How to Invest in Startups

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Startup investment is exciting, invigorating, and it also provides substantial income for millions of investors around the world. The sheer number of startups grows every day, with sites like Entrepreneur.com highlighting over 60 simple business types that are easy to start for budding businesspeople.

The risks can also be low for investors, with one-third of businesses requiring less than $5,000 investment to start trading, and the rewards are immeasurably high – If you had invested $100 in Amazon in 1997, you would have been able to sell your stock for $120,762 in August 31st, 2018. With so many opportunities to invest, the sky really is the limit.

Why, then, does investing in startups seem so difficult?

Forget the “it’s not what you know, but who you know” mantra for now. I can tell you that it is indeed what you know which matters most. With this in mind, let me take you through both the traditional and simplest ways to change your life by investing in a startup.

While the term “startup” is a 21st-century buzzword, investing in businesses at the beginning of their journey has always been an option for savvy investors. Even today, you can still go down these tried and tested routes with great success. 

Traditional Ways of Investing in a Startup

1) IRA Investment

Using what’s known as an Individual Retirement Account (IRA) or Individual Retirement Arrangement, you can find useful opportunities when investing in startup businesses.

Such accounts are set up to provide you with a dividend or revenue when you retire. Investments can include stocks, bonds, mutual funds, and exchange-traded funds, which tend to be handled by a financial advisor or bank.

As IRAs are intended to pay out when you reach retirement age, there is usually a 10% early withdrawal penalty.

2) Self-Directed 401k

Self-directed investment opportunities work much like IRAs; however, the investor has much more say in how your capital is used.

This gives you important input in buying and selling decisions. You will also be able to invest in a wider range of alternative businesses. While you have more input, the negatives often outweigh the positives.

Making such decisions requires a lot of time and knowledge, both of investment and of the niche in which you are investing. It is best to go into such investments with your eyes open, and if you are unsure, try a standard IRA instead where your money will be in the hands of an expert. If you want to be an expert, however, you can make that happen.

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3) Pitch Events

Occasionally, you will find opportunities at pitch events. These are organized so that startup founders and/or managers can pitch their idea to investors. Often, this is at the angel or seeding stage early on, but occasionally you may find entrepreneurs pitching their more mature businesses for a new round of investment.

Some of these events will involve a detailed pitch for one startup, others will include a number of startup businesses. Local trade magazines, newspapers, and social media should have listings of pitch events near you.

These are great avenues to get a face to face feel for a company. You might also get the opportunity to ask direct questions and set up one-to-one meetings later.

4) Single Purpose Vehicle (SPV)

Joining an AngelList Syndicate as part of an SPV is a great way to invest in a startup business. An SPV is a form of crowdsourced investment, often led by one or more skilled investors. Even with little experience, an investor can contribute to an SPV and piggyback off of the experience of others.

SPVs are set up for investment in only one business, and you must be an accredited investor. If you have experience in investment and/or know a good amount about a specific niche, you could lead an AngelList Syndicate yourself.

5) Personal Networks

Many first-time investors involve themselves in startup investment through a friend or associate. If you know someone who is investing in or has a startup company you think is a good opportunity, this could be a great way to get started.

A word of warning, however: Just because someone is a friend, this does not mean that they have business acumen. Your finances are your future, so invest them diligently.

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6) Social Media

Okay, so this is not all that traditional, but social media has been around in one form or another for well over a decade now, so I’m calling this “traditional” fundraising.

Facebook is a great resource for joining investment groups, which will list investment opportunities. Again, due diligence is a must, as scammers can try to tempt you.

Sometimes it is a good idea to use social media to find lists of local businesses looking for investment. Then, you can have a face-to-face chat with a startup founder and know that you are not dealing with a faceless company.

The Simplest Way to Invest

All of the above are great ways to invest, but you might still be scratching your head about how to proceed.

If you want to dip your toe into startup investment with a small amount, and not have to do a large amount of research, then I highly recommend online crowdsourcing. You have probably seen companies like Kickstarter and Indiegogo provide opportunities for entrepreneurs to raise capital, but there are also many websites specifically for startup investment.

What is great about these companies is that they vet the startup businesses available to you and that they allow for small investments to get you started.

You do not have to spend countless hours networking and chasing down investment leads – instead, you can log in to one of these services and pick a listed company in which to invest. Training to become a startup expert is always preferential, but crowdsourced websites provide a good entry point to investment.

Companies like WeFunder help you find investment opportunities for as little as $100, while SeedInvest can help you get started without the need for being an accredited investor.

For those of you who are accredited investors, SeedInvest also offers higher investments over $20,000. Microventures allow for investment during different stages of startup development, even late-stage investment when the potential success of a startup is more easily anticipated.

The beauty of these services is that they usually provide a detailed history of startup founders, how long they have been raising investment for their investment round, and provide detailed strategies for how your investment will be spent.

Product freebies and special events are also often offered to investors.

Startup Investment Can Change Your Life

I hope you have found these suggestions helpful. If you are looking for a comprehensive guide on startup investment, please listen to the DealMakers podcast and feel free to peruse my other articles filled with useful business and investment strategies. Another way to gain access to startups is by reaching out to a good M&A advisor as they typically have the deal flow of opportunities.

BIO

Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs. 

Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online. 

Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake). 

Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business. 

Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.

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