A novel way to invest in small businesses

If you’re keen to bypass the traditional financial industry, you are increasingly spoilt for choice. The latest entrant to the market aims to raise money for start-ups. Merryn Somerset Webb examines whether you should get involved.

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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.