Everything You’ll Need to Know Before Investing in Startups

Investing in startups can be an option for your portfolio. However, there are a few things to know before you begin. In this blog, we’ll cover some key insights that could help you make informed decisions and make the most of your investments.

How To Invest In Startups

Investing in startups can be potentially rewarding and can help you diversify your portfolio. However, before you invest, you need to understand some important details about this type of investing.

A startup is a private company that is launched in a specific industry. Usually, it is not a large company, and it can take a few years to start making money. But successful start-ups can, sooner or later, turn into profitable enterprises.

Investing in a startup may give you the opportunity to purchase stock in a company before it goes public. Depending on your financial situation and how much you want to invest, you may also want to consider crowdfunding. This option can involve a lower minimum to gain access, as it often doesn’t require as much capital from the investor, but we’ll cover this in more detail later.

If you believe you’re ready to invest in a startup, the first order of business may be to do your homework. Some things to consider, look for investment opportunities with companies that have laid good groundwork for their business plan, have a solid team and a market for their product or service. You could look for and research opportunities by attending networking events or connecting with people who have experience investing in startups. Networking can help you find companies to invest in, and could potentially give you access to startups that aren’t available to the general public, if you qualify to invest in the opportunities. Additionally, if you know friends or family who are starting a business, you may consider investing with them.

There are also certain websites you can use to help find startups, such as MicroVentures. With MicroVentures, you can join for free to gain access to our portfolio of past and current startup investment opportunities. One advantage of investing in the startups available through MicroVentures is that we do a lot of the homework for you through our vetting process. You still need to decide what investments are right for you, but it’s a great place to start.

What Are Primary Investments for Startups?

Primary investments in the private market involve the issuance of securities by a company seeking funding. These securities are typically created and sold in exchange for investment capital in the form of equity financing rounds, such as pre-seed, seed, or Series A rounds. The shares of the company are transferred to the investor upon the closing of the funding round. These primary investments are considered to be a direct investment in the company, as the investor is purchasing the shares directly from the issuer.

Primary investments are often associated with start-up companies that are seeking initial funding, but it is possible for later-stage companies to also engage in primary investments. Earlier rounds of equity financing, such as Series A, B, and C, are typically considered to be early-stage investments. However, companies are not restricted to a certain number of named funding rounds, and can continue to raise capital through primary investments through later rounds such as Series D, E, F, and beyond. These later-stage companies may offer primary investment opportunities, although they may only be available to institutional investors such as hedge funds or pension funds.

Who Can Invest in Startups?

Anyone can invest in startups, but the opportunities and access an individual has are largely determined by their status as an investor. There are two types of investors: accredited and non-accredited. An accredited investor meets certain financial requirements which determine their status.

• A net worth over $1 million, excluding primary residence (individually or with spouse or partner)
• Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year,
• Or, holds in good standing a financial professional’s Series 7, 65 or 82 license.[1]

While it’s true that certain opportunities are traditionally only available to accredited investors, non-accredited investors can often participate in early stage private market investments through a different avenue, such as equity crowdfunding. MicroVentures, for instance, makes investing in startups through equity crowdfunding opportunities. With pre-vetted startup investments starting as low as $100, MicroVentures offers investment opportunities open to all investors.

Platforms for Startup Investing

Investing in startups can be a great way to build your portfolio. However, before you start investing, it’s important to do your due diligence. You’ll need to consider your financial situation and determine if investing is right for you and how much you’re willing to put into the investment. To that point, it’s also important to consider the high risk associated with startups. If you’re not comfortable with a large, risky investment, you may want to consider more conservative options, like crowdfunding, instead.

Crowdfunding platforms allow practically anyone, including non-accredited investors, to invest in startups through equity crowdfunding. Some platforms require a minimum investment, but this amount can be considerably smaller than amounts required of accredited investors. Furthermore, some platforms may offer a curated selection of startup companies. In some cases, these opportunities offer the option of buying shares in startups or debt instruments. If you would like to know more, you might want to check out our crowdfunding options.

Startup investing with MicroVentures raises capital for private companies through our network of accredited and non-accredited investors. Through our platform, both accredited and non-accredited investors alike can invest in vetted startups alongside venture capitalists and angel investors, often at the same terms. Sign up for free to become a startup investor today.

How to Begin Investing in Startups

Startups are available in almost every industry, and they can be diversified across industries and cap sizes. This means that you can invest in a variety of startups, and potentially make more money from your investments over time.

As a non-accredited investor, you can invest in startup companies through our crowdfunding platform by creating an account here.

If you are an accredited investor, you can sign up here, and we will get in touch with you over the phone to confirm your accredited status. After your account has been activated, you will be able to browse our Regulation D primary and secondary offerings.

The final way to invest in startups is by purchasing through an initial public offering (IPO). An IPO is the first sale of stock to the public. While this isn’t considered an early stage investment, it may be an option for you to review.

Risks of Investing in Startups

It’s important to understand the risks involved in a startup. The harsh reality is, many startups fail, and the value of your investment can be less than you expect. In fact, losing your entire investment is a possibility you need to be prepared to face, should you decide to invest.

Another important consideration is that startup investments are illiquid, and there may be restrictions on resale. There are also no readily available secondary markets for selling your shares. In most cases, it could be years before you have the ability to liquidate your position and  begin to see returns, as it takes time for a business to get off the ground — or fail.

The return on your startup investment will depend on several factors, including the size of the market, the amount you invest and the product or service being developed and sold. Some startups  can gain momentum quickly, while others may struggle to gain traction in the market. These are some of the risks you need to understand and be willing to take before jumping into an investment opportunity.

How to Decide If a Startup Could Be a Good Investment

Investing in a startup often ushers the investor into the innovation economy. Startups can help create jobs and can bring new technologies to the market. The opportunities can be exciting, but research is required to determine if the investment fits your needs.

The first step to assessing a startup investment opportunity is to determine what problem the startup is trying to solve. This will help you determine the potential size of the market and the growth potential. It will also help you determine whether the startup addresses a real need or demand and if it has the capacity to solve it.

Evaluating the company’s target market can also help provide valuable insights. A startup that focuses on a unique product or service can be attractive and exciting for investors, but it’s important to look at the size and saturation of the market. A startup that’s innovating in a market where there’s high demand and minimal competition could make for an investment opportunity, but reverse circumstances could raise some red flags for investors.

You can also look at the startup’s team, industry experience and business model to evaluate their expertise and perceived growth potential. Additionally, consider the company’s current customer base and target market: how will the company reach them, and what will they do or provide for them?

Due diligence is essential to making informed investment decisions in any context. Startups can offer the opportunity to see returns, but they are also high-risk investments. Be sure to do your homework, or consider using a platform to help like MicroVentures. Learn more about startups in our Investing 101 blog.

 

[1] https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.