Startup is a compelling option for investors willing to accept significant risk in exchange for outsized returns and the satisfaction and thrill that come with backing innovative, cutting-edge es.Because of the risk involved in knowing how to invest in startups, it was once available only to accredited investors.
But thanks to federal regulatory changes, nology, and the emergence of equity crowdfunding and online platforms over the last few years, retail investors now also have access.Successful startup is challenging but possible with meticulous re and knowledge how to find opportunities for retail investors.
This guide will get you started.Table of ContentsHow Does in Startups Work?Ways to Invest in StartupsHow to Start in StartupsSee All 6 ItemsHow Does in Startups Work?Before you can know how to invest in startups, you need to know what startups are.Startups are new to early-stage companies.
They’re small and founded by an individual or small group of individuals with an innovative duct or service.
Un typical small es that aim to sustain themselves with gradual if modest growth, startups have rapidly scalable models.
They’re privately owned but seek outside funding to accelerate growth and scaling.Startup is also very different than in publicly traded companies.Public companies are transparent because they must publish public filings their operations and finances.
But as , startups have no such obligation and far less is revealed to the public.Because of the lack of transparency and high risk intrinsic to startup , federal regulations have traditionally allowed only accredited investors to invest in them (more below on what it takes to be an accredited investor).
In recent years, however, new rules permitting crowdfunding platforms have emerged that permit retail investors to gain access to opportunities.Two other key factors in the differences between public companies and startups are liquidity and time frame.
Public company investors can easily sell or trade their s, which makes them liquid.
Because startups are private, their s are generally difficult or impossible to sell, making them illiquid.Investors in public companies can also sell s whenever they want, but investors in startups must wait for an “exit event,” such as being bought by another company or going public on a stock exchange, before seeing returns.But it’s the potential of those larger-than-typical returns of double or even triple-digit multiples that make illiquidity, years of waiting, and high risk acceptable sacrifices for the startup investor.
Ways to Invest in StartupsAs mentioned, federal rules have changed in recent years to allow non-accredited investors to invest in startups through various platforms and mechanisms.
Some of the most common are: Equity Crowdfunding: On platforms such as StartEngine, Wefunder, Republic, and MicroVentures, non-accredited investors can invest in startups.
On some platforms, investors can invest as little as $1,000, or even $500 and $100, into startups that have been vetted by platform managers.
Angel : Angel investors vide capital to startups in exchange for convertible debt or equity in the company.
Traditionally and by definition of the Securities and Exchange Commission (SEC), angel investors are accredited investors, but that is changing.
Traditional, accredited angel investors can invest in startup es directly or pool their money to invest.
Non-accredited investors also have a pathway to angel , thanks to the SEC’s Regulation A+, which went into effect in June 2015.
Reg A+ allows startups to conduct unregistered public stock offerings if they file disclosure statements, so-called Offering Circulars, that are apved by the SEC.
These public offerings are initial public offerings called mini-IPOs.Venture Capital Funds: A venture capital fund pools capital from high-net-worth individuals and entities for investment in startup ventures.
angel investors, venture capital investors are by rule accredited investors.
While Regulation A+ and equity crowdfunding vide non-accredited investors a door to startup usually reserved only for accredited investors, there is no such option for venture capital funds.
Startup Accelerators & Syndicates: Other avenues with which accredited investors can fund startups include platforms such as AngelList and accelerators such as Y Combinator.
At AngelList, accredited investors form syndicates that then target startups in which to invest.
Y Combinator is a startup accelerator with an ever-growing network of founder alumni that backs new cohorts of startups with capital, expertise, and other resources.How to Start in StartupsThe first step that investors interested in startup need to take is determining whether you are an accredited investor or not, as that will determine how broad or narrow your early-stage investment platform landscape is.To qualify as an accredited investor, an individual must either have a minimum annual salary of at least $200,000, or assets of more than $1 million, not including the individual’s primary residency.
To qualify as an individual with a spouse, the minimum annual salary required is $300,000, or assets of at least $1 million, not including the couple’s primary residency.After determining their investor accreditation , investors must next decide their investment platform, whether it’s through equity crowdfunding, an angel network, or a venture capital fund.After choosing a platform, investors can begin identifying and reing potential startups to invest in.
Important factors to re include the quality of the leadership team, the potential of the model, and whether the has already demonstrated any traction.Just one startup success can result in double- or triple-digit multiples for investors, but at the same time, most of them fail.
That’s why it’s important that startup investors have a diverse portfolio of startups that will hedge-in potential losses.Finally, make sure you understand your startups’ exit strategies such as an IPO, acquisition, or buyback, as well as the time frame it could take before you see any returns.
Risks and Rewards of Startup Startup is high risk and high reward. Statistics vary, but the vast majority of startups eventually fail, most of those within the first few years of existence.
Other downsides include a lack of liquidity, because once investments are made, they are locked in with the company until there’s an “exit event” such as an IPO or acquisition, or if s are sold on a secondary market.
And because it takes years before a startup experiences an exit event, it’ll be years before investors see any returns.If a startup should survive the gauntlet of challenges, however, the return for investors could be outsized.
Consider the early backers of companies Uber and AirBnB.
In short, most startups in a startup portfolio will fail, but the small number of winners could eclipse those losses and turn investors into millionaires.
For that reason, make sure your portfolio is diversified, to better the chances of in a winner that will offset the failures.Taking the Startup PlungeWhile in startups has become more accessible to non-accredited investors, it still may not be for everyone.
The vast majority fail sooner or later, and if investors can’t counterbalance losers with winners, they could find themselves in financial peril.That’s why thorough re into potential startup companies being considered for investment is essential.
This includes verifying that there is a market demand for the ducts or services being offered, trusting the leadership team, understanding how the model is scalable, and being prepared to wait years before seeing any returns.
If you’re willing to do rigorous re and place your money selectively in a portfolio of diverse startup es, startup could ve lucrative for you.
Frequently Asked QuestionsQCan I invest in startups without being an accredited investor?AYes, non accredited investors can invest in startups through equity crowdfunding platforms and Regulation A+ offerings.
QWhat is the minimum to invest in startups?AMinimums can be as low as $100 on some platforms and $500 and more on others.
QHow risky is startup ?AStartup is very risky because the companies are unven, little is known them, and most fail.
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