Is it impossible to invest in a start-up without losing your investment? No! if we consider that 9 start-ups out of 10 end up disappearing, the last one will develop, thanks to its project, and will gain in profitability on the long term. Investing in start-ups meets the objective of tax exemption and profitability: crowdfunding (participative financing), mutual funds and management mandates allow investors to take on French SMEs, by combining returns and economic support.
The best ways to invest in start-ups
How to invest in a start-up company? The start-ups of tomorrow’s economy are accessible via different ways: investors have several ways to invest in start-ups:
- invest in crowdfunding,
- invest in Fonds Communs de Placement dans l’Innovation (FCPI),
- investing in Local Investment Funds (FIP),
- invest in management mandates,
- investing via a PEA-PME.
The new economy: 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 put their hands in the wallet to become shareholders, lenders or even donors.
Indeed, there are 3 types of crowdfunding that meet different needs:
- Charitable crowdfunding,
- Bonded crowdfunding,
Classic crowdfunding - or participatory financing - is in fact a form of donation: investors finance projects generally carried out by associations, NGOs or individuals making an appeal for funds. The financing then takes the form of unrequited donation or donation against reward (generally the product financed and finished).
Bond crowdfunding, or crowdequity, allows investors to become shareholders of a company through the purchase of securities. For investors, holding shares in the company is interesting in terms of dividends or capital gains on resale, while the company itself uses the money injected to grow. It is also possible to invest in royalties crowdfunding to receive a fixed percentage of the company’s turnover per quarter.
The issuance of bonds (or debt securities) is accessible in bondedrowdfunding, but does not allow the investor to access the capital or to interfere in the strategy of the invested company.
Finally, crowdlending is a form of loan: an investor lends a fixed amount to a company to help it grow, and the company will pay back the full amount with interest. The interest rate is usually around 4-10%, which allows investors to achieve a very attractive return that offsets the risk involved. In fact, many companies go bankrupt before being able to repay the loans paid by investors: Any investment involves risk!
Fiscalizing investments : FCPI and FIP
If your primary goal is to reduce your tax burden, you are bound to be interested in tax exemption schemes. There is no shortage of these for investing in real estate, but how can you invest in start-ups while reducing your taxes? By turning to tax niches specially designed for, of course!
The Fonds Communs de Placement dans l’Innovation (FCPI) and the Fonds d’Investissements de Proximité (FIP) are excellent investments to reduce your income tax with a ceiling of €4,320 for a single person. Investing in start-ups and other SMEs is thus possible, if they are eligible for these FCPI and FIP, while enjoying welcome tax benefits. These funds have been designed to encourage investors to finance the development of French companies and thus support an entire sector of the economy.
However, beware: the companies concerned generally have a rather long maturation period, which makes you “trapped” in your investment for several years. Moreover, we are talking about investments where the risk of capital loss is very real: only invest sums that you are prepared to lose!
Did you know?
You can join an investment club to invest in a start-up.
Delegating your investment: the management mandate
How to invest in the right start-ups?
How to invest in the right start-ups? By opting for a management mandate! This type of mandate allows you to invest in unlisted SME securities while delegating management to a agent who will select the best investment options for you.
Attractive on paper, this type of package can however be quite expensive when you take into account the various fees that arise from it:
- subscription fees
- indirect management fees,
- management fee,
- average annual expense ratio…
It is possible to invest in start-ups and other SMEs via a PEA-PME (for Plan d’Épargne en Actions - Petites et Moyennes Entreprises). This is one of the preferred envelopes for French people to invest in companies, since the PEA has the merit of combining investment dynamism with high performance and tax advantages. As a complementary tool, the PEA is an excellent option for investing with peace of mind.
Why invest in a start-up?
What is the difference between a traditional company and a start-up?
In addition to its legal status, a start-up differs from a company in its structure and its organization: whereas an already launched company 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, in a global way, seeks itself. The company focuses on the efficiency of its operation and the quality of the service given according to a business model already defined.
A start-up does not carry this name for long: it will eventually become a company, or go bankrupt if it does not manage to find the added value that will make the difference.
As you can see, investing in a start-up is betting on its development, it is supporting its project and adopting its functioning. It is all the more important to get as much information as possible about the start-up you are targeting, in order to know your investment and to understand why it will work… or not.
The advantages of investing in a start-up
There are start-ups that can certainly make some companies envious: sales figures that reach new heights, optimal profitability or even a welcome attractiveness. In France, these small companies are very popular, and an investment of this type can be very profitable… as long as you keep in mind the risks of loss, which are always present. How to invest in a start-up in complete security? Unfortunately, there is no answer to this question, but an investment of this type offers several advantages:
- The direct profitability, with sales figures that can increase fivefold,
- The support of the economy and job creation in France,
- The tax reduction for investment,
- The diversification of one’s personal assets,
- The human aspect of a business investment…
How to choose your start-up ?
We have already said it: 9 start-ups out of 10 are destined to disappear. How can you be sure to bet on the one that will succeed in standing out from the crowd? First of all, it is important to understand that there is no certainty: you may well find the rare pearl, but you are never safe from a sudden loss of your invested capital.
Overall, however, you can look at some criteria to determine which startup deserves your favor:
- the team that makes up the start-up: adaptation to change, sustainable growth, diverse skills, complementarity and cohesion, experience, market knowledge, technical skills, etc;
- its market: size, age, attractiveness, competitiveness, current demand
- its scalability: its capacity to increase its revenues while decreasing its expenses in order to generate profit;
- the sustainability of its business model: prospects for added value, lifespan, market maturity, timing.