Want to learn how to invest in startups? Benzinga’s guide outlines the benefits, risks and best practices to be a successful startup investor.
You’d be standing on a gold mine if you had invested just $1,000 in companies like Amazon, Microsoft, Apple or Dell when they had their initial public offering (IPO). Of course, the stocks of these companies have multiplied many times over since then. Imagine if you had invested long before the IPO! What could your investment look like today?
Each prosperous startup began as a homegrown idea. Success stories like Sequoia Capital’s 12,000% return from investing in WhatsApp might make you think about investing at the ground level of the next big thing. Remember, transforming startups into a success story requires effort, capital and risk.
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Invest With Startup Crowdfunding Platforms
Online investment platforms allow investors like you to add startups to your investment portfolio. Companies at all stages launch campaigns on these platforms and typically offer early investors equity, convertible notes or debt.
While some companies choose to pay dividends to their shareholders once they become profitable, most investors on these platforms are banking on the company being acquired or going public at a much higher valuation than what they invested at.
Here are the most popular startup crowdfunding platforms to find the next big opportunity.
StartEngine is a leading equity crowdfunding platform between Reg A+ and Reg CF raises. Over $650 million has been invested through StartEngine, with StartEngine themselves having raised over $70 million from the crowd to fund their platform. StartEngine consistently has over 100 startups raising on the platform at any given time, with a collective audience of over 1 million investors. StartEngine is backed by popular Shark Tank investor, Mr. Wonderful, and ran by the co-founder of Activision games, Howard Marks. The startup has seen alum like Boxabl, the viral tiny home company currently serving as a guest house for Elon Musk, and the now public Knightscope, a robot security company. StartEngine does not require you to be an accredited investor, which means anyone can invest in startups through their platform.
Wefunder is another leader in the equity crowdfunding space and one of the first equity crowdfunding platforms in the United States. Because of this, they have vast connections in the industry and some of the top deals in the startups space listed on their platform. Their network also consists of over 1 million everyday angel investors and previous alumni include unicorns like Meow Wolf and Zenefits. Wefunder has raised over $500 million on their platform for thousands of founders which has subsequently created tens of thousands of jobs, and significant gains for everyday people. Wefunder does not require you to be an accredited investor, which means anyone can invest in startups through their platform.
EquityBee is an excellent alternative investment platform, providing investors with access to startups and growing firms. At the same time, startups and companies with big ideas can access retail investors through EquityBee—broadening their reach.
Employees can use the platform to push their stock options back into the firm and take part in its future success. You can invest in a startup and continue with the company even though you’ve exercised your stock options and turned them into another investment.
Investors can use EquityBee to diversify their investments, gain access to companies that have no IPO’d or even make their first investments in the private sector.
By funding employee stock options, EquityBee makes it possible to serve both team members and investors. With a minimum investment of $10,000, EquityBee allows you to get in on the ground level today.
Invest With Venture Capital Funds
Investors that want to take a less hand-on approach to investing in startups can turn to venture capital funds to pool their money with other investors and rely on the fund managers to choose early stage companies to invest in.
Venture capital firms usually look for pre IPO companies to invest in that they believe will increase in value and either go public or be acquired by another company.
While there aren’t many venture capital funds with minimum investments that fit into most individuals’ budgets, we’ve found one company that has closed in that gap for retail investors. Alumni Ventures allows individual investors to participate in venture capital with minimum investments as low as $25,000. The company is also one of the most active VC funds in the country.
Other & Accredited Options to Invest in Startups
AngelList is one of the most popular startup investing platforms out there. The platform offers startups, from seed to post-IPO, to secure funding and angel investors. You’ll have firsthand experience in the startup ecosystem through a platform that lets you research the fastest-growing companies.
The platform also has a job board, AngelList Talent, where you can apply privately to more than 130,000 tech and startup jobs with a single application. There’s also a Product Hunt section where you can join millions of early adopters and makers in waiting for the next big launch.
AngelList allows you to build a network via email invite or connecting social media accounts to boost your chances of securing funding. You can also use its search tool to identify investors who are a good match for your startup.
Gust is quite different from other startup investment platforms. Instead of acting as an investing network, Gust offers a SaaS platform by 80+ angel networks including OurCrowd, SeedInvest and others. The platform provides the tools accredited angel investors, startup programs and venture funds need.
Whether you’re an investor syndicating a deal or a startup program seeking to connect investors with quality startup talent, Gust lets you investigate individual offerings, discuss deals, track and review investments and share your potential investments with others.
The platform also provides a vast video and proprietary data library to help you stay abreast of the latest trends as well as predict future performance.
Pros of Startup Investments
Several high-profile company success stories have proven that putting money into a startup is one of the few great ways to invest and reap high returns. Here’s what motivates investors to put their money into startups:
- Potential profits: With good planning, startup investments can be very profitable. Pay attention to companies that provide solutions, bring value and develop new trends in the ever-evolving knowledge-based economy.
- Portfolio diversification: Startups are an asset class that allows you to explore a different investment channel. Investments are risky and a diverse portfolio means you can minimize the possibility of taking a big hit during a downturn.
- Job creation: By putting money into a startup, you’re helping the economy move in the right direction by helping a company get on its feet. If it succeeds, you’ll have contributed to the creation of jobs for non-investors.
- A range of options: You can find startups in virtually every market and industry. This way, you can diversify your investments across markets and cap sizes, including emerging markets.
- Buy-out potential: Many startups are bought by large corporations that see them as a potential competitor or want to leverage the technology created by the startup. If the startup you invest in sells at a lucrative price, you’ll enjoy great returns on your investment.
- Make an Impact: Wefunder describes startups as “socially good lottery tickets” because when you get one right, it can make you a lot of money. But otherwise, you’re funding startups you believe can make a change in the world. You can invest in technology making affordable housing, reducing humanity’s carbon footprint and more. If you get one right then you can have a direct impact on making a major change and some money to help fund your future intuition.
Cons of Startup Investments
Even with their growth potential, startups are considered high-risk investments since only a small percentage succeeds. Consider these cons before putting your money into a startup.
- Tremendous risk: As lucrative as it may be, you could invest in a company that never succeeds. Startup investments are high-risk and your return on investment depends on the new venture becoming a success.
- Wrong valuations: Valuing startups is incredibly difficult because many don’t have any revenue or tangible assets. For example, if Elon Musk decides to start a company like SpaceX, but at the point where SpaceX has no assets or revenue and nothing more than an idea, what is that worth? Similarly, if it’s a startup that is looking to make a revolutionary new battery technology, but if they succeed it’s worth billions, but if they fail they’re bankrupt, what is that worth? These are the considerations people must consider when investing in startups, and they’re not easy. This could mean you could invest in a great company at a vastly overvalued valuation.
- Lack liquidity: Startup investments can’t be traded like publicly traded stocks. This means that you may not be able to sell your stake until the company is acquired or goes public. Even if a startup is making billions in revenue, the startup might not want to IPO until market conditions improve. This could mean you’re holding on to a goldmine, but can’t sell until the company conducts an IPO. There are companies like StartEngine looking to create secondary markets to change this, but even then there’s no guarantee it will mean you get a fair price, or any price, for your shares.
Best Practices for Investing in Startups
Need the right approaches and strategies for investing in startups to maximize potential returns and hedge risks? Here are some best practices we recommend.
First and foremost, choose the startup carefully, including its industry and target market. Some industries may not make sound investments at certain times, so consider the prevailing market conditions. Some industries are hotter than others. Consider your view of society’s needs and direction before picking an investment.
Factors like the investor’s experience in the industry also come into play when picking an investment in a specific industry. If you’re a doctor, for instance, you may have some insights about the medical world that may be valuable when investing in a medical technology startup. Higher investment returns are often connected to an investor’s industry expertise.
Some industries to consider include:
You should always know what you put your money into, so perform due diligence. Spend time investigating a company before signing an investment contract to positively influence your investment outcomes. Dig deeper into the company’s financial records, learn more about the founders and identify what the startup promises to solve. The more information you have about a company, the better poised you are to make a wise investment decision.
Whatever your expertise, you should always diversify in your investment class. You may want to diversify beyond 1 or 2 startups. Invest in more startup companies to improve your odds of landing a winner.
Diversification also includes maintaining a portfolio of startups in diverse industries with different business strategies. You may also diversify based on the age of your startups — look into early-stage, mid-stage and late-stage investments. Multiple startup companies provide a sweet spot for building a diverse portfolio.
You can also learn more about investment firms that offer professional wealth management.
After making your investment, there are extra contributions you can make to increase the chances of a higher return. This can include financially monitoring the company, mentoring the startup and helping establish business relations on its behalf. You may also attempt to secure a board seat to maintain your degree of post-investment involvement.
The startup investment landscape is undergoing a renaissance. Individual investors now boast unprecedented access to investment opportunities that were once only available to accredited investors. There are numerous platforms, strategies and forms of returns to research and understand before making your investment decision.
Be sure to diversify, draw on previous experience and do the legwork — market research and due diligence. The risks are high, but the rewards can be worth it.
Frequently Asked Questions
How long before startups become profitable?
A good rule of thumb is two to three years before it takes a business to become profitable. However, all startups carry different initial costs and ways of measuring profit. A startup could become profitable immediately or take longer than three years to make money.
What’s the most important thing to consider before investing in a startup?
Startups could be a great way to add to your portfolio but investing in one can be extremely risky. Cash flow projects might look good on paper but might not translate well in the real world. Make sure you research a startup investment thoroughly before you take the plunge.
How much can you make investing in startups?
It largely depends on the stage of the startup. Investing in pre-seed (the earliest stages) of a startup can lead to returns in the thousands, hundreds of thousands, and even millions of percent. For example, the earliest investors in Uber’s round made a 3,000,000% return. Investing in a pre-IPO company could mean investing at the IPO listing price so no real gains, just becoming one of the first investors in an IPO.
How do you see a return in startup investing?
Investors generally get shares in a company. As the shares appreciate in value over time, you will see a return once the startup sees an exit (an IPO or acquisition). Once this happens, investors generally see a hefty return, and can thus sell their shares for cash.