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Due to the potential for losses, the Financial Conduct Authority (FCA) considers venture capital fund investments to be very complex and high risk. What are the key risks?
What are the key risks?
1. You could lose all the money you invest
- Most venture capital fund investments are shares in start-up businesses, advance subscription agreements or convertible loan notes issued by them. Investments in these shares, advance subscription agreements or loan notes often lose 100% of the money invested, as most start-up businesses fail.
- If Volution fails, there is a high risk that you will lose all your money. Businesses like this often fail as they usually use risky investment strategies
2. You won’t get your money back quickly
- Even if the venture capital fund you invest in is successful, it will likely take several years to get your money back
- This type of business could face cash-flow problems that delay payments to investors. It could also fail altogether and be unable to repay any of the money owed to you.
- You are unlikely to be able to cash in your investment early by selling your investment. In the rare circumstances where it is possible to sell your investment in a ‘secondary market’, you may not find a buyer at the price you are willing to sell.
3. Don't put all your eggs in one basket
- 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.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
4. This is a complex investment
- Venture capital fund investment has a complex structure based on other risky investments which makes it difficult for the investor to know where their money is going.
- This makes it difficult to predict how risky the investment is, but it will most likely be high
- You may wish to get financial advice before deciding to invest.
5. You are unlikely to be protected if something goes wrong
- 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.
- Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.
- The Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover investments in unregulated collective investment schemes. You may be able to claim if you received regulated advice to invest in one, and the adviser has since failed. Try the FSCS investment protection checker here: https://www.fscs.org.uk/check/investment-protection-checker/