Investing in startups can be an exciting way to diversify your portfolio and support innovation. However, startup investing is not for everyone—it comes with high risks, illiquidity, and the possibility of losing your entire investment. In this blog, learn more about if startup investing is right for you, the benefits and limitations, key considerations, and how to start investing in startups.

How to Start Investing in Startups

Is Startup Investing Right for You?

Before investing in startups, you may want to ask yourself the following questions.

What is your risk tolerance?

Can you afford to lose your entire investment? Are you comfortable holding your investment for years to decades? Startups are inherently high-risk investments—statistically, most fail, and even those that succeed may take years to grow. Unlike publicly traded stocks, which can be bought and sold instantly, startup investments are illiquid, meaning you may not be able to exit your position quickly. This makes it crucial to ask yourself whether you can afford to lose your entire investment and whether you’re comfortable with holding periods that can stretch from five to ten years or longer.

Are You an Accredited or Non-Accredited Investor?

Your investor status can affect in which startups you may be able to invest. Accredited investors are those who meet certain financial or knowledge requirements – whether having a net worth exceeding $1M, an annual income of more than $200k if single or $300k if married, or hold certain financial licenses. Non-accredited investors still have the ability to invest in certain startups – one example is crowdfunding – but understanding your accreditation status is an important first step in startup investing.

Can You Conduct Thorough Due Diligence?

Do you have the time and expertise to thoroughly research and consider investment opportunities before ever making investments? Investors should evaluate and completely understand the startup’s business model, market potential, founding team, competitive landscape, and other factors. Not having the bandwidth or knowledge to conduct strong due diligence may mean startup investing is not right for you.

Why Invest in Startups?

Potential Growth

While startup investing carries significant risks, it also presents opportunities that set it apart from traditional investments. One benefit is the potential for growth and meeting investment goals. While not every startup becomes a unicorn or produces an exit, the possibility of backing a future industry leader can make this asset class appealing for some investors.

Portfolio Diversification

Another advantage of investing in startups is portfolio diversification. Startups span a wide range of sectors—from cutting-edge biotech and artificial intelligence to sustainable energy and fintech—providing exposure beyond conventional stocks and bonds. Because private markets often move independently of public equities, adding startups to your investment mix can help mitigate overall portfolio risk.

Fueling Innovation

Startup investing can allow you to play a role in fueling innovation. Many startups are founded to solve pressing challenges, whether in healthcare, climate tech, or digital infrastructure. By providing capital to early-stage companies, you may be supporting visionary entrepreneurs developing technologies and services that could transform industries and improve lives.

Key Risks of Startup Investing

High Failure Rate

The most sobering reality of investing in startups is the exceptionally high failure rate – statistics show approximately 90% of startups ultimately fail. Even ventures with groundbreaking ideas and strong initial traction can collapse due to fierce competition, operational missteps, unexpected market changes, or simply running out of cash. Many promising startups that appeared destined for success have folded because they couldn’t secure follow-on funding or adapt to shifting industry landscapes.

Illiquidity

Another significant challenge is the illiquid nature of startup investments. Unlike publicly traded stocks that can be sold more easily, investing in startups typically locks up your capital for extended periods – often 5-10 years or even more. There’s no guarantee of when (or if) a liquidity event like an acquisition or IPO will occur to provide an exit opportunity. This means your investment could remain illiquid during times when you might need access to those funds.

Dilution

Investors also face dilution risk as startups progress through subsequent funding rounds. Unless you participate in future investment rounds, your ownership percentage could gradually shrink as new investors come on board, unless there are anti-dilution provisions in place. This erosion of equity can substantially reduce your potential returns even if the company succeeds. Some startups undergo multiple funding rounds that can leave early investors with just a fraction of their original stake.

Lack of Transparency

Another challenge is the lack of transparency inherent in private market investing. Unlike public companies that must file regular financial disclosures, startups aren’t obligated to share detailed performance metrics or financial statements. This opacity makes thorough due diligence very important, yet simultaneously more difficult to execute. Investors must often rely on limited information when making decisions, which may not be for everyone.

How to Invest

Once you’ve determined if investing in startups is right for your portfolio, there are a few ways to get started.

1. Determine Your Investment Strategy

Before ever investing in startups, you should define your goals. How much capital are you willing to allocate to startups? Some investment opportunities may have minimum investments of $3k or more, so understanding how much you can comfortably afford to lose if the startup fails is the first step.

Then, determine which sectors or industries that you would like to invest in. It’s important to fully understand the industry in which a startup operates, and you should always invest in an industry that you can understand.

Finally, decide the stage of company in which you’re comfortable investing. Are you comfortable investing in early-stage startups that haven’t begun generating revenue yet? Or would you prefer companies that have demonstrated some form of traction and product-market fit?

2. Choose Your Investment Method

There are several ways to invest in startups, depending on your capital and accreditation status. Do you want to target equity crowdfunding? Do you want to make investments directly in a company or purchase secondary shares from a former founder/employee? Or would you rather diversify your investment across a fund that is investing in multiple companies?

3. Conduct Due Diligence

Once you have the basics, it’s time to conduct that thorough due diligence we discussed earlier. It’s important to never invest blindly—research every opportunity. Is the team equipped to lead the company? Is the startup truly solving a need with a market big enough to support growth? What competitors are in the landscape? All of these factors and more should be answered with thorough due diligence.

4. Invest & Prepare for the Long Haul

Finally, it’s time to invest. Once you’ve identified a startup that meets your investment thesis and needs, it’s time to prepare for the long haul. As mentioned, startups are highly risky and illiquid. The most common outcome is failure. Additionally, a startup may choose to stay private. Or, the startup could have an exit event in the form of being acquired, merged with another company, or conducting an IPO. It’s impossible to tell which route a startup will take, so it’s important to be prepared for any outcome on a timeline that you are not able to predict.

Final Thoughts

Startup investing is not for everyone. It may be suited for those who have a high risk tolerance, can afford to lose their investment, and are able to wait significant periods of time for a potential exit. Startups can be an exciting investment opportunity, but it’s important to do your research or meet with a financial professional to help determine if it is suitable for your portfolio.

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Want to learn more about investing in startups? Check out the following blogs to learn more:

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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.

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