Want to Invest in a Startup? Here Are Three Things You Should Know Investing in startups can be a profitable endeavor if you know what you're doing.
By Lucas Miller Edited by Maria Bailey
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Thomas Jefferson famously stated, "With great risk comes great reward."
But the man was not some Average Joe debating whether he should invest in startups or not. Novice investors no longer need to have millions in disposable income to invest in startups and get in the game. This is why so many early-stage startups are bootstrapped, with finances from friends and family keeping the engine running.
The fact is that 90% of startups fail. The ones who are lucky to not fail may just break even — no loss, no gain. So how can one proceed with caution when trying to get their feet wet in the startup investment arena? After all, it's already known that if you wait to invest after a startup goes public, you are missing out on as much as 95% of the gains.
Yes, the reward that can come out of a wise investment is plentiful. With that in mind, here are some pointers worth considering if you're looking to invest in startups for the first time.
1. There are plenty of rewards tied to startup investing
As a novice investor, you may be wary of investing in startups due to the risk factor, but the rewards should also be considered. For example, investing in startups will help you diversify your portfolio due to the addition of a high-risk and high-reward asset class.
It also works wonders if you're looking to beef up your personal branding as it puts you in the position to learn about and from new entrepreneurs and what they are building — and possibly support them in the process.
As an investor, new doors will open for you, allowing you to network with other investors, founders and esteemed members of the industry you're passionate about. When it comes to returns, if you're an early investor that funds a startup that turns out to be successful, the returns can significantly exceed other types of investments.
Related: 3 Major Advantages of Investing in Startups
2. You can help drive innovation by keeping a company private
Initial Public Offering's (IPO) used to be considered the ultimate goal for entrepreneurs, especially those behind tech startups. However, an increasing number of entrepreneurs are choosing to either delay IPO or even stay private indefinitely.
A large reason for that is it enables their team to focus on innovation, which can be appealing to you as an investor if you're passionate about the tech itself. After all, one can't deny the fact that things can get a little messy internally after an IPO — such as public market investors trying to force executives out of companies.
Related: How Privately Held Companies Can Compensate Top-Tier Talent and Retain Cash
Investment platforms are an option to get started
Not everyone has a personal connection with a startup looking for funding that they're genuinely passionate about. There are also plenty of investors that would rather not invest in startups that are run by their friends or family for the sake of not letting money come between their relationship.
So, what's another great way to get involved in startup investments?
You might want to look into a few investment platforms. There are many to choose from, such as FundersClub and SeedInvest. These platforms operate somewhat similarly, offering lists of startups on their respective platforms, descriptions and terms such as minimum investments and fees.
There are also blockchain options, such as Decentralized Autonomous Organizations (DAO), which offer growth and funding opportunities for startups while simultaneously reducing risks for investors. According to an article on NASDAQ by Hatu Sheikh of DAO Maker, "The fluidity, perpetuity and resilience of a DAO can never be matched by any corporate. So, a new level of efficiency with clear demarcation of capital and governance awaits us all in the near future."
Of course, for anyone who chooses to go the blockchain route, it would be advisable to deeply weigh in on a couple of investment options before moving forward. This is because scalability and organizational structure are usually a top concern for companies with DAO-styled governance.
According to Investopedia, "Unless you happen to be a founder, family member or close friend of a founder, chances are you will not be able to get in at the very beginning of an exciting new startup. And unless you happen to be a wealthy, accredited investor, you will likely not be able to participate as an angel investor."
It is also important to keep in mind that with changing times comes changing conditions, especially when you consider the fact that many startups have had high valuations, even throughout the pandemic. However, that quickly changed in the post-pandemic world as consumer behavior, preferences and expectations have changed.
Novice, would-be private investors should be aware of the three pointers mentioned above to be able to get involved in startup investments with greater confidence.
