Investing in startups is one of the most effective ways investors can diversify and grow their portfolios. However, until recently, venture capitalists and angel investors were the only people investing in startups. Thanks to the government reforms and the advent of crowdfunding, individual investors can now put their money into potential businesses in their early stages of growth.
In this guide, let us discuss why you should invest in startups and how it can be done online.
Why Invest in Startups?
Investing in startup businesses provides you with a plethora of benefits. When Microsoft offered its IPO in 1986, it had a market value of $777 million, and the share was priced at $21. Its current market value is $2.13 trillion.
Similar is the case of Amazon which stands at a market value of $1.7 trillion today. It went public in 1997 with $18 per share and a value of $438 billion. Anybody who invested in either of the two companies at the IPO price would have become a multi-millionaire if held onto it.
Though investing in startups is riskier than in S&P 500 and large-cap stocks, the growth potential is much higher. If you choose the right startup to put your money in, the sky is the only limit. Investors can quickly see their returns expanding enormously, turning their original investment of a few hundred dollars into millions in no time.
Startups have massive growth potential which is why every investor should put a small part of their portfolio into them.
What is Equity Crowdfunding?
The JOBS Act was brought into law in 2012 to remove any hindrances to capital raising. Before the act, only accredited investors with a net worth of over $1 million or earning $200,000 per year could invest in startups, locking out a majority of investors. The JOBS act paved the way for small businesses to raise funds from individual investors as well as their customers.
Equity crowdfunding is one of the outcomes of this act whereby startup owners can raise money from any number of small investors, allowing anybody to invest in startups and build a portfolio with as little as $20. An individual investor can now put money in early-stage and growing companies with high growth potential with one of the equity crowdfunding platforms.
Platforms for Investing in Startups
Crowdfunding sites allow individuals to start investing in startups without having to allocate huge funds. These platforms offer a curated selection of companies and have varying minimum investment amounts. Some of the biggest players in the crowdfunding landscape include:
- SeedInvest – A platform specializing in highly vetted opportunities, SeedInvest claims to accept only 1% of the applicants most of which are technology startups though you can find options from other sectors as well. Investors can put in as little as $500 and gain access to financial details about listed entities as well as direct access to founders.
- Wefunder – Wefunder offers investment opportunities for as less as $100. Listed companies range from early-stage to startups in the retail, logistics, insurance, and food sectors.
- Republic – Republic is known for its useful education resources and rigorous screening used for vetting companies. The platform accepts less than 5% of the startups applying and uses a four-stage process before listing the offerings.
- StartEngine – This platform offers a pool of investment opportunities in business as well as consumer-facing startups. Most of their offerings, including ones in high-cost sectors, have low minimum investments, sometimes under $250.
- NetCapital – The platform offers a secure place to invest in startups and offers clear information to help make decisions. Offerings on the site sometimes have minimums of as little as $99.
Pros and Cons of Investing in Startups
Here are some of the most prominent advantages of startup investing.
Investing in startups can be highly lucrative at times; a $100 investment can sometimes turn into millions of dollars as the company grows. The potential is particularly massive in the crowdfunding sector.
Easy to Get Started
The ability to invest through an equity crowdfunding platform makes the process easier. All the offerings are available to the public and there is no need to have connections or do research. You simply have to visit the company’s page on the platform to learn about it and decide if you want to put some money into it.
Smaller Investment Minimums
No matter how little you want to invest, there is always an opportunity in the equity crowdfunding landscape. Some platforms even allow getting started with as less as $100. Equity crowdfunding platforms allow startups to raise capital through small checks and benefit investors by making startup investing affordable and profitable.
Though startup investing is lucrative, each investment has its own risks. Let us see some risks associated with this form of investment.
Lack of Control
Investing in a startup through equity crowdfunding means you don’t get voting rights or a board seat. Moreover, businesses in their early stages provide limited information about their operations.
Startup investments are hard to buy and sell; your money can get locked in for years once you invest. When you invest through crowdfunding, you lose control over when you get returns.
When a company decides to raise additional capital through funding rounds in the future, dilution occurs and your investment becomes smaller, reducing your returns and profit potential.
Risk of Failure
Startups have a higher chance of failing; even the most promising ventures with a great business plan can fail. If you invest in 20 startups, most of your returns will be coming from 2-3 companies while the rest of your portfolio is filled with failures.
Adding startup investing to your portfolio is a great way to maximize returns but it comes with high risks. It is advisable to do your due diligence before selecting a platform to invest in a new offering. Also, you should only invest a small part of your portfolio in startups and allocate only the amount you can afford to lose.