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How To Invest in Startups

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You’d be standing on a gold mine if you had invested just $1,000 in companies like Amazon, Microsoft, Apple or Dell when they had their initial public offering (IPO). Of course, the stocks of these companies have multiplied many times over since then. Imagine if you had invested long before the IPO! What could your investment look like today?

Each prosperous startup began as a homegrown idea. Success stories like Sequoia Capital’s 12,000% return from investing in WhatsApp might make you think about investing at the ground level of the next big thing. Remember, transforming startups into a success story requires effort, capital and risk.

Read Benzinga’s guide. We outline the benefits and risks and share our best practices so you can find investment opportunities at the ground level. 

Start-Up Investment Platforms

Online investment platforms allow investors like you —who are aptly called angels — to easily add this asset class into your investment portfolio. Here are the best platforms for startups to raise capital from venture capitalists, angel investors and crowdfunding from the public.

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1. AngelList

AngelList is one of the most popular startup investing platforms out there. The platform offers startups, from seed to post-IPO, to secure funding and angel investors. You’ll have first-hand experience in the startup ecosystem through a platform that lets you research the fastest-growing companies.

The platform also has a job board, AngelList Talent, where you can apply privately to more than 130,000 tech and startup jobs with a single application. There’s also a Product Hunt section where you can join millions of early adopters and makers in waiting for the next big launch.

AngelList allows you to build a network via email invite or connecting social media accounts to boost your chances of securing funding. You can also use its search tool to identify investors who are a good match for your startup.

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2. Gust

Gust is quite different from other startup investment platforms. Instead of acting as an investing network, Gust offers a SaaS platform by 80+ angel networks including OurCrowd, SeedInvest and others. The platform provides the tools accredited angel investors, startup programs and venture funds need.

Whether you’re an investor syndicating a deal or a startup program seeking to connect investors with quality startup talent, Gust lets you investigate individual offerings, discuss deals, track and review investments and share your potential investments with others.

The platform also provides a vast video and proprietary data library to help you stay abreast of the latest trends as well as predict future performance.

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3. Wefunder

Wefunder has been in the crowdfunding game for long enough to know how to get results. You can invest as little as $100 in the startups you love. The platform has helped fund $55+ million in startups like biotechnology, entertainment, software and neighborhood businesses.

Wefunder is closely regulated by the SEC and FINRA. When you invest, your money is transferred to an escrow account. The funds are released to the startup when the fundraising succeeds, otherwise, you’ll receive a refund. Create a profile by providing some basic information and proceed to browse the available investment opportunities.

Pros of Startup Investments

Several high-profile company success stories have proven that putting money into a startup is one of the few great ways to invest and reap high returns. Here’s what motivates investors to put their money into startups:

  • Potential profits: With good planning, startup investments can be very profitable. Pay attention to companies that provide solutions, bring value and develop new trends in the ever-evolving knowledge-based economy.
  • Portfolio diversification: Startups are an asset class that allows you to explore a different investment channel. Investments are risky, and a diverse portfolio means you can minimize the possibilities of taking a big hit during a downturn.
  • Job creation: By putting money into a startup, you’re helping the economy move in the right direction by helping a company get on its feet. If it succeeds, you’ll have contributed to the creation of jobs for non-investors.
  • A range of options: There are startups in virtually every market and industry. This way, you can diversify your investments across markets and cap sizes, including the emerging markets.
  • Buy-out potential: Many startups are bought by large corporations that see them as a potential competitor or want to leverage the technology created by the startup. If the startup you invest in sells at a lucrative price, you’ll enjoy great returns on your investment.

Cons of Startup Investments

Even with their growth potential, startups are considered high-risk investments since only a small percentage succeeds. Consider these cons before putting your money into a startup.

  • Tremendous risk: As lucrative as it may be, you could invest in a company that never succeeds. Startup investments are high-risk and your return on investment depends on the new venture becoming a success.
  • Wrong valuations: Most startups often give valuations more aligned with Silicon Valley, even when the company has not gained traction. This creates a harder barrier for you to invest in your startup of choice.
  • Lack liquidity: Startup investments can’t be traded like publicly traded stocks. This means that you may not be able to sell your stake until the company is acquired or goes public.

Best Practices for Investing in Startups

There are various approaches and strategies for investing in startups to maximize potential returns and hedge some of the risks. Here are some best practices we recommend.

Industry Choice

First and foremost, choose the startup carefully, including its industry and target market. Some industries may not make sound investments at certain times, considering the prevailing market conditions. Some industries are hotter than others. Consider your view of society’s needs and direction before picking an investment.

Factors like the investor’s experience in the industry also come into play when picking an investment in a specific industry. If you’re a doctor, for instance, you may have some insights about the medical world that may be valuable when investing in a medical technology startup. Higher investment returns are often connected to an investor’s industry expertise.

Due Diligence

You should always know what you put your money into, so perform due diligence. Spend time investigating a company before signing an investment contract to positively influence your investment outcomes. Dig deeper into the company’s financial records, learn more about the founders and identify what the startup promises to solve. The more information you have about a company, the better poised you are to make a wise investment decision.

Diversification

Whatever your expertise is, you should always diversify in your investment class. You may want to diversify beyond 1 or 2 startups. Invest in more startup companies to improve your odds of landing a winner.

Diversification also includes maintaining a portfolio of startups in diverse industries with different business strategies. You may also diversify based on the age of your startups — look into early-stage, mid-stage and late-stage investments. Multiple startup companies provide a sweet spot for building a diverse portfolio.

You can also learn more about investment firms that offer professional wealth management.

Post-Investment Involvement

After making your investment, there are extra contributions you can make to increase the chances of a higher return. This can include financially monitoring the company, mentoring the startup and helping establish business relations on its behalf. You may also attempt to secure a board seat to maintain your degree of post-investment involvement.

Join the Startup Investment Community

The startup investment landscape is undergoing a renaissance. Individual investors now boast unprecedented access to investment opportunities that were once only available to accredited investors. There are numerous platforms, strategies and forms of returns to research and understand before making your investment decision.

Be sure to diversify, draw on previous experience and do the legwork — market research and due diligence. The risks are high, but the rewards can be worth it.

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