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FINANCE & INVESTING | 29.3.2023
Crowdfunding makes it possible to invest in early-stage growth companies with limited capital. Early-stage companies offer higher returns but carry more risk than investments in listed equities and fixed-interest assets.
Niklas Green, Project Manager at Invesdor Nordics, is a long-time investor in both growth companies and listed equities. For him, crowdfunding offers an ideal opportunity to become a mini angel investor and to invest in growth companies and start-ups with limited capital.
I invest mainly in listed equities and diversify into growth stocks and fixed assets. I invest ten per cent of my portfolio in growth stocks, most of which are not yet listed on the stock exchange. Trading in them is not very liquid, and the companies often don't have a market yet – the risk of such stocks is correspondingly high. But when convinced that this market is emerging, these growth investments obviously offer a much higher expected return than shares already listed. The other 90 per cent of my investments have a much lower risk.
When building an optimal investment portfolio, several factors are essential. The first is, of course, the expected return. I always start by looking at the company valuation and its development forecast. Then, depending on the company, I do a more minor or extensive market analysis to determine whether the company's current market value is appropriate.
I ask myself where the company stands and whether it can achieve its forecasts. Then, I compare that with other current company valuations. I also ask myself how much it would cost to build up a comparable company. This is usually called reproduction value. For example, what would it cost to acquire the necessary patents? Are there other barriers to market entry, buildings or production facilities that must be built first? That is the starting point for the business analysis.
Next, I look at the team. I check how much expertise the employees have and how they are networked. It is also essential to know whether the founders have successfully built up or sold other companies in the past. Have there been exits or IPOs at previous companies? The competitive environment is also important. Are there companies with similar business models? How unique is the business model? Does it offer solutions to a real problem? It is also important to determine what market growth can be expected in the future.
The equity offered to the investors in the financing round is a highly important factor as the company will likely raise more equity in the future. This leads to the question of how high the company's future financing needs are because selling further company shares to new investors dilutes my shares. In this case, I must be prepared to increase my stake in the company by subscribing to more shares in the next funding rounds.
Investors hold shares in a company for different lengths of time. If a company is aiming for an exit within the coming years, I can expect to earn a return soon. With other companies, an exit is still years in the future, and I must be prepared to hold the shares longer. Therefore, when making an investment decision, I must be able to calculate the expected return and the risks of loss.
Crowdfunding offers a way to invest in growth companies even with limited capital. Previously, only venture capital or private equity companies could invest in growth companies. Otherwise, only investors with a lot of money had access to an investment as angel investors. In my view, crowdfunding offers private investors the only opportunity to invest in growth companies that were previously only accessible to professional investors. As a rule of thumb, you should invest around ten per cent of your total portfolio in growth companies and diversify further over at least ten, twenty or more growth companies. That is now possible with crowdfunding.
Through a venture capital fund or as an angel investor, investors must invest at least tens of thousands of euros per company. So, if I want to diversify ten per cent of my portfolio into at least 10 to 20 companies, I will need at least 100,000– 600,000 euros worth of funds available. Considering these investments should only represent ten percent of my total portfolio, I need a relatively extensive portfolio to make this allocation. With crowdfunding, on the other hand, minimum investments are usually between 250 and 500 euros. This makes it possible to invest in growth companies with much smaller portfolios and to diversify one's portfolio more efficiently.
Long before I started crowdfunding investments, I was watching companies and the digital fundraising market. Back then, it was more something that investors did for fun and to support companies. In the past five years, crowdfunding has increasingly become a professional investment opportunity. Small investors now invest in companies that have good future prospects and high return potential. The market is still developing rapidly and maturing every year. In today's market, seasoned investors can find exciting investment opportunities through crowdfunding.
Personally, I have not invested in fixed-income investments, but I might do so in the future. I'm always looking at my overall portfolio and trying to find the best risk-return relationship. In Scandinavian countries, it is common to invest in growth companies instead of fixed-income investments. Fixed-income investments offer investors access to interesting returns, while the risks are substantially lower than equity investments. Investing in fixed-income investments through crowdfunding allows investors to earn a better expected return compared to listed companies' bonds. Fixed-income investments also offer equity investors the opportunity to diversify. In many cases, this is an excellent strategy.
There are good companies that are now having difficulties with their financing because of higher interest rates. This is due to a higher capital cost, making it challenging to finance profitable growth and assets. Investing in a company with a low valuation means you can acquire a more significant share for a smaller amount. As the valuation is lower, the expected return can be higher long term. In these market conditions, I think finding good investment opportunities at a fair price with a high expected return for the next five to ten years is easier.
It is essential to know what you are buying. Before investing in a growth company, you need to know the company's finances, structure, and valuation. Market research is also important. Investors also need a clear investment horizon. Capital in growth-oriented investments is often tied up in a company for five to ten years. If the company needs further financing, additional investments may be required. This is the case with many growth companies. Investors must then either be prepared to accept the dilution of their shares or invest more. To put it simply, do your homework. Furthermore, investors should pay attention to diversification. Investing not only in growth companies and start-ups, but also in less risky investments such as fixed-income investments, shares in listed companies and real estate is important.
The information contained herein is not meant to be, and it shall not be interpreted as investment advice or a recommendation and investors must neither accept any offer for, nor acquire, any securities unless they do so on the basis of the information contained in the applicable investment material of a target company. Investing in securities of unlisted companies is associated with high risk.