Invest in Green Start-ups
Disclaimer: This is not financial advice. Investing in start-ups is inherently risky, and you could lose all of your investment. Investing in start-ups is not for everyone.
Why Invest in Green Start-ups?
Supporting green start-ups is crucial in accelerating the transition to a sustainable future. These innovative companies are developing groundbreaking technologies that reduce carbon emissions, improve resource efficiency, and promote circular economies.
As the world moves towards zero emissions, driven by increasing government regulations and growing public demand for action, technology will play a key role in achieving this goal. Start-ups, however, often require funding to bring their eco-friendly solutions to market. By investing in these technologies and helping them scale, you could see substantial returns if they are adopted successfully.
In addition to potential financial rewards, investing in green start-ups offers valuable insights and the satisfaction of contributing to climate change solutions.
Anyone Can Invest in Start-ups!
While investing in start-ups sounds like something only high-net-worth individuals do, it’s actually very accessible thanks to crowdfunding sites like Crowdcube and Republic. You can invest as little as £10-£50.
There are also various funds you can invest in where your risk is diversified across multiple businesses, although the minimum investment is usually higher starting at £10,000.
Big Tax Breaks for many UK investments make investing very attractive.
The UK offers some of the most attractive tax incentives for investments in eligible start-ups through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These schemes provide Income Tax Relief, Capital Gains Tax Exemptions, and Loss Relief to investors.
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Description text goes hereSuppose you invest £1,000 in a start-up and you're in the higher rate tax bracket (20% on capital gains and 40% on income tax):
Income Tax Relief (30% for EIS, 50% for SEIS)
With EIS, you receive 30% income tax relief on your investment.
This means you pay £300 less in income tax.
Effectively, the start-up receives £1,000 per £700 of your investment.
Capital Gains Tax Exemption (if shares are held for at least three years)
Let’s say your £1,000 investment grows to £3,000, and you sell:
Without EIS:
You would pay Capital Gains Tax (CGT) on the £2,000 profit.
If you’re in the 40% tax bracket, you’d pay 20% of £2,000 = £400 in CGT.
This leaves you with £1,600 profit.
With EIS:
The profit of £2,000 is exempt from CGT, meaning you keep the full £2,000.
Plus, you also benefit from the £300 income tax relief, bringing your total to £2,300 profit.
Loss relief:
If the start-up fails, you lose your £1,000 investment:
Without EIS:
You realise a £1,000 loss, which you can offset against capital gains.
Assuming you have £1,000 of capital gains to offset, you could claim 20% of £1,000 = £200 back.
This reduces your effective loss to £800.
With EIS:
After receiving the £300 income tax relief, your effective investment cost is reduced to £700.
If the start-up fails, your loss is £700.
You can offset 40% of £700 = £280 against your income tax (or 20% against your CGT).
This reduces your effective loss to £420.
Crowdcube and Republic both make very clear what investments are EIS / SEIS, so look out for these. Going for opportunities like these means your money can go further while also reducing the risk.
How to invest
Through Crowdfunding sites:
Find start-ups to invest in: browse sites like Crowdcube and Republic for start-ups that you find interesting.
Not only do they show live projects, you can see upcoming ones and sign up for early access to be notified when they go live.
Look out for EIS / SEIS tags
Research: read the pitch, you can request the pitch deck for further information.
Read the discussions as there are usually interesting questions being raised, and ask anything you’re unsure of yourself.
Follow the company to stay up to date with any updates they may come up with.
Consider the valuation (this refers to the start-up’s worth), which can be tricky to calculate especially for pre-revenue businesses. Overvalued companies may limit your returns for the risk you're taking. To gauge fairness, I often look to see if larger, experienced investors (outside the platform) are involved, as their participation can indicate a reasonable valuation and strong prospects.
Invest: if you want to invest, then go on ahead!
Note there are platform fees, both Crowdcube and Republic charge 2.5% on the investment amount (min of £5 and max £250) and 5% on any profits.
Claim Tax Relief:
Once invested, the start-up will work with the platforms to process everything including any tax certificates you need to claim relief. Once obtained, you will need to submit this to HMRC.
If you prefer to invest through funds, here are some that you can investigate:
Final Tips
Diversify: Set a budget for your fund and distribute it across multiple start-ups. Even the most promising ventures come with risk, so diversification is key to minimising potential losses. Spread your investment across several companies to reduce risk.
Research: Read the pitch and request the pitch deck for more details. One factor to consider is the scale of impact in reducing emissions. In How to Avoid a Climate Disaster, Bill Gates states that he invests only in companies capable of addressing at least 1% of the 51 billion tonnes of CO2e emissions.
Acknowledge the risks: Start-up investments are high-risk and illiquid. Be prepared to wait years for potential returns, if any.
YOU CAN LOSE YOUR MONEY: Do not risk more than you are comfortable losing.
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