A novel way to invest in small businesses

If you're keen to find ways to bypass the traditional financial industry with your money, you are increasingly spoilt for choice. We've written here many times about the various websites you can use to exchange currency (CurrencyFair.com), take out personal loans and save money (Zopa.com) and lend to small businesses (Thincats.com). But the latest entrant to the market takes things a little further.

Seedrs.com, which launched this month, is designed to raise money via ordinary investors for start-ups. Entrepreneurs stick a pitch up on the site. Investors then browse for the ones they think are interesting and invest anything from £10. If the start-up gets pledges for all the money it thinks it needs, Seedrs will do the due diligence on the firm, buy the shares on behalf of the investors and then act as middleman while everyone waits for the firm to be sold, pay a dividend or go bust.

Should you get involved? We'd love to say yes. There's little Britain needs more than a revival of entrepreneurial energy and anything that directs finance to it should be considered a good thing. But there are so many risks here it's hard to know where to start.

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Let's take the risk of failure. Seedrs' site has a bemusing chart that appears to suggest angel investing' has beaten all other investments over the last ten years with an annualised return of over 20%. But, depending on the statistics you look at, 60%-80% of new businesses go bust in their first five years. So that claim seems a bit nuts. And it is.

Milo Yiannopoulos on Kernelmag.com notes that the report on which is it based comes from the British Business Angels Association and Nesta. It's based on feedback from 158 angels, some of whom make good returns. But even when "highly skilled entrepreneurs invest in a balanced portfolio of start-ups, 40% of them lose money overall". The results are also based on "exited investments" only (so those that never return money aren't included) and a mere "9% of exits produced nearly 80% of the positive cash flows". The point? You might make 20% plus. But the odds aren't good. Yet the odds of losing your money are good. Anyone in any doubt need only look at the risks listed by Seedrs on their site (loss of capital, illiquidity, rarity of dividends, dilution etc).

Seedrs will take 7.5% of the money raised by the firms and 7.5% of the returns to investors. So I won't be using it as an investor. I like the idea, but couldn't stand the risk. But if I was planning to start a small business (raising, say, £20,000-£30,000), I might be tempted to give it a go. As Andrew Orlowski says on The Register, with this kind of crowd sourcing you no longer need to go to the effort of finding "a few, big idiots" to get financing. Just use the site to find a "number of smaller idiots". That's a lot easier.