RISKS HIGH ARE

Too many startups don’t make it past five years, and neither will your investment

New rules for equity crowdfunding in Canada permit ordinary people to diversify their portfolios and buy a stake in fledgling startups. But spotting the next Shopify Inc. or Kik Interactive Inc. early in their life cycles — way before they’re worth billions of dollars — is like finding a tiny needle in a tall, messy haystack.

Most small businesses fizzle and die within their first few years. Quantifying the exact rate of failure is no easy task. An Industry Canada report published in 2010 says the failure rate for Canadian companies after five years is in the 50-per-cent range. In a handful of years, will any startup be dead or alive? Flip a coin. Then, consider how well you know the company, how it generates revenue — if it even does — and what has to happen for you to make your money back and then some. But wait, how confident are you in that evaluation?

Another concern will be about the quality, veracity, depth and frequency of disclosure so that an average investor can assess a company’s financial health, progress, strategy and potential. Without that knowledge, you can’t possibly calculate a company’s value.

What if after you invest, you lose your job and need the money? Who will buy the shares you want to sell? Yes, it is still early days for equity crowdfunding, but you can’t log on to your online brokerage account, click a few buttons and sell your shares in a matter of seconds, like you would with shares of BCE Inc. or Royal Bank of Canada. Even if you can resell the shares, there’s much less liquidity in these investments than with one of those blue chips.

If the amount you plan to invest through equity crowdfunding is so insignificant that you wouldn’t flinch at all if it was wiped out, then you can stomach this high-risk asset class. But, if you’re relying on a return or steady income to fund your retirement or your children’s education, or in case of a rainy day, invest at your own peril.