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 investors exists and is certainly important, not all startup investors are ultra-wealthy finance industry titans. Some are average people who want to get in at 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.
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.
Why to 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 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 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.
Investment minimums at FundersClub depends 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 of 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 investing 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.
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.
- No matter how you want to invest your money, a financial advisor can help you make the right decisions for your situation. Find an advisor near you with SmartAsset’s free financial advisor matching service. You answer just a couple of questions. We match you with up to three advisors in your area, all fully vetted and free of disclosures. You talk to each advisor and decide how to move forward.
- 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.
Photo credit: ©iStock.com/Vasyl Dolmatov, ©iStock.com/Drazen_, ©iStock.com/fizkes
Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.
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