How to be your own dragon for just a tenner Of course the risk remains the same: you could still lose the original investment, however small it is. But the advantage of investing less is that it allows most people to diversify, so while some of their investments may not come to fruition there is the potential - at least over the longer term - to back a growing business that will deliver a handsome return to its initial backers. Jeff Lynn, the founder of Seedrs, said that the term "crowdfunding" covers a wide range of activities. Many companies - like the US-based Kickstarter - have been instrumental in raising huge amounts from such micro-donations, often to back charitable or artistic projects or scientific research. Community projects in the UK that have tried to raise money by such schemes include a "forest garden" in south London. But Mr Lynn said the outlook is different at Seedrs. We are not there solely to raise money for projects we think are cool or worthy, although a lot of them are. We are there because we think this is a fantastic asset class which has the potential to deliver serious returns over the longer term. Our prime motive is to deliver profits to our investors. There is a fee, of course. This isn't paid upfront, but is deducted from any profits made. Once individuals have got back the amount they have made, Seedrs will impose a 7.5pc charge on the remaining profit. In addition, any business seeking funding through the site will pay the same fee if they succeed in raising the funding asked for. Mr Lynn said the key had to be diversification. Whether you have £5,000 to invest or £50,000, it shouldn't all be in just one business. By its very nature these are long-term investments. Most start-up companies don't pay dividends, and there isn't a secondary market to buy and sell private equity shares. Investors are only likely to see a return on their money when their business is either sold, or another private buyer - say a group of venture capitalists - offer to buy your stake in the business at a later stage. Given the gains are unpredictable, and likely to be years away at best, there are generous tax incentives to encourage people to invest in such "Seed Enterprise" investment schemes. Depending on your tax status, you could effectively gain tax relief worth up to 78pc on these investments. To start with, you can claim 50pc income tax relief. In other words, if you have invested £40,000, then you can offset half of this against your tax bill. So if you had to pay tax on £100,000, it could be reduced by £20,000 - meaning you would only be taxed on £80,000. This will be particularly beneficial if this reduction moves you from the 50pc to 40pc tax band. So how do these crowdfunding schemes work? In many ways they obey the principles of Dragon's Den. The companies that get selected to pitch for business (both Crowdcube and Seedrs will do some initial filtering to ensure they are viable and legal businesses) state how much money they are looking to raise, and how they plan to use this money to drive their business forward. On Seedrs the company then has three months to raise this money. If investors don't put up the full amount, they walk away with nothing, and any money pledged to date is returned. This week it was reported that Crowdcube - like Seedrs - is now fully authorised by the Financial Services Authority. This means that it is covered by the Financial Service Compensation Scheme, and investors have recourse to the Financial Ombudsman Service should a dispute arise at a later date. Luke Lang, the co-founder of Exeter-based Crowdcube, said this approval should encourage more ordinary investors to look at this asset class. He said: "When we talk about taking crowdfunding mainstream, it is crucial that people have the confidence of the additional protection they'll get as a result." But investors should be clear on the limits of the protection being offered. Mr Lynn said: "This won't offer protection against failed investment. Not all of these businesses will deliver returns for investors - that is the nature of private equity. However, as an authorised business, these crowdfunding sites have to keep customers" money in separate segregated accounts, and ensure it is invested as stated. If this does not happen, then customers would have grounds for complaint and compensation. Although these companies look similar there are some differences between them, the main one being that when funding is raised, Seedrs holds all the share issues in a nominee structure. In contrast, Crowdcube passes on these share certificates directly to investors. Seedrs argues its structure gives investors additional protection, as it can act on their behalf and negotiate with the company on issues like share price dilution, should they need to raise further funding at a later stage. Crowdcube also requires customers to "self-certify" that they meet the FSA's definition of sophisticated or high-net-worth investors. This is not required on the Seedrs site - although customers do have to complete an online test to ensure they are aware of the risks involved in investing in this asset class. Gavin Jordan, who works in corporate finance for Ernst & Young, has been investing in start-up businesses on Seedrs since it launched in July 2012. "I now have holdings in seven or eight companies," he said, and tends to invest in companies "with a technology bias." I like companies where there is clearly articulated innovative idea, and the opportunity for the business to scale up quickly. Before committing his money he researches the start-up thoroughly, and tries to talk to the individuals behind it. Seedrs has been very useful, he said, arranging events to facilitate this. In one case I wasn't going to invest, as it looked more like someone's hobby, rather than a business opportunity. But after meeting the individual, and seeing their enthusiasm and dedication, I've invested a small amount of money. It's a punt, but I'm confident they will put in every effort to make it a success. Previously he has provided small loans to individuals and businesses in Africa via the Kiva website. The tax-efficient nature of these investments helps limit my risk but this is about supporting entrepreneurs. Hopefully it will do good and help create jobs in the UK.