The UK’s largest digital wealth manager Nutmeg has just announced it plans to undergo a round of ‘crowdfunding.’ But what is this, and should you get involved?
Nutmeg is a self-styled ‘digital wealth manager.’ What this means in practice is that you save your money with them and they select investments on your behalf, depending on your appetite for risk.
Now, however, it is offering customers the opportunity to invest in the company itself. Crowdfunding is a means for a business to raise money without resorting to an initial public offering (IPO), in other words, listing on a publicly-traded stock exchange.
This gives the company more control as publicly-traded shares are at the whim of market forces. The value of the company could go down as well as up based on investor sentiment.
Crowdfunding raises money like with an IPO, but avoids the pitfall of such a move as the value of what you are investing in isn’t as obvious.
Digital bank Monzo famously undertook a round of crowdfunding last year, and raised a prodigious amount of money in a very short space of time.
The firm says it wants to “democratise ownership” of the company. As of yet however, it has not announced how much it wishes to raise, or when it plans to launch the round of funding.
Most recently, investment bank Goldman Sachs invested a hefty amount of cash in the business, joining other firms such as Convoy, Taipei Fubon Bank and Balderton Capital.
Martin Stead, chief executive officer, Nutmeg, says: “Nutmeg was the first digital wealth manager to launch in Europe and now we’re opening up ownership of our business to give eligible customers the opportunity to invest alongside institutional investors, venture capitalists and leading entrepreneurs.
“This is an incredibly exciting time for Nutmeg. We’re investing in new features for our UK customers, while also taking Nutmeg to new markets around the world, with our first international launch imminent.”Nutmeg chief executive Martin Stead
To be eligible for the Nutmeg crowdfunding you’ll have to be a Nutmeg customer, and have an account on Crowdcube, the firm handling the venture on Nutmeg’s behalf. This is the same as the process that Monzo underwent in 2018.
The risks of crowdfunding
Participating in crowdfunding is a much riskier investing activity than investing in ETFs, funds or investment trusts.
Investing in these products spreads risks as your money is used to buy a panoply of companies. If one of those companies goes bust, you will still have others in the fund to maintain the value of your cash.
However, investing through a crowdfund is purely investing in the fortunes of one firm. Crowdfunding is even riskier as often companies that engage in the practice are younger, financially unproven firms that still rely on investment cash to expand, and are often not yet profitable businesses.
Anyone who buys shares in the unlisted company would have to hold onto the shares until what is called an "exit" took place. This can take the form of a share buyback from the firm, an initial public offering (IPO), where the company lists on the stock market, or is sold.
This makes shares bought in the Nutmeg crowdfund a very ‘illiquid’ asset. Unlike buying shares on the stock market, an investor has to wait for one of the aforementioned events to occur if they wish to make a profit on their money. And of course, it is highly possible the shares' value will go down and you'll lose money.