Investing in early stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. SCIP is targeted exclusively at sophisticated investors who understand these risks and make their own investment decisions.
Loss of Capital
Most startups fail, and if you invest in a business through SCIP, it is significantly more likely that you will lose all of your invested capital than that you will see a return of capital or a profit. You should not invest more money through the platform than you can afford to lose without altering your standard of living.
Potential investors should note that there can be no assurance that any appreciation in value will occur. The value of investments and the income from them can fluctuate and may fall and there is no certainty that an investor will get back any part of his investment. Any investment made through SCIP should be viewed as a long term and illiquid investment. Investors' interests are unsecured and rank subordinate to the interests of all creditors. In the event that a company becomes unable to meet its debts as they fall due, investors may realize less than their original investment. The price which investors may realize for their investments and the timing of any such realization may be influenced by a large number of factors, some of which are specific to the investment and others of which are extraneous. The ability of an investor to sell shares will depend on there being a willing buyer for such shares at an acceptable price. Consequently, it might be difficult for an investor to realize his investment.
Rarity of Dividends
Startups rarely pay dividends. This means that if you invest in a business through SCIP, even if it is successful you are unlikely to see any return of capital or profit until you are able to sell your shares in the investee company. Even for a successful business, this is unlikely to occur for a number of years from the time you make your investment.
Any investment you make through SCIP is likely to be subject to dilution. This means that if the business raises additional capital at a later date, it will issue new shares in the investee company to the new investors, and the percentage of the investee company that you own will decline. These new shares may also have certain preferential rights to dividends, sale proceeds and other matters, and the exercise of these rights may work to your disadvantage. Your investment may also be subject to dilution as a result of the grant of options (or similar rights to acquire shares) to employees of, service providers to, or certain other parties connected with, the investee company.
Lack of Operating History
Many SCIP investee companies are recently formed entities and have no substantive operating history upon which prospective investors can evaluate likely performance.
Difficulty in Valuing startup Investments.
It is difficult to determine objective values for any startup.
Investing in startups should only be done as part of a diversified portfolio. This means that you should invest relatively small amounts in multiple businesses rather than a lot in one or two businesses. It also means that you should invest only a small proportion of your investable capital in startups as an asset class, with the majority of your investable capital invested in safer, more liquid assets.
Dependence on the Directors
The success of many SCIP investee companies will depend in part upon the ability of their directors to develop and maintain a strategy that achieves the company's investment objectives.
Shares in SCIP investee companies are not and will not be listed on a recognized market in the short to medium term and a secondary market in such shares is not expected to develop. Consequently, it may be difficult for an investor to sell shares and investors may receive less than the amount invested. Share prices may also be subject to fluctuation.
Past performance is not a reliable indicator of future performance. You should not rely on any past performance as a guarantee of future investment performance.
Forecasts are not a reliable indicator of future performance.
There are many tax risks relating to investments in startups and they may be complicated. You should consult your tax advisor for information about the tax consequences while investing in a startup.
The investment may be subject to the certain applicable laws of the investor’s country of residence as well as the country where the relevant start up is registered. The investors are advised to seek adequate legal advice in this relation, prior to making the investment.
This list of risk factors does not purport to be a complete enumeration or explanation of the risks involved. Prospective investors should read the relevant SCIP investee companies' pitch documents in their entirety and consult with their own advisers before deciding whether to invest.