How to Invest in Startups

Venture capitalists poured over $675 billion into startups around the world in 2021. This is twice as much as the record amount they invested in 2020.

There are more unicorns, too. These are startup ventures with valuations of more than $1 billion.

Some of these startups might not amount to anything, while others go on to have multi-billion dollar valuations.

This is a high-risk investment that comes with big rewards if it pans out. The good news is that there are more ways to invest in startups.

Do you want to know how to invest in startups and make your risks pay off?

Read this startup investing guide and learn the top startup investing tips.

Type of Startup Investors

What kind of startup investor do you want to be? Let’s take a look at your options. Startup investing is heavily regulated to protect both entrepreneurs and investors.

There are accredited and non-accredited investors. Accredited investors have to meet income and net-worth requirements.

Your income has to be more than $200,000 a year, or $300,000 if you’re married. You need to earn this much over the last two years and expect it to continue.

If you don’t earn that much, then your net worth (excluding your home) has to be over $1 million.

If you don’t meet these qualifications, you can still invest in startups. You’ll do so as an unaccredited investor.

Angel investors use their own funds to invest in startups. These are individual investors who invest in startups in exchange for a percentage of the company.

If you’re an accredited investor, you can invest in startups as an angel investor.

SEC regulations let startups raise capital from 35 non-accredited investors. Startups that have more than 35 non-accredited investors have to file disclosures.

Crowdfunding platforms allow non-accredited investors to participate with $100. The top crowdfunding platforms are Republic, SeedInvest, WeFunder, and Startup Engine.

AngelList is a crowdfunding platform that only allows accredited investors. The minimum investment is $1,000.

Another type of investment is a special purpose vehicle that allows investors to shield themselves from risk.

Venture capitalists work for companies that invest in startups using funds from other investors. Accredited and non-accredited investors can invest in VC and public equity firms that invest in startups.

How Much Can You Invest in Startups?

No matter what investment path you choose, you need to know how much you can invest in startups.

Accredited investors don’t have limits as to how much they can invest. The typical angel investment is between $25,000 and $150,000.

Non-accredited investors have limitations placed by the SEC. This is designed to protect non-accredited investors from bad investments.

Investors with a net worth or income under $100,000 can invest up to $2,000 or 5% of their income or net worth, whatever is lower.

Those earning more than $100,000 can invest up to 10% of their net worth or income.

Reasons for Investing in Startups

Is startup investing worth it? Startups have a high failure rate, and only a handful go on to become giants like Facebook or Google.

There are other investments that don’t carry that much risk, such as real estate. If you do invest in startups, you should assume that you’ll lose the investment.

Even if the investment works out, your funds are tied up for several years before you can cash out. Startup investing requires patience to see the company grow.

Startup investing carries a number of other things, whether they work out or not. For example, you can invest in a startup because of a close connection with the founder.

You might believe in the product or technology and see its potential. There are startups that want to solve the world’s pressing problems.

Investing in these startups gives you a chance to do something about these larger issues.

Analyzing Startup Investments

You can minimize your risk when you invest in startups by analyzing the company before investing.

Invest in startups that you know and understand. A startup might ask for your investment in an industry or technology where you have zero knowledge or experience.

Investing in industries and products you know well lets you evaluate the startup. You can also serve as an advisor to the founders.

Look at the market opportunity. Are there other companies doing the same thing as the startup company? What makes this startup different from the others?

Read the investment documents such as the prospectus, business plan, and pitch deck. Evaluate the business model and decide how sustainable it is.

Most importantly, go over the financials of the startup. The burn rate tells you how much cash the company spends each month.

Companies that spend a quarter of the cash available might not be around in a few months.

Investing in Startups

Small investors have a lot to lose in startup investing. Many non-accredited investors look for the unicorn startup, hoping that will make up for bad financial decisions in the past.

Accredited investors can invest too much, though they have the means to recover quickly from bad investments.

Don’t invest in startups hoping for a unicorn. Investors shouldn’t put all of their funds into one company, either.

If you do invest in startups, invest in several of them equally. This diversifies your risk. If you lose four investments but have one that works out, you’ll make up for the lost investments.

How to Invest in Startups and Make Money

Investing in startups is possible for accredited and non-accredited investors. This startup investing guide showed you some possibilities and how to evaluate those opportunities.

Now that you know how to invest in startups, check out the other articles on the blog for the latest business and technology tips.