Investing in startups may seem like an opportunity that only exists for those willing and able to drop a few million into a fledgling tech company housed in a garage or a Stanford dorm room. While that type of investor exists and is certainly important, not all startup investors are ultra-wealthy finance industry titans. Some are average people who want to get in on the ground floor of a business they believe in. Many, in fact, are family members and friends of the people running the company. If you want to start investing in startups, this guide explains what you need to know to get into the game. You may want to first consult with a financial advisor, though, to make sure the investment aligns with your long-term financial goals.
What Exactly Is a Startup?
First, let’s define what a startup is. It’s one of those business terms that gets used so much that it can sometimes lose meaning. Knowing exactly what we’re talking about when we talk about startups is key to making sure you make the best investment decisions possible.
Startup companies are companies that were only recently formed. They aren’t part of a larger company. Startups often relate to the tech field, but this isn’t always the case. Startups are generally founded by a small group of people, often friends or business associates, who have an idea they want to turn into a reality.
Many firms that are now considered big companies began as startups, including Uber, Facebook and even Apple. Every great idea has to start somewhere. Today, many startups begin with the help of incubators that provide resources and access to funding for the right businesses.
Why Invest in Startups?
Investing in startups is not the safest of investments. It can be very risky. In fact, many startups fail. As such, investing in startups likely is not the way to provide yourself with a retirement nest egg or to make money for purchases like a house or a new car.
Instead, startup investing is for people who want to take a chance on a company they really believe in. It is for investors who believe in the people behind a company and in the company’s mission. They want to help the company achieve it — and get some returns in the process.
If you want your investments to be more than just a way for you to make your money work for you, startup investing may be a good choice. If not, there are other options, like investing in stocks or mutual funds, that may be a better fit.
Investing in Startups With Investment Platforms
One of the best ways for lower-level investors to invest in startups is through one of the many investment platforms focused on startups. There are a number of platforms available, but most of them work in fairly similar ways.
You can go onto the platform and browse the startups available on each platform. From there, you can decide where you want to invest and put money into the companies.
Different platforms have different rules about minimum investments and fees for access to the platform itself. Make sure to read carefully about each platform before making a choice to use that for your startup investing. Below, read the basics about a few of the popular options.
SeedInvest
SeedInvest is based in New York and has successfully funded more 150 companies. The minimum investment is just $500 and you can put money into a number of different startups. All of the companies on SeedInvest are vetted and the company claims to accept less than 1% of the companies that apply to be part of the platform.
WeFunder
WeFunder has an even lower minimum — $100. Companies include “moonshots” — think flying cars and space exploration. There are also entertainment companies and mobile apps. The company has raised more than $55 million in investments for startups.
FundersClub
Investment minimums at FundersClub depend on the company itself. You must be an accredited investor to use the service. The service has funded more than $310 companies and seen more than $128 million invested.
Investing in a Friend’s Startup
One of the best ways to invest in startups, though, is to find a personal connection to a startup that’s looking for funding. Many startups rely on family and friends for early rounds of funding. Friends, family members, or associates who are in the process of getting a startup off the ground likely will welcome your investment.
There are a number of reasons why investing in a startup or someone you know makes sense. First off, you can personally ask questions about how the company is going to work. You can get details on the business plan, the mission statement, the hiring schedule and the company timeline. In other words, you can find out everything you want to know directly from the horse’s mouth, which lets you make the most informed investment decisions possible.
For startup investing, passion is key. It makes the most sense to invest if you are passionate about supporting both the project and the people behind the project. For most people, you’ll find no one you are more passionate about supporting than your family and friends, making investing in the startup of someone you know a good choice.
Do make sure you are confident in your friend of family member’s ability to follow through on the startup’s plan. You are blurring the lines of business and personal life. Still, think about the bottom line and make sure you are making an investment you truly believe could pay off.
Become an Angel Investor
An angel investor is an accredited investor that typically provides the first check to startups looking to prove out their ideas. Wealthy individuals generally either provide that whole check, of less than $1 million or write a smaller check as part of the startup seed round for that business. Being an angel investor is considered to be very risky but it can be a good tax write-off while you help businesses get off the ground and if one hits it big then you could have quite the return.
The hardest part of being an angel investor, once you qualify, is sourcing opportunities. If you’re not investing in a business for someone you know then the most common way to be an angel investor is to work with institutions that help startups. You can generally get access to businesses being built at incubators or through your network if you volunteer to offer business advice or potential funding to businesses.
The Bottom Line
Startup investing is not just for the extremely rich and powerful. You can invest in startups even if you have a relatively small amount of money. It’s possible to make your investment through any of a number of platforms dedicated to connecting startups with small investors. You can also consider investing in the startup of a family or friend. However, you should still make sure to do your due diligence to ensure you’re making a sound investment.
Investing Tips
- No matter how you want to invest your money, a financial advisor can help you make the right decisions for your situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Asset allocation is an important part of your investing plan. Figure out what your portfolio should look like based on your risk tolerance with our free asset allocation calculator.