Seedrs P2P Investing Review – A Real Experience (Updated October 2020)

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Summary of Seedrs Review
There are a few P2P platforms which specialise in equity crowdfunding. Seedrs is the oldest and possibly best regarded in the industry. It is quite difficult to appraise the platform as far as returns go. The stark fact is that most businesses featured will end up delivering no returns for investors. The recent pandemic has also made investing in businesses a much more risky proposition. However, investing in the ones that do go right could make spectacular returns. There also are certain taxation benefits from investing, such as the Seed Enterprise Investment Scheme (SEIS).

Here is how Seedrs compares my other platforms. Note that they are not strictly comparable. Equity investment can be very volatile.

PlatformLinkTarget Rate (%)My XIRR (%)StatusLive Rating
ReviewVariable-5.9%OPEN3/5
ReviewVariableTBCOPEN3/5

What is Seedrs?

Seedrs is a long-established platform conceived in 2012. This allows new businesses to raise capital by pitching to the crowd. Instead of loaning the company money (as seen in others such as Funding Circle), investors purchase shares in the company.

The difference between debt and equity has benefits for both businesses and investors alike. Businesses are not encumbered by debt repayments which is important in the early stages. Therefore, they do not have to repay investors a fixed amount as in the case in loans. In many cases bank loans are unavailable to such businesses. In return, the business pays out in future. This is either in the case of dividends when it makes profits, or in increased equity values in the case of takeover.

From the point of view of an investor, these can be attractive aspects. An investment can repay itself many times over, unlike a loan which pays a fixed amount only. The trade-off is extra risk. If a business fails the entire investment will be lost.

There are no real statistics to show. The majority of the business on the platform are new, do not trade in a liquid market and an overall platform return would be heavily skewed by the successes. Therefore for any investor looking for an income stream on their investment, or even a positive return over the short and medium term may not find Seedrs attractive. Even in the longer term it is certainly the case that there is no guarantee of returns. It is worth bearing in mind that many of the massive businesses today were start-ups at one point or another. It seems likely that some of the stars of tomorrow will raise capital in this way.

Here is a list of Seedrs features:

Established2012
Advertised ReturnsN/A
Investment TypeEquity
Loan SecurityNone
Minimum Investment1 share (price varies)
Cash DragSome
Secondary Market?Yes
Fees7.5% on profits
Provision Fund?No
Auto Invest?Yes
Available in ISA?No
FCA Authorised?Yes
Active on forum?No
Sign-up offers?None

Seedrs sign-up offer

There is a small sign up incentive for new customers. Get £25 investment credit when you open and invest £150 in your first 30 days. This isn’t the same as cash (as it can’t be withdrawn) and must be invested in a business on the Seedrs site.

Is Seedrs profitable?

Seedrs is a trading name of Seedrs Limited. This company has been incorporated since 2009. The last set of accounts was filed on 13 September 2009 and covered the period of 1 year to 31 December 2018. This period showed a loss of almost £4m, up from £3.6m a year before. With cash at the bank declining from £11m to £6.2m we can see that at this current rate of burn there was just over a year before more cash was needed.

And indeed, this is what happened in 2019: Seedrs raised £4.4m on their own platform. With an estimated company value of £55m it seems likely that they could tap the market for money several times.

In October 2020, the leading crowdfunding platforms Seedrs and Crowdcube agreed to merge. It remains to be seen what shape the new company will take.

Seedrs Operating Model

Seedrs do not operate any of the businesses on the platform. They facilitate the investment between business and investor. The process is therefore slightly different to investing in P2P. Each business is different, and they also choose how much of the business to sell at what price. There isn’t a negotiation here, either take it or leave it. Like the stock market, prices of shares are not comparable as it depends on the number of shares on the market.

The prospective business also gives away a wealth of information and a high level of interaction with investors. This is unsurprising, as they want people to invest. This information comes in the form of pitches, cashflow projections, and accounts (some only available on request). Unlike other business P2P sites such as Funding Circle where the company founders are mostly invisible, on Seedrs they fully participate in the raising process, on hand to answer any questions.

Once you have chosen to invest, it is simply a matter of waiting. Campaigns can go into ‘overfunding’, where the company can choose to allocate more equity if they are proving popular. Once the campaign closes, you are a shareholder. Seedrs take care of the documentation and drop you the relevant paperwork.

Exit routes are where investors make their cash. Invariably this lies far into the future, as startup companies almost never pay dividends, preferring to re-invest for growth. Another alternative is that a start-up does well enough to be acquired by a bigger company. Usually this will be at a large premium to the original prices.

Seedrs have tried to remedy this somewhat by operating a secondary market. This is open for a short period once a month, allowing users to trade their shares between themselves. All this work doesn’t come free for either investors or businesses. Seedrs charge both sides. In the case of investors, you are only charged if you sell your investments at a profit, the commission comes in at 7.5%.

How are funds protected?

It should be noted that investor funds are passed straight onto the businesses and do not remain on the Seedrs platform. As such they do not have any sort of protection, and neither does Seedrs operate a provision fund. In the case of Seedrs failing, the share certificates would still be valid.

Pros of Seedrs

Greater Potential: Investing in early stage businesses give a greater upside than fixed rate investments, and your downside is limited to the money you invested.
Tax Benefits: SEIS-eligible businesses give rise to tax advantages, allowing a tax rebate if investment is held for a stipulated time, further reducing the downside. Seek further advice if this point is of interest.
Supporting new business: Directly supporting start-ups can be a plus for some, and quite often they will give out further benefits and discounts if your investment is over a certain size.
Fees only levied on profits: There is no charge for maintaining your account, with investors only facing fees if they sell an investment.
Good communications: Investors are kept in the loop with frequent updates.

Cons of Seedrs

There are also some downsides:

No guaranteed returns: Investing in startups is highly speculative, and it may be some years before you see a return on investment, if any at all.
High volatility: Expect most of these startups to fail over a period of time with the bulk of returns coming from a couple of very successful businesses.
Business Valuations High: One point that escapes many is that the effective business valuation many startups demand is quite high, compared to established small businesses quoted on AIM.
Further dilutions possible: Businesses may require several rounds of funding to get to profitability, and issues of new shares will dilute your overall stake.
Not liquid: Liquidity in some shares is extremely bad. The secondary market does not allow discounting, so you may have to commit for the duration.

Seedrs Investment Strategy

Given the unpredictability of new businesses and their high failure rate, it would be churlish to recommend any particular business over another. My tips are rather general:

Read prospectus: Try and imagine a future for the business. For huge gain in market value, the changes in the business have to be remarkable. If the business can scale up quickly that is a promising sign, on the contrary a small chain of shops may take a long time to expand.
Appraise valuation: The shares offered price implies a valuation for the whole company. Consider whether this is worth paying in terms of what the future cash flows may be. Just because a business is a start up does not mean it is worth an investment.
Keep investments low: Diversification is key. Spreading money across many businesses increases the chances you will hit a successful one.
Because this is the most riskiest form of investing, only money you can afford to lose should be put here.

CONCLUSION

Seedrs provide a very nice way to fund start-ups. It comes in quite a transparent fashion and can confer distinct tax advantages for those who qualify. There is quite a lot more entertainment and excitement for your money relative to other platforms as you can follow the course of your invested companies. However, with some punchy valuations it remains to be seen if this is a path to riches. By taking percentage take of the raise, Seedrs priorities may lie more with the businesses than investors.

 

Disclaimer: This article represents my own opinions and should not be substituted for investment advice. Please research before you invest with any firm. Typically P2P investments are not covered by the Financial Services Compensation Scheme (FSCS) in the way bank deposits are, and there are no guarantees that you will receive the returns advertised (or even a return at all).

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