crowd investors.
Learn more about the risks of equity crowdfunding investments in our full risk warning.