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Sci-Fi tech, claiming more than is possible

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One of my favourite parts of being a venture capital investor is getting to talk to entrepreneurs who dream big and are building companies at the cutting edge of the possible. Some of the technology being built by start-ups in the UK today only a few years ago would have seemed impossible and the stuff of science fiction. Here though lies the challenge for investors when talking to start-ups – Is this grand vision really possible to deliver today or am I being sold the promise of future technology?
I spend a lot of time talking to start-ups building technology powered by Artificial Intelligence (AI) in all its various forms, and in particular AI is a field where technology is developing very rapidly. There is a strong inter-play between the start-up world and academia, with many start-ups boasting a raft of PhD’s on the team roster.
So how does a humble investor tell if the tech they’re backing is really the best?
I try to keep pace with what start-ups and academics are claiming to be able to achieve, whilst also asking the right questions of entrepreneurs to understand what their technology can do now, compared to what they think might be possible in the future. For example, in a heavily-researched field like Artificial Intelligence, it is unlikely that a new start-up will be light years ahead of everyone else. Articles like the one below are a great resource for me, both clarifying some of the limits on what AI can currently achieve and also providing some handy questions to probe CTO’s with on the limits of their technology.

Estimated reading time: 2 min

 

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    1. If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
  2. You are unlikely to be protected if something goes wrong
    1. Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
    2. Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
  3. You won’t get your money back quickly
    1. Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    2. The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
    3. If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    1. Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    2. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest
  5. The value of your investment can be reduced
    1. The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    2. These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

 

If you are interested in learning more about how to protect yourself, visit the FCA’s website here.