As with any investment, there are risks associated with crowdfunding investments, particularly when investing in startups. The three main risks to consider when investing in equity are:
1. 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.
2. 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.
3. Your holding in the business may be diluted.
If the business raises more funds at a later date (which most startups 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.
In order to mitigate the risks attached to crowdfunding investments, many investors seek to invest in a diverse portfolio of businesses. Many startups do not succeed, hence the importance of having a diversified portfolio, as 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, less than 6% of businesses to fund on Crowdcube have failed, demonstrating the sophistication of crowd investors.