Here’s what you need to know about investing in a start up
James Sanders founded London Diamonds, an innovative online only bespoke jewellery designer, and is an active investor in start-ups across a range of sectors.
An Entrepreneur and investor in start-ups, James Sanders knows a thing or two about how and when to invest. Here’s his advice.
Every successful business starts with a great idea. For example, when we created the concept for London Diamonds, it was after a realisation of the massive mark-up that traditional jewellers slap on diamond engagement rings.
My wife and I wanted to upgrade her ring, and when we started looking around, it became increasingly apparent that we weren’t paying for the diamond alone. Instead, we were forking out for the showroom, the sales people and the whole ‘experience’.
London Diamonds has created an innovative way to get the same quality jewellery, without paying over the odds. The core of this idea has developed into a really successful venture that customers seem to respond to — and that’s why London Diamonds is currently increasing its share of the lucrative engagement ring market in the UK.
Believe in the start-up you’re backing
The mission of a start-up is always important, and to become successful the entrepreneur needs to believe in it 100%. But if you’re looking to invest in a start-up then you also need to believe in what the start-up is trying to achieve.
I’m always open to discussing start-up ideas with individuals who are clearly driven, have a clear strategy and understand their market. This is what interests me in investing with them. I want to work with start-ups that are led by people who are enthusiastic, motivated and forward-thinking.
Finding true ‘value’ is what drives my investment strategy. Asset valuations in general are controlled by market forces and central banks, so I’m far more interested in investing in a venture that has a tangible benefit for their customers and the wider society.
Consider how risk aware you are
Risk is something you need to think carefully about as an investor in start-ups. In my experience, it’s very common for investors to take on too much risk at the beginning. This is generally in their quest for the best possible returns, but it works better to remain grounded and switch the ‘return on capital’ focus to something more like ‘return of capital”.
We’re currently riding out some seismic geopolitical and economic shocks. Turbulent times can cause risks to be higher — or even cause brand new risks to form — but they are also times of great opportunity.
Today, investing in the early stages of a start up is far more accessible, and no longer the reserve of HNWIs. Anyone who has some capital and a good understanding of risk can invest in a start-up.
Equity or convertible crowdfunding are accessible investment options
According to start-up business researchers Beauhurst, equity crowdfunding is now among the top three sources of finance for start-ups in the UK. Between 2011 and 2021, the number of businesses that were funded this way rose from eight to just under 600.
Equity crowdfunding attracts investors because of its accessibility and the possibility of very high returns. There are a number of examples we can look at that show early stage investors have got an enormous return on their initial stake. For example, crowdfunding investors for BrewDog received a return of 2,765%.
However, along with the potential for high rewards, there are higher risks. The Office of National Statistics says that around half of all start-up ventures fail within the first three years of operation — not every microbrewery turns into a BrewDog.
I think there are three main pathways into start-up investment for newcomers — crowdfunding, angel investing or Venture Capital fund investing. All of these are viable options, and some offer a lighter risk than others.
How does crowdfunding work for investors?
Crowdfunding platforms allow a number of investors to pledge a stake towards an early round of investment. The investors get an equity stake in return, and when the company floats on the stock market, starts a new round of funding or is acquired, then the investor cashes out.
This kind of funding has led to the success of various big names, including Monzo and Nutmeg. It’s one of the simplest ways to get involved with backing a start-up. Alternatively, you can invest in convertibles, which convert later on to equity shares. The major difference with these is that you obviously don’t know their value upfront.
Whichever investment method you choose, you need to be sure it’s the right start-up for you. In my experience, investors make the most when they are fully behind the start-up they’re backing. So, they believe in the company’s mission, for example, and of course the services or products the start-up produces.
If you fully understand the sector, believe in the start-up’s mission and want to share in their success story, then investing could be the right move for you.
To find out more about James Sanders and London Diamonds click here.
