Should You Invest in a Startup?

After a decade of operating privately, Uber is preparing an IPO for 2019 and investors are eager to get exposure to the former renegade startup. Uber’s valuation has been estimated near $120 billion and private firms that invested early have already seen enormous returns. Uber could fundraise because it had a hold of a market that startup founders knew was valuable.  

Though you won’t find ways to invest with Uber through traditional brokerages, that doesn’t mean you’re completely shut out. The IPO market in the United States faced decline starting in 2015, with only 105 companies going public in 2016 (although that’s improved in 2018). Initial public offerings from American companies hit a post-Recession high of 275 in 2014, but many private companies have decided to withhold going public longer as they mature. Even so, the fintech space has made it possible for companies to raise money prior to an initial public offering.

Public companies face pressures from shareholders and government regulators that private companies don’t and a company with a valuation like Uber’s would’ve never waited to go public during the dot-com boom. 

Still, there are ways for individual investors to get involved with startups, but you’ll have to seek alternative avenues. And as always, there’s benefits and drawbacks to this type of investing, especially as you get onto a CRM platform, review each investment opportunity and aim to make the best investment decision for your portfolio.

What are Startups?

The definition of startup might be different depending on who you ask. Pose the question to 10 different entrepreneurs and you might come away with 10 different answers from a venture capitalist, a retail investor, a business owner and many others. So, there must be some parameters that investors review when doing their due diligence of a startup.

But regardless of the specifics, most definitions of startup have two important factors:

• Company size
• Length of business history
• Aggressive growth plans

Startup companies haven’t been in business very long, usually topping out at five years. They also have only a handful of employees and get funding from either the founders, venture capital or angel investors. Additionally, startup companies usually aim for disruption, either by replacing a current enterprise (like Uber wants to do to taxis) or creating an entirely new market (like online dating companies).

Some startups design a product or forge a business plan in the hopes of getting bought out by a larger firm. Before becoming an Uber founder and CEO, Travis Kalanick developed a peer-to-peer file trading service called Red Swoosh, which he sold for $19 million to Akamai in 2007. Kalanick used his money from the Red Swoosh buyout to help get Uber off the ground.

Pros and Cons of Startup Investing

Thinking about investing in startups? Before we discuss ways to buy in, you’ll want to consider the pros and cons of a startup program. Startup investments can be risky, but also extremely rewarding.

Pros 

• Potential for huge gains: Startups are usually brand-new companies without much revenue but plenty of room to grow. If you get in on a great company early, your investment could grow exponentially. Consistently doubling and tripling sales is difficult for an entrenched company to pull off. With startups, the sky is truly the limit.
• First-hand knowledge of new advances: Many startups work at the frontier of technology, so getting in on the ground floor of these companies would provide insight into coming advances. Imagine being at the forefront of AI research or space exploration.
• Diversification away from the stock market - ETFs and mutual funds have made the stock market more interconnected than ever, so big news often moves every company in lockstep. Startups valuations may be prone to fluctuation, but you’ll have assets that aren’t connected to the broader market.
• A unique shopping experience: When you are looking at startup investment opportunities, you can review portfolio companies that intrigue you while others simply look profitable. You’re making a judgment call, but each startup opportunity should jive with what you like, what interests you and your investment strategy.

Cons

• Risky investments: Startups have minimal revenue and many fail before ever getting too far off the ground. You can’t get outsized gains without taking on risk and startups are some of the riskiest investments you can find.
• Hard to trade: Startups aren’t publicly traded companies with shares going back and forth on stock exchanges.
• Valuations are difficult to verify: Business valuations are difficult to clarify even when the company is publicly traded. How much is a brand worth? Or an idea? Startups don’t make much profit and don’t release financial statements to the public. Valuing new companies is difficult because so many parts of them are nebulous.

Best Startup Crowfunding Platforms

• Best for Private Investments: SeedInvest
• Best for a Large Selection of Offerings: WeFunder
• Best for Easy Access to Startup Investing: 1000 Angels

If the pros of startup investing outweigh the cons in your view, you’ll still need to find a platform for access. Private startups don’t trade on stock exchanges and an intermediary is needed for individual investors.

The equity crowdfunding platforms listed below connect startups with potential investors like you, in the same way venture capital investing connects the well-to-do with fledgling businesses. If you want to get in on the ground floor of exciting new companies, check out the offerings listed on these sites.

1. Best for Private Investments: SeedInvest

SeedInvest is a crowdsource funding platform letting everyday investors connect with some of the most innovative startups looking for capital. You’ll get opportunities to invest in AI research firms like SapientX, Inc. or mobile streaming services like Pongalo. Investment minimums with SeedInvest can be as low as $500 to enter a new seed round.

2. Best for a Large Selection of Offerings: WeFunder

Since its founding in 2013, WeFunder has provided startups with over $70 million in funding. It has a wide variety of startups to invest in, including breweries like Sly Fox, Border X Brewing, and Redemption Rock Brewing. WeFunder prides itself on being a Public Benefit Corporation that helps individual investors, not Wall Street firms.

3. Best for Easy Access to Startup Investing: 1000 Angels

Anyone can be a venture capitalist using 1000 Angels, a platform that’s brought in big names from SoftBank, Thiel Capital, and Cisco looking to expand the world of angel investing. Take advantage of the 14-day free trial and see if startup investing is right for you.

Try Startup Investing Today

Startup investing used to only be available to the wealthiest and most connected investors. But platforms exist now that bring startup investing to laptops and smartphones of investors all over the world. If you’re looking to get into startups, you have more options than ever, but don’t jump in without understanding the risks. Startups are inherently illiquid and volatile, so only risk capital you can afford to lose.

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