Wondering how to invest in a start-up in 2020?

Investing in a start-up without losing your stake, impossible? No! If we consider that 9 out of 10 start-ups end up disappearing, the last one will develop, thanks to its project, and will gain in profitability in the long term.

The start-up investment meets the objective of tax exemption and profitability: crowdfunding (participatory financing), mutual funds, and management mandates allow investors to tackle SMEs, by combining returns and economic support.

The best ways to invest in a start-up

How to invest in a start-up type business? The young shoots of the economy of tomorrow are accessible via different channels: investors have several means to invest in start-ups in 2020: 

• Invest in crowdfunding,
• Invest in Mutual Funds for Innovation (FCPI),
• Invest in Local Investment Funds (FIP),
• Invest in management mandate,
• Invest via a PEA-PME.

1. Economy 2.0: crowdfunding

 

Many crowdfunding platforms put investors in touch with companies with projects to help them develop. Business creation needs financial support, and investors are ready to step up to become shareholders, lenders, or even donors. 

3 types of crowdfunding meet different needs: 

• The charitable crowdfunding, 
• The bond crowdfunding,
• The crowdlending.

Crowdfunding makes it possible to finance many business or association projects.

The classic crowdfunding – or crowdfunding – is a form of giving: investors typically finance projects by associations, NGOs, or individuals making a call for funds. Funding then takes the form of a donation without consideration or donation for reward (generally the product financed and completed).

The bond crowdfunding, or crowd equity, allows investors to become shareholders of a company through the purchase of securities. For investors, owning shares in the company is beneficial in paying dividends or capital gains on resale, while the company itself uses the money injected to grow. It is also possible to invest in royalty crowdfunding to receive a fixed percentage of the company’s turnover per quarter. 

The issue of bonds (or debt securities) is accessible through bond crowdfunding but does not allow the investor to access capital or interfere in the strategy of the company invested.

Finally, crowdlending is a form of loan: an investor lends a fixed sum to a company to help it grow, and the latter will reimburse it in full by adding interest. The rate of the latter generally revolves around 4 to 10%, which allows investors to achieve a very attractive return that counterbalances the risk-taking. Indeed, many companies file for bankruptcy even before having been able to repay the loans paid by investors: any investment involves risks!

There are many crowdfunding platforms : KissKissBankBank, Ulule, WeDoGood, SmartAngels (now closed), etc.

2. Tax exemption: FCPI and FIP

FCPIs and FIPs diversify your assets and reduce your taxes!

If your primary goal is to reduce your tax burden, tax exemption systems are necessary of interest to you. There is no shortage of these when it comes to investing in real estate, but how do you invest in start-ups while reducing the amount of your taxes? By turning to tax loopholes specially designed for, of course! 

The mutual funds in Innovation (FCPI) and the Investment Fund Proximity (FIP) are excellent investments to reduce the amount of your income tax with a ceiling of 4,320 euros for a single person. Investing in start-ups and another SMEs is thus possible, if they are eligible for these FCPI and FIP, while benefiting from welcome tax advantages.

Be careful, however: the companies concerned generally have a fairly long maturity period, which makes you “prisoner” of your investment for several years. Also, we are talking about investments where the risk of capital loss is very real: only invest sums that you are ready to lose!

Did you know? You can join an investment club to invest in a start-up. 

3. Delegate your investment: the management mandate

How to invest in the right start-ups? By opting for a management mandate! This type of mandate allows you to invest in unlisted securities of SMEs while delegating its management to an agent who will be responsible for selecting the best investment options for you.

Attractive on paper, this type of envelope can however prove to be quite expensive when taking into account the various costs that result from it: 

• Subscription commission,
• Indirect management fees,
• Management fee,
• The average annual fee rate

It is possible to invest in start-ups and other SMEs via a PEA-PME (for Action Savings Plan – Small and Medium Enterprises). 

Why invest in a startup?

• What is the difference between a classic business and a start-up?

In addition to the legal status, a startup differs from a company by its structure and its organization: where a company already launched will execute a business model while optimizing it as it goes along, a start-up seeks to find this business model.

The start-up explores its market, experiments with different processes to define the one that will work best, seeks to develop economically, and, globally, seeks itself in away. The company focuses on the efficiency of its operation and the quality of the service given according to an already defined business model.

A start-up does not wear this name for long: it eventually turns into a business, or files for bankruptcy if it cannot find this added value that will make the difference.

As you will have understood, investing in a start-up is betting on its development, supporting its project, and adopting its operation. It is all the more important to learn as much as possible about the start-up you are targeting, to know your investment, and to understand why it will work, or not.

The advantages of investing in a start-up

Start-ups are popular in the whole world and represent a valuable investment.

Some start-ups can undoubtedly make some companies green with envy: turnover that is reaching peaks, optimal profitability, or even welcome attractiveness. In the USA, these small companies are popular, and an investment of this type can pay off big, on condition that you keep in mind the risks of loss, which are always present. How to invest in a start-up safely? Unfortunately, there is no answer to this question, but an investment of this type offers several advantages: 

• The direct profitability, with revenues that can quintuple,
• The support of the economy and job creation in
• The tax reduction due to investment
• The diversification of his assets,
• The human aspect of a work placement 

How to choose your startup?

We have already said that 9 out of 10 start-ups are destined to disappear. How to be sure to bet on the one that will manage to stand out? First and foremost, it’s important to understand that there is no certainty: you might just find the rare pearl, but you are never safe from a sudden loss of your invested capital.

Overall, however, you can look at certain criteria to determine which start-up deserves your favors: 

• The team that makes up the start-up: adaptation to change, sustainable growth, various skills, complementarity and cohesion, experience, market knowledge, technical skills, etc.
• It’s market: its size, its age, its attractiveness, its competitiveness, present demand.
• Its scalability: its ability to increase its income while reducing its expenses to generate profit.
• The sustainability of its economic model: prospects for added value, lifespan, market maturity, timing.