How to Invest in Startups

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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There are essentially two types of people that can invest in startups: accredited and non-accredited investors. Accredited investors meet certain criteria for net worth and yearly income and can thus invest in private deals and have significantly more options for investing in startups. Non-accredited investors areretail investors and everyone else. Non-accredited investors have more limited options for investing in startups, but thanks to recent changes in federal law and technology, they are still able to invest in startups to almost the same degree.

The primary focus of this article will be to lay out all the ways investors can potentially invest in startups, and some examples and links to get you started. There are eight ways investors can invest in startups:

• Equity Crowdfunding, also known as Startup Crowdfunding (accredited and non-accredited)
• Venture Capital (accredited and non-accredited)
• Secondary Markets (accredited and non-accredited
• Pre-IPO Shares (accredited and non-accredited)
• Private Placements (accredited)
• Stock market and Public Venture Capital funds (accredited and non-accredited)
• Friends and Family (accredited and non-accredited)
• Start Your Own Startup

Just a few short years ago, none of these options were available to retail investors. While there are still limitations on retail investors ability to invest, there’s tons of great options.

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. The top U.S. equity crowdfunding platforms are:

• StartEngine – Largest Equity Crowdfunding portal
• Wefunder – Second Largest but still a phenomenal option.
• Republic – Third largest and can have some top deals

There are still others, including large portals abroad. Republic owns Seedrs, which is the largest equity crowdfunding portal in the U.K. As well, DealMaker uses technology to allow investors to launch equity crowdfunding raises on individual sites, rather than collectively alongside hundreds of others. Each of these have their pros and cons, so its best to explore what works best for you.

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.

Republic is well-connected within the startup investing sphere because it’s a subsidiary of AngelsList. This means they can often list certain gems backed by some of the top VC’s in the world and tend to list companies based on the latest VC trends. They also have a private deal portal for accredited investors which the likes of SpaceX, Robinhood, EquipmentShare and others have been through.

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. 

Secondary markets take a number of forms, but one of the most popular and fastest growing forms are essentially mini stock markets for startups. Before the JOBS Act, it would often just be more unofficial markets for accredited investors. Now, there are several platforms building centralized exchanges for trading shares in startups as easily and efficiently as someone would on the stock market.

StartEngine has “StartEngine Secondary” is one of the largest and most active secondary markets on the market. It also allows investors to purchase equity in various startups, but these typically only trade for a limited time. Meaning a startup might only list for a couple of days or weeks at a time. The secondary market is open to everyone to buy and sell, and only requires a StartEngine brokerage account.

All three of the previously mentioned portals have plans to implement secondary markets on their platforms, but StartEngine is the only one currently live. But there are private secondary markets available to accredited investors like CartaX, Forge Global and EquityBee.

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.

Allowing everyday investors to purchase shares in pre-IPO companies is becoming increasingly common. Robinhood was the first one to pioneer the idea, but now it can be done on a host of exchanges, including Webull, TD Ameritrade and more. While many of the other options on this list are also technically pre-IPO, this specifically is in reference to buying shares days before they IPO. When a company is looking to IPO but the offering still has capacity for investors before launch, Robinhood and others now allow investors to purchase those shares before they list on the stock market.

There are a number of pros and cons to this method. Unlike traditional startup investing, you’re not getting nearly the same gains as someone would if they invested in the earliest stages of a startup. Plus there is typically a lockup for these specific shares, meaning investors aren’t able to sell them for two to three months after IPO.

This creates a very high-risk, high-reward situation. If you reserved shares in a company that opened trading and shot up, you could instantly be sitting on substantial gains. But the lockup period means you can’t realize those gains until months after their IPO. By that time, the stock could have retreated significantly, including having your investment now in the red. On the other side, the stock could continue to rise during that period and investors could be sitting on substantial gains for getting in early.

Accredited investors have more options when investing in startups because the regulations have been expanded around this idea of accreditation. Now, laws are starting to expand and everyday investors have very similar options. But often times many of the top deals are still reserved for the rich. This isn’t to say there aren’t tons of great options out there for retail investors, but often times these larger companies have the demand to only raise from accredited, and it’s easier when raising just from accredited investors.

Accredited investors can invest in many of the same ways listed above, but also a few other options and places to invest. Some of the best options for this are listed below:

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.

While not quite as common, there are certain funds investors can invest in to get some exposure to startups. For example, Cathie Woods recently launched “ARK Venture Fund” through her company Ark Invest. The fund is available to all investors but currently only available through the investing app, “Titan.” Other companies like BlackRock Inc. (NYSE: BLK) invests billions in startups each year, which can give investors some exposure to the area.

There are companies that could be considered ‘startups’ that are public simply because they’re pre-revenue or still working on scaling to profitability. Some of these becomes penny stocks, while others have the funds to sustain a stable stock price. This effectively equates to value investing but can be a good way to get exposure to early-stage, high-growth companies while maintaining the ability to sell.

If you have any friends or family with an online website or small business, it might be easier than you think to invest in startups. Adding members or owners to a limited liability company (LLC) or corporation is simple enough if you have a friend or family member willing to edit the core documents of the business. Starting a joint venture with a friend or family member can be one of the most lucrative ways on this list to make money in startups. You’re likely to own a substantial portion of the business and can earn a salary from it as well.

Similar to the previous point, you can always start your own startup. It’s incredibly simple, and doesn’t even necessarily require any legal documents. If you start a website, or have a skill on the side, you likely have what it takes. If it becomes, you can turn it into an LLC or Corporation and start getting investors of your own.

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.

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.

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.