Seedrs: Crowdfunded Private Equity for innovative startups

Are you still dreaming of investing in the next big thing before it becomes big? Me too! But unless you had a friend of family member with a really good idea, an equity investment (meaning you own part of the company) in a non-tradeable company was all but impossible – until the likes of Seedrs, Crowdcube and others came along. In this post, I will describe and review Seedrs, which is not a sustainable investment platform per se, but funds a surprising amount of startups that pride themselves of being green or social.

If you’re not familiar with equity crowdfunding, do check out the paragraph I wrote on it here.

According to Seedrs, their mission is to “make it simple to buy into the businesses you believe in and share in their success”. What this means for you as a potential investor is that you can invest in an early stage company before it (hopefully) becomes a big hit – and therefore expensive. Seedrs is based in the UK with offices in London and Portugal. This shows in the startups they help funding: at the time of writing, 46 of their 50 investment opportunities are based in the UK, with the remaining four from other EU countries.

By far the most prominent company to raise money on Seedrs is Revolut, a British fintech startup, now valued in the billions. Revolut was so successful that Seedrs had to exclude it from some analyses of its portfolio performance to avoid skewed results. Other companies are more modest in size, such as Riversimple, a maker of small Hydrogen cars with a service-based business model or NOVA innovation, a developer of tidal energy. More curious examples include the AFC Wimbledon as well as Seedrs itself.

Seedrs has recently announced a merger with its competitor Crowdcube. According to Techcrunch.com, the value of the combined company is $140 million and will be one of the world’s largest private equity market places. The resulting platform might look quite different from what I’m reviewing here, so I will update this article once the new platform has been rolled out.

Letting the cat out of the bag: The pitch.

Each start-up raising money on Seedrs has their own page to give you an overview and to pitch their idea following a set pattern. The top of the page shows the startups funding target and how much has already been pledged by investors. Once the limit is reached, the company’s owners can decide to stop and call it a success – or they can go into overfunding. This means they would give away a higher percentage of their stake in the company in return for more additional capital. How much equity is up for sale is also mentioned. If the company interests you but you’re not quite ready to invest yet, you can click the Follow button to receive updates on the campaigns progress.

Further below, is where it gets interesting. The pitch usually starts with a short video in which the team energetically explains why their idea will change the world in one way or another. Below, you’ll find more details on their product or service, strategy, what they have achieved so far and the team behind it all. This gives you a rough idea, but not enough reason to put your money in it. Before you even think about doing so, you need to find out as much about the company as you can, starting with it’s “pitch deck”. Available under the “documents” tab, this short presentation includes some additional info on the company’s financials and strategy.

Critical questions benefit everyone

But what I find most valuable – and where Seedrs stands out from the crowdfunding crowd in my opinion – is the “discussions” tab. Here, investors can ask all sorts of questions, regarding competition, intellectual property or other things they deem relevant. I for instance make it a point to check a company’s environmental credentials, if they don’t mention anything in the pitch deck. Some Seedrs investors are quite critical, which is good for everyone else, too. If the company’s response is unconvincing, they will point that out, potentially raising a red flag for other investors. Fortunately, this doesn’t happen too often. Replies often come quick and from the founders directly, sometimes surprisingly thorough.

I see two reasons for this lively discussion. First, companies funding on Seedrs must already have a certain track record, meaning they have already dealt with many of these questions before. Second, one core value added by Seedrs is the due diligence they conduct. As one founder assured me, claims made by a business seeking funding are verified by Seedrs. For instance, if they boast about lower CO2 emissions than competing services, they must provide evidence.

Still, a few startups leave valid questions unanswered for several months. Whether this means they have no good answer or are just busy growing their business is hard to say.

How a Seedrs investment works

Properly understanding private equity investments is somewhat more challenging than investing in regular shares. I will not go into the details of overfunding or company valuation. If these mechanics interest you, check out their excellent Help Section.

After setting the amount you want to invest in a given company, you will be asked to pay by card or via bank transfer. From then on, you will start receiving updates about the campaign, but also new questions being asked. It can take anywhere between a few weeks and a few months before you actually receive your share certificate as a PDF.

So now that you’re a proud owner of a piece of startup – what now?

Now you will receive regular shareholder updates directly from the investee, usually quarterly. This allows you to follow your company’s progress and challenges. But mostly, it’s time to wait. For a long time. A private equity investment has a time horizon of several years at least. What you’re waiting for is for the company to “exit”, meaning for a buyer to show up and purchase the shares from the existing investors at a higher price. This will take several years at least and is by no means guaranteed to happen. Check out this article to learn more.

That’s a crazy fact, but if you happen to be a crazy person, you might nevertheless want to invest in more cool startups. At some point your Seedrs portfolio might look something like this:

While the pie chart is self-explanatory, the IRR (internal rate of return) is not. How can there be a return if you sit on these shares for several years? Part of the IRR shown on the above picture is due to currency fluctuations. I invested in GBP (£) but am displaying the value in EUR. But there’s another reason. Say you invested £180 in 2019 in The Cheeky Panda, a company producing toilet paper from Bamboo, at a share price of £18. Toilet paper being a precious commodity in 2020, The Cheeky Panda is growing and requires more capital to expand. So they launched another funding round, but at a higher share price of £36, owing to their success in the last year. Seedrs takes these new valuations into account and now values your investment at £360. The value of your portfolio has increased.

For a share of a publicly traded company this would mean I can now sell my shares at a profit. But this is private equity, so you have to wait for the company to exit – or go find yourself a buyer. And this is where the Secondary Market comes in.

The secondary market, a mini stock exchange

The secondary market is a relatively new addition to the Seedrs platform. It allows you to trade shares with other Seedrs investors, adding flexibility to an otherwise very rigid investment. The main benefits are:

• Sell your shares if you need the money back sooner than expected
• Diversify your portfolio by buying shares of companies that have raised capital on Seedrs in the past
• Buy more shares of companies you have already invested in but that you have grown to love more over time

The secondary market is only open for one week each month (a “trading cycle”), owing to the administrative requirements of transferring the shares.

My experience with the secondary market: I have traded only once when I discovered that Abundance Investment (see separate article) had previously raised via Seedrs – and I thought it would be fun to own part of the platform I’m investing with. The process is straightforward and similar to buying shares on Seedrs during funding rounds. The only difference is that the seller has to confirm his or her willingness to sell before the shares are transferred.

“Read before investing”

Private equity investing is super fun! Invest in companies at the forefront of technological and societal change? Check! Potential for stellar returns? Check! According to their own Portfolio Analysis, the performance for all investments on Seedrs up to 2018 was 10-12% year, depending on the measure. That’s pretty neat.

But nothing in life is certain. While some investments might double or triple in value, others might never actually take off or even go bust. This is why Seedrs advises investors to avoid large individual investments and to diversify instead. Diversification is always important, but even more so with high-risk investments such as private equity. At one point, Seedrs’ official recommendation was to invest in 10-15 different startups to benefit from the high growth potential while keeping risk in check. The portfolio analysis referenced above also found higher returns for more digitised startups as well as those with a B2B (business-to-business) focus, as opposed to selling to consumers directly.

The bottomline is: don’t invest too much of your funds in startups. You will be fine if you pick just one or two young firms that you want to support with a small sum. Make sure you are well diversified across other asset classes, be they conventional or unconventional.

Conclusion: Pros & Cons of Seedrs

Pro: Broad range of really cool investments, that could actually change something. I mean, where else can you invest in tidal power or upside-down houses? Ok, maybe the last one is a bit silly, but there is a wealth of bright ideas available that can make a real impact for our society and its fun to just browse, investing (or maybe: donating) a few bucks here and there. Some of these ideas might not get enough money to grow any other way, which means YOU are actually making an impact as well. And who knows, maybe you will actually hit those triple digit returns!

Pro: Due diligence and interaction with founders. So far, I haven’t come across anything fishy on Seedrs and the fact that they are so successful speaks for itself. Still, never switch of your brain. Instead, make use of the opportunity to ask the founders questions (many even answer stupid ones). Read other investors’ questions and if the replies don’t satisfy you, don’t invest.

Pro/Con: The secondary market might seem like a nice-to-have at first glance. And it is, when it comes to buying. But the possibility to sell your investments earlier than planned is very important when it comes to trusting an investment in the first place. Bear in mind that there is no certainty that you can actually sell via the secondary market, especially if the company you’re selling is in trouble. You might still lose the money you invested.

Con: High risk requires good diversification which takes time. Being serious about investing in private equity and investing more than a few hundred bucks means you need to read up diligently on every investment. And not just the material provided, but also doing your own research. If you’re not willing to do that, stick to small investments that you don’t care to lose – and then it’s questionable if it’s still worth your time.

Category	Crowdfunded Private Equity
Country of origin	United Kingdom (offers are mostly denominated GBP, some also in Euros)
Geographical focus	United Kingdom and European Union
Minimum investment	£10, but always a multiple of the share price. If the share price is £3, minimum investment for that startup will be £12.
Cost	Seedrs is not free, although it may seem so at first. While they don’t charge investment fees, they take a pretty hefty cut once the investor can sell his or her shares at a profit. But hey, they helped you to make that profit in the first place, so that’s only fair!
Referral programme	£25 for both the existing and new customer. If you don’t have a friend already investing with Seedrs, you can use my code when signing up to support this blog: REFERRAL LINK
Similar offers	Crowdcube.com (which will soon merge with Seedrs)