Stories abound of startup companies making it big and, in turn, making their investors extremely wealthy. Investing in a company at the very beginning of its lifecycle can prove to be very profitable.
However, it seems like startup investing is reserved for wealthy venture capitalists, not your average working-class citizen.
Fortunately, startup investing by average investors became easier in 2012 with the passage of the Jumpstart Our Business Startups Act (JOBS), which relaxed some federal securities regulations and made it easier for businesses to seek investments through crowdfunding. The Securities Exchange Commission also voted in 2016 to adopt rules that made crowdfunding more possible.
The Basics of Investing in Startups
Before you get started investing in early-stage companies, it’s important to understand that many startups fail and leave investors with nothing. It is a high-risk, high-reward kind of endeavor.
Sometimes, startups allow you to get your money back if a company is not successful in raising sufficient funds, and if they guaranteed the return of your money.
It’s worth noting that startup investments are generally not tradeable like stocks. You should expect to hold onto your investment until the company goes public or is acquired.
While relaxed regulations have allowed for more individual investors to get a financial share of startups, there are some rules to follow. Due to the risks involved, the Securities and Exchange Commission (SEC) limits how much you can invest in any 12-month period. This limit could be as low as $2,200 or as high as $107,000 depending on your income and net worth.
The platforms listed below offer a sampling of the avenues available to anyone who wants to invest in a startup with limited funds. While it’s unlikely that you’ll become the next Silicon Valley billionaire, these platforms can help diversify your broader investment portfolio and give you the satisfaction of supporting a young company you believe in.
Seedinvest is a crowdfunding platform that allows individuals to invest in early-stage companies that have been pre-screened for potential viability. According to SeedInvest, less than 1% of companies that seek funding through the platform are accepted.
The company claims it has more than 250,000 investors, with more than 150 companies successfully funded.
When you sign up for an account on SeedInvest, you are presented with a list of companies seeking money. Many companies are open to receiving investments from anyone, but some require large investments and are open only to accredited investors who had an income exceeding $200,000 in each of the past two years.
You are provided with a “pre-money valuation” as well as the total value of funds being sought and the amount already raised. Each company has its own minimum investment requirement and a time by which the money needs to be raised.
For example, an ice cream company in New York City can have a pre-money valuation of $9 million and have raised $71,250 out of a goal of $2 million, with 29 days remaining.
If you aren’t interested in investing in just one startup, you can build a portfolio of investments through the company’s auto-invest feature. With auto-invest, there is a minimum investment of $200 and there is a 2% processing fee for each investment.
SeedInvest touts the importance of diversification, recommending that you invest not in a single startup, but a portfolio of up to 25 companies.
Wefunder has a stated goal of funding more than 20,000 startups by the year 2029. It hopes to do this by accepting investments of as little as $100 at a time.
Through Wefunder, an average investor can inject capital into a wide range of companies. At last glance, it was accepting investments into dozens of companies including a fan-owned entertainment company, a vegan marketplace, a dog cancer cure, and a brewing company.
The platform allows an investor to purchase stock (with dividends or no dividends), convertible notes, or debt. Wefunder has accepted $110 million in investments since 2012, supporting over 300 companies.
When you invest, money is placed in an escrow account. If the company succeeds in raising enough funds, your investment goes to the startup. Otherwise, you can get your money back.
Republic is another online platform that allows individual investors to purchase a stake in early-stage startups. It allows you to get started for as little as $10.
The company was founded by alumni of AngelList, the popular investment platform for accredited startup investors.
Republic says it selects the companies you can invest in through a four-step screening process that analyzes a firm’s founders, product, mission, and proof of growth. It then performs lengthy due diligence before putting a company up for investment.
In addition to offering investments, the Republic platform hosts six different investment groups and allows for discussion, ideas, and advice between investors. Group members are also encouraged to invest together.
The MicroVentures platform allows for early-stage and late-stage startup investing for as little as $100.
The company has dozens of companies to invest in, ranging from a maker of live-action mobile sports games, a digital marketing and tradeshow company, and a manufacturer of high-end tequila.
MicroVentures was founded in 2009 for accredited investors and was an early funder of many top companies, including Twitter. It remains quite selective about the number of companies approved for investment.
Like other platforms, MicroVentures offers information on each investment including the company’s fundraising goal, and the number of days left in the investment round. In most cases, a startup will offer details on how it intends to spend the money it raises. Many companies will also offer perks to investors, such as free products or invitations to exclusive events.
Frequently Asked Questions (FAQs)
What is considered a startup company?
There's not one definition, but in many cases, a startup company is launched by a founder or co-founders with the future goal of taking the company public or selling it for a large profit. Startups begin small, and they tend to be lean and agile in the way they do business. Founders may fund the business themselves to start with, but they eventually look to venture capitalists and other investors to grow the business and get it ready to sell to a larger company or for an initial public offering (IPO).
What are some companies that began as startups?
Startup are often in the eye of the beholder, and it could be said that most companies began as startups. Successful companies that began as startups include MailChimp, Shopify, Shutterstock, Wayfair, GoFundMe, and SurveyMoney. You can also count big names such as Facebook, Instacart, Uber, and DoorDash as having been startups.
How many startups make money for their investors?
According to some estimates, less than one-third of startup companies ever generate a positive return for their investors.