How to Invest in Startups

How to Invest in Startups

You don't have to be a billionaire or an insider to invest in startups anymore. The development of equity crowdfunding platforms allows even smaller "armchair" investors to get in on the action. However, investing in startups is not quite as simple as opening an account on an equity crowdfunding platform and clicking a few buttons. If you want to make money off of your investment, careful research is required to choose startups that are more likely to make it big.[1] X Research source

Method 1 of 3:
Creating an Equity Crowdfunding Account

Image titled Invest in Startups Step 1
1
Establish a budget for your investments. Startups are never a "sure thing," and can be extremely risky investments. You definitely don't want to pin your entire retirement or your kids' college savings on startups. Generally, 5% of the total amount of money you have to invest is a good limit. [2] X Research source For example, if you have $100,000 set aside for investment, you could plan to invest about $5,000 in startups. For American investors, the amount you can invest in startups is limited by the federal government, depending on your net worth and annual income. The amount you can invest will typically be calculated for you when you provide information about your income and assets to open an equity crowdfunding account.[3] X Research source
Image titled Invest in Startups Step 2
2
Research equity crowdfunding platforms carefully. Equity crowdfunding platforms are online platforms that work under the same crowdfunding principles as sites like Kickstarter or GoFundMe. However, instead of getting a product or other incentives, you get an actual ownership stake in the company itself. Because you typically won't profit from your investments for 5 to 10 years, you want to make sure the platform you choose will still be around at that time. If the platform goes belly-up, you may not be able to recover the money you invested. [4] X Research source Read up on how the platform conducts due diligence on the companies it offers. A platform that allows any company to offer equity without much of an approval process is not likely to be around for very long. Look for documentation on the platform as well. You should be able to read documents and information the platform has compiled on each of the startups available on the platform.

Tip: Looking at the application process for startups that want to offer equity on the platform can give you some insight into the review process. You might also look at what percentage of applications are accepted by the platform, if that information is available.

Image titled Invest in Startups Step 3
3
Browse the startups available on platforms you like. Once you've found a few platforms that you trust, look at what they have to offer before you decide on one or two you want to use. The best platform won't do you any good if there aren't any startups there that appeal to you. [5] X Research source Ideally, you want a platform that has a variety of startups available in a number of different sectors. Even though the offerings on most equity crowdfunding sites are relatively tech-heavy, there are different types of startups available within the broader tech sector. A wide variety of startups also gives you more room to diversify your startup investments. Investing in a variety of different startups gives you a much greater chance of earning a profit off of your total investment.
Image titled Invest in Startups Step 4
4
Set up an account on the platform of your choice. Typically, you can start investing on an equity crowdfunding account similar to the way you would start contributing on a regular crowdfunding site. The initial application to set up an account usually consists of providing your name and contact information. [6] X Research source If you are an American investor, you may have to provide some additional financial information. This information will be used to determine the maximum amount of money you can invest in startups if you don't qualify as an "accredited investor." An accredited investor has a net worth in the millions.[7] X Research source
Advertisement

Method 2 of 3:
Choosing Startups for Your Portfolio

Image titled Invest in Startups Step 5
1
Examine your reasons for investing in startups. The best investment strategy for you depends on why you want to invest in startups. Generally, you may be investing in startups to try to earn income, to fund causes you believe in, or simply for entertainment. [8] X Research source If you want to try to earn income, make sure the rest of your finances are solid. Because of the inherent riskiness of startup investing, you should have an emergency fund and little-to-no consumer debt before you start investing in startups. If you're investing in startups that advance a social cause you believe in, you can be a little freer with your investment dollars. For example, you may not need the level of diversification you would want if you were treating your startup investments as part of your overall investment portfolio. Instead, you might look at your investments the same way you would look at a charity or nonprofit organization you wanted to donate to. If you just want to invest in startups for fun, you can invest in any startup that you like or think is making a fun product. However, if entertainment is your sole reason for investing, you probably want to commit less money. Think of your startup investment fund the way you would think of planning for a trip to a casino.
Image titled Invest in Startups Step 6
2
Research trends in the sectors that capture your interest. Startups that perform well tend to be companies that are offering a product or service that is unique and meets a particular demand. Successful startups often capitalize on growing trends in their sectors to offer a product or service that is more convenient and less expensive than those offered by established companies. [9] X Research source Avoid startups offering a product or service in a market that's already saturated. For example, the ride-share market is pretty saturated. If you come across a startup that's offering the same basic platform as Uber or Lyft, that might not be a good investment. However, there might be room for a startup that targeted a specific niche, such as an Uber-like service that provided ride-share transportation for kids.
Image titled Invest in Startups Step 7
3
Evaluate the performance of individual startups you're interested in. By virtue of being a startup, the company typically won't have much in the way of past performance for you to evaluate. However, you can research the team behind the startup, including the founders of the company and any initial investors. [10] X Research source If you're investing in startups as a serious part of your investment portfolio, focus on companies that already have revenue. Startups whose founders have already launched other successful startups can also be good bets. If you're investing in startups to advance a social cause, you might look at the founders' commitment to the cause, or other work they've done in that particular area. You would also want to look at how the product or service will help the problem or issue it's designed to address. If you're investing in startups for entertainment, the company's performance may not matter that much to you. However, that doesn't mean you shouldn't do a little due diligence. Your investment activities aren't going to be that much fun if the company is doomed to failure from the start.

Tip: Regardless of your reasons for investing in startups, avoid investing in a startup if you don't understand the product or service that startup is offering. You can't properly evaluate a company's performance or potential if you don't know what need it's fulfilling.

Image titled Invest in Startups Step 8
4
Analyze a startup's valuation compared to similar companies. A startup's valuation tells you how much equity, or percentage of ownership, you are getting in the company in exchange for your investment. Valuation methods can be relatively complex, especially if you're a beginning investor. However, comparing the company's valuation to comparable companies in the same or similar industries is a good starting point. [11] X Research source You can also compare the startup's valuation to the startup valuation of established companies that are similar. This can give you an idea of what the startup could potentially do. However, be careful not to think of this potential as guaranteed. If a startup is valued significantly higher than similar companies, be wary. If a company is overvalued, you're more likely to lose your investment. On the other hand, a company that seems to be undervalued may be a good investment if you believe in its product or service.
Image titled Invest in Startups Step 9
5
Invest in a multitude of diverse startups. Startups are far riskier than other investments. If you plan to make any money at all off of your investments (or even simply get your money back), you should plan on investing in at least 20 different startups. Try to invest in startups across a number of different sectors and industries, or even invest in competing startups to hedge your investments. [12] X Research source If you're investing for social activism or for entertainment, you may not be as concerned about diversifying your portfolio since your primary goal is not to make money.
Advertisement

Method 3 of 3:
Managing Your Investments

Image titled Invest in Startups Step 10
1
Monitor news about the startups you invest in. Once you've committed your money to a startup, you want to stay on top of developments with that company. Check the platform at least once a week to monitor the funds the startup has coming in and the progress the company is making towards its goals. [13] X Research source Most companies that raise funds through equity crowdfunding platforms provide news to investors directly on the platform. However, you also want to look for news from independent sources as well.

Tip: Bookmark websites that offer news in the sectors in which the startups operate. For example, if you invested heavily in tech startups, you might look to sites such as TechCrunch and Wired for news about their performance.

Image titled Invest in Startups Step 11
2
Evaluate the liquidity of your equity shares. Most equity shares in startups don't have much of a market. This means that unlike shares of stock that trade on stock markets, you can't just unload them when you decide you don't want them anymore. However, you can still sell your shares if you can find a buyer. [14] X Research source The platform where you purchased your shares is typically the best place to find a buyer if you've decided you want to sell. If the startup has already sold the shares offered in its initial round, there may be other investors that want to buy in. If there's a comments section on the startup's page on the platform, look there for buyers. Make sure you do your due diligence with buyers before you agree to a trade, especially if you're selling your shares directly to the person rather than through the platform.
Image titled Invest in Startups Step 12
3
Rebalance your portfolio yearly if possible. If you're treating your startup investments as part of your serious investment portfolio, you'll want to hedge your investments in startups that are underperforming with startups that are doing well. Since startup shares are difficult to sell, this typically means you'll have to invest in additional startups each year to achieve the right balance. [15] X Research source If you are an American investor, the maximum amount you can invest in startups through equity crowdfunding will likely be limited. However, those limits apply to investments each year, so you can still purchase shares in additional startups to balance your portfolio. Just make sure you aren't putting too much money into startups relative to your other assets.
Image titled Invest in Startups Step 13
4
Hold your investments for at least 10 years. Because of their limited liquidity and the time it takes to establish a startup business, startup investments are not ideal if you're looking for short-term gains. Even if you have shares that are fairly liquid, you're typically better off holding them for the long term rather than trying to trade them at the first sign of trouble. [16] X Research source Because it's best to hold your investments in startups for a longer period of time, startup investments aren't good for short-term investment goals. Use less risky investments for investment goals you hope to achieve within 5 to 10 years.
Advertisement

Method 1 of 3:
Creating an Equity Crowdfunding Account

Image titled Invest in Startups Step 1
1
Establish a budget for your investments. Startups are never a "sure thing," and can be extremely risky investments. You definitely don't want to pin your entire retirement or your kids' college savings on startups. Generally, 5% of the total amount of money you have to invest is a good limit. [2] X Research source For example, if you have $100,000 set aside for investment, you could plan to invest about $5,000 in startups. For American investors, the amount you can invest in startups is limited by the federal government, depending on your net worth and annual income. The amount you can invest will typically be calculated for you when you provide information about your income and assets to open an equity crowdfunding account.[3] X Research source
Image titled Invest in Startups Step 2
2
Research equity crowdfunding platforms carefully. Equity crowdfunding platforms are online platforms that work under the same crowdfunding principles as sites like Kickstarter or GoFundMe. However, instead of getting a product or other incentives, you get an actual ownership stake in the company itself. Because you typically won't profit from your investments for 5 to 10 years, you want to make sure the platform you choose will still be around at that time. If the platform goes belly-up, you may not be able to recover the money you invested. [4] X Research source Read up on how the platform conducts due diligence on the companies it offers. A platform that allows any company to offer equity without much of an approval process is not likely to be around for very long. Look for documentation on the platform as well. You should be able to read documents and information the platform has compiled on each of the startups available on the platform.

Tip: Looking at the application process for startups that want to offer equity on the platform can give you some insight into the review process. You might also look at what percentage of applications are accepted by the platform, if that information is available.

Image titled Invest in Startups Step 3
3
Browse the startups available on platforms you like. Once you've found a few platforms that you trust, look at what they have to offer before you decide on one or two you want to use. The best platform won't do you any good if there aren't any startups there that appeal to you. [5] X Research source Ideally, you want a platform that has a variety of startups available in a number of different sectors. Even though the offerings on most equity crowdfunding sites are relatively tech-heavy, there are different types of startups available within the broader tech sector. A wide variety of startups also gives you more room to diversify your startup investments. Investing in a variety of different startups gives you a much greater chance of earning a profit off of your total investment.
Image titled Invest in Startups Step 4
4
Set up an account on the platform of your choice. Typically, you can start investing on an equity crowdfunding account similar to the way you would start contributing on a regular crowdfunding site. The initial application to set up an account usually consists of providing your name and contact information. [6] X Research source If you are an American investor, you may have to provide some additional financial information. This information will be used to determine the maximum amount of money you can invest in startups if you don't qualify as an "accredited investor." An accredited investor has a net worth in the millions.[7] X Research source
Advertisement

Method 2 of 3:
Choosing Startups for Your Portfolio

Image titled Invest in Startups Step 5
1
Examine your reasons for investing in startups. The best investment strategy for you depends on why you want to invest in startups. Generally, you may be investing in startups to try to earn income, to fund causes you believe in, or simply for entertainment. [8] X Research source If you want to try to earn income, make sure the rest of your finances are solid. Because of the inherent riskiness of startup investing, you should have an emergency fund and little-to-no consumer debt before you start investing in startups. If you're investing in startups that advance a social cause you believe in, you can be a little freer with your investment dollars. For example, you may not need the level of diversification you would want if you were treating your startup investments as part of your overall investment portfolio. Instead, you might look at your investments the same way you would look at a charity or nonprofit organization you wanted to donate to. If you just want to invest in startups for fun, you can invest in any startup that you like or think is making a fun product. However, if entertainment is your sole reason for investing, you probably want to commit less money. Think of your startup investment fund the way you would think of planning for a trip to a casino.
Image titled Invest in Startups Step 6
2
Research trends in the sectors that capture your interest. Startups that perform well tend to be companies that are offering a product or service that is unique and meets a particular demand. Successful startups often capitalize on growing trends in their sectors to offer a product or service that is more convenient and less expensive than those offered by established companies. [9] X Research source Avoid startups offering a product or service in a market that's already saturated. For example, the ride-share market is pretty saturated. If you come across a startup that's offering the same basic platform as Uber or Lyft, that might not be a good investment. However, there might be room for a startup that targeted a specific niche, such as an Uber-like service that provided ride-share transportation for kids.
Image titled Invest in Startups Step 7
3
Evaluate the performance of individual startups you're interested in. By virtue of being a startup, the company typically won't have much in the way of past performance for you to evaluate. However, you can research the team behind the startup, including the founders of the company and any initial investors. [10] X Research source If you're investing in startups as a serious part of your investment portfolio, focus on companies that already have revenue. Startups whose founders have already launched other successful startups can also be good bets. If you're investing in startups to advance a social cause, you might look at the founders' commitment to the cause, or other work they've done in that particular area. You would also want to look at how the product or service will help the problem or issue it's designed to address. If you're investing in startups for entertainment, the company's performance may not matter that much to you. However, that doesn't mean you shouldn't do a little due diligence. Your investment activities aren't going to be that much fun if the company is doomed to failure from the start.

Tip: Regardless of your reasons for investing in startups, avoid investing in a startup if you don't understand the product or service that startup is offering. You can't properly evaluate a company's performance or potential if you don't know what need it's fulfilling.

Image titled Invest in Startups Step 8
4
Analyze a startup's valuation compared to similar companies. A startup's valuation tells you how much equity, or percentage of ownership, you are getting in the company in exchange for your investment. Valuation methods can be relatively complex, especially if you're a beginning investor. However, comparing the company's valuation to comparable companies in the same or similar industries is a good starting point. [11] X Research source You can also compare the startup's valuation to the startup valuation of established companies that are similar. This can give you an idea of what the startup could potentially do. However, be careful not to think of this potential as guaranteed. If a startup is valued significantly higher than similar companies, be wary. If a company is overvalued, you're more likely to lose your investment. On the other hand, a company that seems to be undervalued may be a good investment if you believe in its product or service.
Image titled Invest in Startups Step 9
5
Invest in a multitude of diverse startups. Startups are far riskier than other investments. If you plan to make any money at all off of your investments (or even simply get your money back), you should plan on investing in at least 20 different startups. Try to invest in startups across a number of different sectors and industries, or even invest in competing startups to hedge your investments. [12] X Research source If you're investing for social activism or for entertainment, you may not be as concerned about diversifying your portfolio since your primary goal is not to make money.
Advertisement

Method 3 of 3:
Managing Your Investments

Image titled Invest in Startups Step 10
1
Monitor news about the startups you invest in. Once you've committed your money to a startup, you want to stay on top of developments with that company. Check the platform at least once a week to monitor the funds the startup has coming in and the progress the company is making towards its goals. [13] X Research source Most companies that raise funds through equity crowdfunding platforms provide news to investors directly on the platform. However, you also want to look for news from independent sources as well.

Tip: Bookmark websites that offer news in the sectors in which the startups operate. For example, if you invested heavily in tech startups, you might look to sites such as TechCrunch and Wired for news about their performance.

Image titled Invest in Startups Step 11
2
Evaluate the liquidity of your equity shares. Most equity shares in startups don't have much of a market. This means that unlike shares of stock that trade on stock markets, you can't just unload them when you decide you don't want them anymore. However, you can still sell your shares if you can find a buyer. [14] X Research source The platform where you purchased your shares is typically the best place to find a buyer if you've decided you want to sell. If the startup has already sold the shares offered in its initial round, there may be other investors that want to buy in. If there's a comments section on the startup's page on the platform, look there for buyers. Make sure you do your due diligence with buyers before you agree to a trade, especially if you're selling your shares directly to the person rather than through the platform.
Image titled Invest in Startups Step 12
3
Rebalance your portfolio yearly if possible. If you're treating your startup investments as part of your serious investment portfolio, you'll want to hedge your investments in startups that are underperforming with startups that are doing well. Since startup shares are difficult to sell, this typically means you'll have to invest in additional startups each year to achieve the right balance. [15] X Research source If you are an American investor, the maximum amount you can invest in startups through equity crowdfunding will likely be limited. However, those limits apply to investments each year, so you can still purchase shares in additional startups to balance your portfolio. Just make sure you aren't putting too much money into startups relative to your other assets.
Image titled Invest in Startups Step 13
4
Hold your investments for at least 10 years. Because of their limited liquidity and the time it takes to establish a startup business, startup investments are not ideal if you're looking for short-term gains. Even if you have shares that are fairly liquid, you're typically better off holding them for the long term rather than trying to trade them at the first sign of trouble. [16] X Research source Because it's best to hold your investments in startups for a longer period of time, startup investments aren't good for short-term investment goals. Use less risky investments for investment goals you hope to achieve within 5 to 10 years.
Advertisement