Investing in Startups for the Non-Rich or Wealthy. Here’s a Guide that Shows You How You Do It, With Little Money.
“When you’ve got 10,000 people trying to do the same thing, why would you want to be number 10,001?”Mark Cuban
It’s easy to think investing is all about index funds that hold large companies that trade on the S&P 500 or Nasdaq. If you’re brave enough, you might buy individual stocks or own real estate. But have you ever considered investing in startups? They can be a great investment opportunity for people that are looking for a great return on investment.
While we won’t dig into the precise definition of a startup, let’s simplify it to a company that is new and in need of more capital to grow their business, regardless of service, product or niche.
Being a venture capitalist in Silicon Valley or being a Shark Tank star isn’t a prerequisite to becoming a startup investor. Average investors that lack serious capital for big investments towards private companies is one of three ways you can invest through crowdfunding. Investing in private companies, although highly risky, can help you earn returns higher than the stock market.
If you’re currently an investor of startups on platforms like Kickstarter or Indiegogo, you already have an idea of what being an angel investor is, without all of the big risks and larger sums of seed money. Now you can make money while investing in private startup companies without being a multi-millionaire or even a billionaire.
What Does Investing in Startups Look Like?
Most investors think the soonest to invest in private companies is by waiting for them to “go public” and IPO on a stock exchange. Some notable private-turned-public companies in 2019 include Lyft, Uber, Beyond Meat, and Pinterest. While you can still earn a handsome profit by owning public stock in these companies, you can earn even more if you can invest in them while they are still private.
If you already invest in stocks and bonds, you might try investing small amounts of money in startups. The reward for choosing the right companies can yield handsome profits, which is the reason that many people love angel investing and startup investments. The money is there.
These are some of the current products and services you can invest in:
- Deployable flood barriers
- Aquaponics farms
- Feature films
- Social media networks
- Retail stores and restaurants
- Coding summer camps
Surprise! They’re not all Tech companies.
The initial minimum investments are usually between $100 and $1,000 per company. These initial amounts are small investments that you can diversify your current portfolio without taking on too much overall risk.
What is Angel Investing?
While we have mentioned angel investing there may be some readers that are unsure what this means or how it works. An angel investor is sometimes referred to as an angel funder, seed investor or “private investor”. Someone that is usually close to the founder/creator of the product or service they invest in.
Depending on who you talk to, this could be friends, family or someone they know with plenty of money that is looking to put that cash to work. But the reality is these are typically accredited investors with a higher net worth than most who are wanting to get started with smaller amounts, which is what this guide is really about. You can skip this section and move to the next if that’s you.
Early-stage companies usually need angel investors to help them get to the next level of their vision, so they seek out these angel investors to help get them there before they need to go out and find venture capital funding or corporate financing, which becomes more difficult and stressful for smaller companies that have yet to prove their product.
The problem with the term “angel investor” is that it could be a grandmother who writes a check for $10,000 or the guy down the street who is a Doctor, drives a Mercedes S-Class and cuts a check for $150,000 for 10% of the business. While it’s not applicable to most reading this guide, it’s something to consider since some readers may have these kinds of funds available and are okay with the slightly bigger risk.
While you can get involved in this type of investing, most angel investors are typically professional, but private investors that are always looking for new opportunities that they can get involved with early. They are experienced and understand the due diligence process, as well as the riskiness of being involved in these types of investments with early stage startups. While the risks are inherently bigger, so are the chances of earning big bucks years down the road.
Now that we’ve covered that and clarified it a bit, we’ll stick to discussing crowdfunding platforms for investors who want to get moving with smaller investment amounts right away.
How to Make Money
Startup investing is a high risk-high reward investing idea. Rule #1 is only to invest money you are comfortable losing. This is because the vast majority of startups fail and don’t produce a profit. But you can make money by carefully screening these small companies.
You can make money in four different ways:
- The company goes public
- A larger company buys the startup
- The startup begins paying dividends
- You sell your shares of stock to another investor
Because it can take several years to start making money, you must practice the investing tips below to increase your odds of success.
Know the Person
The primary task of every company owner pitching investors for funds is to give you the most compelling reasons why you should put your hard-earned money into their company. While they may have an excellent pitch, spreadsheets, and product idea, the most important factor can be the company founder.
Vijar Kohli states, “I invest in people I know. That’s what makes a good startup investment.”
A serial entrepreneur with a history of launching profitable startups can be a better option than a first-time company founder. For your first investments, you may try to start with experienced founders to minimize your downside risk.
Understand the Product
If you buy any individual stock, it’s a good idea to know how the company makes money. For instance, how does Facebook make money for investors when anyone can join for free? Knowing how the product works can help you decide if it’s an investing fad or a long-term way to earn passive income.
When Will You Earn a Profit?
Try looking through the investment documents to see when the company projects investors will earn a profit. Also, what events must happen before the startup can earn income?
Does project success depend on securing government approval after rigorous testing? Or do you know who the current competitors are and if the startup is offering a better product?
Perform your own research on the competition and crunching the financial numbers for yourself.
Invest Small Amounts Per Funding Round
Startups may have multiple funding rounds as their business matures. If you don’t feel comfortable investing your normal amount in the current round, invest less. This gives you the flexibility of making a follow-up investment or saving your cash for a different company.
Federal law can limit how much money you invest in each company. These restrictions mostly apply to non-accredited investors with an annual salary or net worth below $100,000. If this is you, you can only invest up to $2,000 or 5% of your annual income or net worth, whichever is less.
Accredited investors have more flexibility as they can invest the lesser of up to $10% of their annual income or $100,000 per company.
Each platform and company may have slightly different investment limits. Although the above is a good rule of thumb.
Startup Investing Platforms
There are several online platforms you can use to invest in early-stage startups or private companies that allow you to earn a potential profit. These equity crowdfunding platforms provide people with a curated selection of companies that many venture capitalist firms ignore. It’s worth looking at several platforms to see which one has the best investment options for your current investing goals.
Start Engine is a great investment platform that has one of the most extensive selections of open funding rounds and company types. This is probably your best option for individual investors, because you can quickly diversify your startup investments with a single platform. You can easily see the investment details, current project timeline with achieved and future goals, and company press release updates.
Both accredited and non-accredited investors can invest in startups on Seed Invest. The minimum investment for most offerings is $500. Some offerings are only open to accredited investors. If you are an accredited investor, you might like these exclusive offerings.
Each offering includes an interview with the founder, offering terms sheets, and other risk disclosures to help you decide what to invest in.
If investing in startups seems too risky, a safer option can be Worthy. You can still invest in small businesses through asset-backed loans. These companies might be less volatile although you only earn a fixed return of 5% on your investment.
You might also like Worthy if you don’t have the time or confidence to decide what is the best startup to invest in. With Worthy, you buy bonds in $10 increments and invest in their current loan portfolio. It’s very similar to earning interest from a bank savings account. Each bond has a 3-year maturity but you can sell at any time fee-free.
Even if you invest in startups on a platform like Start Engine or Seed Invest, Worthy can be an easy option to diversify your portfolio. Being able to sell your bonds fee-free gives you the flexibility of moving your cash from Worthy bonds into a startup when you find a good opportunity.
Alternatives to Investing in Startups
Startup investing should only be a tiny portion of your portfolio at best. Most of your portfolio should still be in some of these less volatile assets instead.
One of the easiest ways to invest in stocks and bonds is through index funds. This is your most common investment option in your employer 401k plan. Instead of trying to find the next Amazon, Apple, or Microsoft, and index fund holds a position of each company in a certain market index. For example, an S&P 500 fund invests in the 500 largest publicly-traded companies on the U.S. stock exchange.
Another option is real estate investing. One option is owning rental property or flipping houses. Instead of investing in someone else’s business, you invest in your own as you strive to be a real estate mogul.
Real estate crowdfunding might be a better option as it takes less money and time. This investment idea is similar to investing in startups. Although you invest in residential and commercial properties instead of a business idea. Your annual rate of return can be between 7% and up to 12% depending on what type of real estate deals you invest in.
Your Own Side Hustle
A third alternative is investing in yourself. Maybe you have a side hustle like mowing lawns, selling art online, or computer coding. You can put that cash into your own business for training, new equipment, or pitching new clients. Who knows, you might be the best investment opportunity you never considered.
Earning more money with a side hustle can take more work. However, you are more likely to see more immediate profits that improve your short-term cash needs. And you also have more certainty of receiving a positive return of investment instead of investing in a high-risk startup.
Investing in startups is risky but the rewards can be high if you find a winner. Of course, you will need to research a company thoroughly and be willing to have several investment failures along the way.
Startup investing is a good idea if you already have a diverse and established portfolio of investments and you have an appetite for a little more risk without a serious fear of losing money. If you really want to take a bigger jump and have more money to invest, you can always take a bigger risk and become an angel investor. High-risk, high-reward.
Are you going to invest in startups? What type of business is most appealing to you? Please share a comment below.