Investing in start-up and early stage businesses can be very rewarding, but it involves a number of risks. To invest through Crowdsphere you need to understand five important risks. These are:
Loss of investment
Most start-up businesses fail and therefore investing in these businesses may involve significant risk and it is likely that you may lose all, or part, of your investment. You should only invest an amount that you are willing to lose and should build a diversified portfolio to spread risk. If a business you invest in fails, neither the company nor Crowdsphere will pay you back your investment.
Lack of liquidity
Liquidity is the ease with which you can sell your shares after you have purchased them. Buying shares in businesses pitching through Crowdsphere cannot be sold easily as they are unlikely to be listed on a secondary trading market, such as NZX or Unlisted. Even successful companies rarely list shares on such an exchange. In addition, if you purchase B Investment Shares, these are non-voting shares and may not be attractive to potential buyers. Without a public market to find a buyer for shares it may be more difficult to sell them for a cash return. Investment through Crowdsphere should be viewed as a long term and illiquid investment.
Rarity of dividends
Dividends are payments made by a business to its shareholders from the company’s profits. Most of the companies pitching on the Crowdsphere website are start-ups or early stage companies, and these companies will rarely pay dividends to their investors. This means that you are unlikely to see a return on your investment until you are able to sell your shares. Profits are typically re-invested into the business to fuel growth and build shareholder value. Businesses have no obligation to pay shareholder dividends.
Possibility of dilution
Any investment made through Crowdsphere may be subject to dilution in the future. Dilution occurs when a company issues more shares. Dilution affects every existing shareholder who does not buy any of the new shares being issued. As a result an existing shareholder’s proportionate shareholding of the company is reduced, or diluted – this has an effect on a number of things, including voting, dividends and value. Some businesses that pitch through Crowdsphere offer A-Ordinary Shares, which may include pre-emption rights that protect an investor from dilution. In this situation the business must give shareholders with A-Ordinary Shares the opportunity to buy additional shares during a subsequent fundraising round so that they can maintain or preserve their shareholding. Please check a pitch, and the Constitution of the company to see if the shares you are buying will have these pre-emption rights. Most companies do not offer pre-emption rights for B Investment Shares.
The need for diversification
Diversification involves spreading your money across multiple investments to reduce risk. However, it will not lessen all types of risk. Diversification is an essential part of investing. Investors should only invest a proportion of their available investment funds via Crowdsphere and should balance this with safer, more liquid investments.