How Can I Invest in Startups?

Buying a piece of equity in a company has been a way to build wealth and passive income for a long time. More and more individuals are interested in investing in startup companies. Investing in startup companies is an extremely risky, but potentially lucrative venture. 

More startups are staying private for a longer period of time, which means you may be missing out on investment opportunities that are normally accessible in public markets. Technology and lowering government regulations have allowed individuals to invest in startups in a way that was simply not possible before.

Before you get started investing in startups, some background information will help you make the best decision about what is right for you and your financial situation. 

What is a Startup?

First, we should define what a startup is to better understand how investing in startups work. A startup is a newly formed company that is looking to rapidly grow and expand. These companies are generally creating innovative services and products that are looking to disrupt conventional businesses and industries. In order to rapidly grow, startups have to raise money from outside sources. This gives investors an opportunity to receive part of the equity of the business in exchange for capital. Startups then use the capital to grow their business. 

Why Would You Want to Invest in Startups?

There are multiple reasons why you may be interested in investing in startups. 

Big Returns

The main reason why most individuals want to invest in startups is to make money. Public markets are largely stable and offer modest returns most of the time. Private companies have a much higher upside potential, but there is also the possibility to lose 100% of your investment. Investing in the right startup can result in huge returns. Sequoia Capital received a 12,000% return on their investment in WhatsApp.

Support a Family Member or Friend

Many startups raise some of their seed round from family and friends. These personal connections are a great way to get involved in startup investing. You may want to invest in a friend’s startup idea to help them achieve their dream. You should ensure that you separate your personal relationship from your business relationship when you invest in a friend or family member’s startup. 

Make a Change

Startups can change the world and investors can be attracted to this notion. Investing in an idea that you are passionate about will give your capital more meaning. You may be able to directly support a groundbreaking technology that can change the world. New startups can change how industries operate. 

In the past, only accredited investors were able to invest in private companies. It only recently became easier for the average person to invest in private companies. 

In 2012, the Federal Government passed the Jumpstart Our Business Startups Act (JOBS). This act made it easier for businesses to seek investments through crowdfunding. In 2016, the Securities and Exchange Commission introduced Regulation Crowdfunding to protect investors from crowdfunding fraud and make it easier for companies to raise capital. 

How To Invest in Startups?

Modern technology has made it easier to invest in startups. The internet has the ability to connect investors and companies looking to raise capital. Investors who would have never known about certain startups now can access detailed information about a company with just a few clicks of a button. 

The JOBS act opened the floodgates for online companies to get involved with investing in startups through crowdfunding. There are a number of online platforms that allow individuals to easily invest in startups. Many of these platforms allow individuals to get started with as little as $100 of capital. 

Platforms To Invest in Startups

Online crowdfunding platforms allow thousands of individual investors to pool their capital together to invest in companies. Each platform has different benefits. Knowing which platform works best for you can help you find the right startups to invest in. 

Wefunder

Wefunder is a crowd investing platform that gives companies the opportunity to raise capital from individual investors. Their long-term goal is to fund more than 20,000 startups by the year 2029. Wefunder accepts investments as low as $100 in hopes to meet this ambitious goal. Since its founding in 2012, the platform has raised more than $110 million which has gone to more than 300 companies. 

Individuals have the opportunity to invest in companies they believe in and care about. There are a number of types of companies located on the platform from a brewing company to a dog cancer treatment medical company. When you invest in a company on Wefunder, the capital is placed in an escrow account. If the startup is not able to raise its goal, then the capital is released back to the individual investors. 

SeedInvest

SeedInvest is an equity crowdfunding platform that allows individuals to invest in early-stage companies. The startups on the platform are vetted by the SeedInvest team. Less than 1% of companies who apply to the platform are accepted. The platform has more than 250,000 investors and has successfully raised funds for more than 150 companies. Certain startups require large investments from accredited investors, while others accept investments from anyone. 

If an individual does not have the time or desire to analyze each of their investments, they can utilize the auto-invest feature. This feature allows individuals to build a portfolio of investments without having to spend a significant amount of time evaluating each startup. There is a 2% processing fee for each investment with the fee maxing out at $500. 

StartEngine

Founded in 2014, this fundraising platform has more than 500,000 active investors. It has raised more than $350 million for more than 500 companies. The famous Shark Tank entrepreneur, Kevin O’Leary, is a strategic advisor for the investment platform. StartEngine’s 3.5% fee is higher than other investment platforms. 

StartEngine also has a platform where investors can actively trade shares of private companies that raised capital on the platform. Buyers do not have to pay any fees when purchasing shares, but sellers will have to pay a 5% transaction fee when selling their shares. The ability to easily trade private shares can be an attractive benefit for startup investors. 

Republic

Republic has more than 1.5 million members and has raised more than $700 million. This platform is very accessible to most investors. Republic has a minimum investment amount of $10, which is lower than most other platforms. 

Companies can raise money from famous investors, such as Tim Draper, who have profiles on this platform. Republic offers individuals the chance to invest their capital in more than just startup companies. Individuals can invest in cryptocurrencies, video games, and real estate on the platform. This could be attractive for investors looking to diversify their portfolio. 

MicroVentures

Founded in 2009, this equity crowdfunding website originally allowed accredited investors to invest in companies. This platform raised capital for some of the top tech companies in the world, including Twitter, Facebook, and Yelp. Non-accredited investors now have the ability to invest in startups utilizing MicroVentures. 

This platform does not charge a fee and individual investors can invest as little as $100. MicroVentures looks for companies with a unique idea or an innovative approach to an old problem. The approval process can take up to six weeks, as the MicroVentures team will evaluate the startup’s business team, traction, market size, and other factors. 

AngelList

AngelList is another hugely popular startup investing platform. The platform has already had several billion-dollar-plus exits among its investments, including Dollar Shave Club and Twilio. This platform only allows accredited investors to invest in startups on AngelList. This can be prohibitive for investors who do not meet the threshold to be an accredited investor. 

If you are an accredited investor, AngelList is a great platform to find startups to invest in. Investors can easily research the fastest-growing startups that are looking to secure funding.  AngelList also allows startups looking to raise funds to identify and message investors who may be a good fit. 

Invest With Venture Capital Funds

Venture capital funds are an effective way to get involved in startup investing without having to actively manage the investment. Fund managers will choose which early-stage companies to invest in. Venture capital funds will identify and invest in companies that have high potential and an innovative product or service. 

For the average investor, the minimum amount to invest in a venture capital fund is too high. There are venture capital funds, such as Alumni Ventures, that allow individual investors to join the fund with minimum investments as low as $25,000. Venture capital is generally an effective way to grow your capital and get involved in startup funding. 

How Much To Invest in Startups?

The amount of money that you should invest in various startups is up to your individual risk tolerance. However, if you are a non-accredited investor there is a maximum amount you can invest in crowdfunding ventures during any 12-month period. SEC guidelines state the following:

  • You can invest up to $2,200 or 5% of your annual income or net worth, if your annual income or net worth is less than $107.000.
  • You can invest up to 10% of your annual income or net worth, if your net worth and income are equal or more than $107,000. This amount cannot be more than $107,000.

Even if you want to max out your startup investment amount for each 12-month period, there should be a limit as to how much you invest. Most startup investors will invest a smaller amount of money in multiple startups instead of one big amount in a singular startup. This increases your chances of success. If 10 out of the 12 startups fail but two become successful, then those two investments could outweigh your losses. 

What Else You Should Know

You cannot know everything about startup investing. Even the most seasoned venture capitalists do not have all of the right answers. However, there are certain things that you should consider before investing in startups. 

Be Prepared to Lose Your Money

Investing your capital into startups is an extremely risky investment. If the company goes under, you will lose the money that you invested. Some research estimates that 90% of all startups fail. There is a very real possibility that once you have invested your capital that you will lose it all. This is something that you need to consider when evaluating a startup investment. 

The capital that you are investing in a startup should not be earmarked for another purpose, such as a college fund. Talking with your financial advisor can help you come with a plan for investing in startups. Most financial advisors recommend that you do not invest more than 5% of your portfolio in startup companies. 

Your Money is Locked Up

When you invest your capital in a startup your capital will become illiquid for at least three years. You cannot easily sell your shares of a startup. You may be able to sell your shares through secondaries, but there is no guarantee. It takes years for your startup investment to mature and materialize. During this time you will not be able to access the capital. 

Due Diligence

Venture capitalists and other investors take weeks or months to properly evaluate the viability of a startup. You should take your time and look at all of the possible factors that can influence the success of a startup. Here are a few potential questions you should be thinking about:

  • How big is the market?
  • Does the startup have experience operating in the industry?
  • Is the business model sustainable?
  • How long will it take to get my money back?

These questions can help you decide if the startup is worth investing in. 

Investing in startups is no longer for the rich and powerful. The everyday American can get involved in private markets that can offer huge returns. Taking a risk and investing in a startup can result in huge returns that beat any investment in public markets. You should carefully evaluate the startup before investing your capital. 

Want to learn more about investing and fundraising? Check out our guide to pre-seed funding here!

Are you a startup looking for fundraising? Sign up for one of our info sessions!

Armando Vera Carvajal

Armando Vera Carvajal

Armando Vera Carvajal is the Vice President of Product for Newchip, the largest global online accelerator focused on helping startups raise capital from professional investors. As one of the original product founders and pioneers, Armando is passionate about building new products with high potential for global reach and impact. Prior to Newchip, he was as a Research Manager at the Gerson Lehrman Group where he covered hedge fund clients in New York City involved in long/short, distressed credit, special situations, activist, and global macro investment strategies. Armando studied international relations and corporate communications at the University of Texas at Austin, along with global exchanges at the Nanyang Technological University in Singapore and at l’Institut d'études politiques de Paris (Sciences Po). Born in Mexico City, Armando immigrated to the United States of America when he was four years old and grew up in McAllen, Texas. His interests include painting, mountaineering, writing, film, world travel, kayaking, photography, reading, black coffee, running, and inspiring people to become agents of positive global change.

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