Numerous stories are spreading around about how startup companies are generating real money for their investors, making them rich, almost overnight. There are plenty of investment opportunities to be had and several investment strategies to choose from. Startups are usually raising funds either through venture capital, angel investing, equity crowdfunding, or other similar ways. Funding these companies during their early stages of development can prove to be a million-dollar investment for many.
However, many people are under the impression that only venture capitalists, accredited investors, or high net worth individuals can invest in startups. Fortunately, this is not the case. Since 2012, with the passing into law of the Jumpstart Our Business Startups (JOBS) Act, all citizens can invest in private companies. In 2016, the Securities Exchange Commission (SEC) also adopted several rules that made it even easier for private individual investors to get in on the game.
Basic Startup Investing Considerations
But before you decide to invest in new startup companies, there are several things that you need to consider. For starters, startup investments are high-risk, high-reward. In fact, nine out of ten startups fail within their first several years of operation.
For this reason, your investment portfolio shouldn’t be comprised solely of startup equity, but should also include things like real estate, stock market investments, mutual funds, savings accounts, etc. Most seasoned startup investors will keep these types of private investments to below 10% of their entire investment portfolio to mitigate this high risk. Nevertheless, if the startup succeeds and goes public, is bought off, or starts issuing dividends, you’ll be looking at an exponential return on your initial investment.
That said, you will need to develop an investment strategy of minimizing your risks and maximizing your profits on a minimum investment. If you’re starting on this journey, here is the easiest way to invest in startups.
Put simply, equity crowdfunding is a means by which early-stage companies are raising capital from private individual investors (crowds) through the sale of securities. These can include things like shares, debt, convertible notes, revenue shares, etc. These securities are not listed on the stock market.
Funding startups as an individual investor is entirely possible via crowdfunding. There are certain restrictions, however, per the JOBS Act. You’ll need to be over 18 years of age and there is a limit on how much money you can invest. This amount is based on your annual income and net worth. There are also several types of crowdfunding.
On the one hand, you have donation-based and reward-based crowdfunding. This is where potential investments are made either for altruistic reasons or are rewarded with a discount or some sort of a prize. And once these perks are received, the contract between the company and investor is over. With equity-based crowdfunding, on the other hand, startups provide securities in exchange for raising capital. As such, investors have skin in the game, standing to make large amounts of profits if their company grows and is sold off or goes public.
You don’t need to be a close friend or family of a startup founder to invest in their early-stage company. Nor do you have to travel up and down the country looking for companies in which to invest. You can use an investment platform for startups, where you can explore multiple equity-based crowdfunding investment opportunities. Below are some of the top startup crowdfunding platforms that you can use to search and support companies.
- WeFunder has helped support over 250 companies by raising $110 million from private investors. Its startup fundraising goal is to fund over 20,000 businesses by 2029. Through this platform, you can choose any startup to invest in in exchange for stock, debt, or convertible notes. That money is placed in an escrow account, and if the startup reaches its financing goal, the sum will go to the company. If not, the money is returned to you.
- Republic is another investment platform that allows you to purchase a stake with an early-stage company for minimum investments as little as $10. Founded by alumni of AngelList, a popular investment platform for accredited investors, Republic also conducts some due diligence before putting companies up for investment. In addition, it hosts several investment groups and facilitates the exchange of ideas and advice between individual investors.
- Seedinvest claims that only 1% of the companies that seek funding through it are accepted. This is the result of due diligence performed in terms of potential viability. For a 2% commission fee and a minimum investment of $200, you can also use its auto-invest feature. SeedInvest also claims to have over 250,000 registered investors with more than 150 companies successfully founded.
While some of the aforementioned crowdfunding platforms and others like them conduct some degree of due diligence, most think that they should allow potential investors to decide what’s worth the risk. That said, every investment platform will ensure that their companies are compliant with all SEC regulations but will not tell you what is or isn’t a good investment.
Due diligence will be a critical tool for every startup investor, regardless of whether an angel investor, a venture capital firm, or a private investor. This is a process by which you are vetting the companies you are interested in by looking at telltale signs of a successful startup. In doing so, you will help minimize your risk and maximize the chance of hitting it big if the company is sold off or goes public.
While there is no perfect formula, you should keep an eye open on the following criteria-
- Market Size – A successful startup will almost always operate in a large market, such as finance or health, for example. Even if it will end up with a small share of this market, the startup can still become a million dollar company. Alternatively, it should operate in a growing market, such as tech or green energy. If the startup is involved in a stagnant, local, or shrinking market, its potential for fast growth is minimal.
- Innovative Product – The product or service it delivers should also be something that covers a previously unfulfilled market need. If this is not the case, it should be innovative so that it’s much better than what the competition has to offer.
- Experienced and Committed Team – The team and, particularly, the founder(s) are probably more important than the product or market. Their experience and commitment to see things through will play a major role in the company’s eventual success or failure. The wrong team is among the top reasons why a startup fails.
- Robust Financial and Business Models – Raising funds is difficult enough for startups, but it will be even more difficult to use those funds wisely. Around 29% of startups go under because they run out of cash. As such, the company’s financial and business models need to be efficient enough to keep everything from falling apart.
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