Apple. Google. Amazon. These giant companies all started small, and early investors made it big. Although investing in startups used to only be an option for the ultra-wealthy, regulators have eased up on small businesses in the past decade, which makes it possible for everyday people to invest in startups through crowdfunding.
Whether you have $200 or $200,000, a variety of platforms allow you to invest in a portfolio of early-stage companies. Investing in a new business can be a great way to earn passive income. You should be aware, however, that investing in startups is risky. Not every startup will grow to become successful, and you could lose your investment if a company goes under. Therefore, look at investing in startups as a way to diversify your portfolio with alternative investments, rather than as your sole investment strategy.
This is not investment advice, be sure to do your own research if you're going to invest.
How to invest in startups: 7 options
If you have limited funds and an appetite for high-risk, high-reward investments, several online platforms allow you to invest in startup businesses. Each one works a little differently, and the best one for you will depend on your desired strategy and budget.
Here are seven companies that allow you to invest in start-ups::
$500 is all it takes to own a piece of a startup business you believe in with SeedInvest. Founded in 2012, the platform has successfully funded more than 200 companies. If that doesn’t sound like a lot, keep in mind that SeedInvest carefully vets companies before making shares available to investors, and only about 1% of startups make it through SeedInvest’s comprehensive evaluation.
To get started investing on SeedInvest, you’ll need to create an account and submit some information for verification. From there, you can browse startups, review terms, and select one or more investment opportunities. There may be limits to how much you can invest based on your net worth, and minimums can vary by company. SeedInvest charges investors a 2% processing fee capped at $300 per investment.
SeedInvest recommends diversifying your portfolio by investing in a handful of different companies. If the company you choose fails to meet its fundraising goal, your investment will be returned to you. Otherwise, you’ll hold on to your shares until one of two events allows you to sell or trade:
- The startup goes public
- The startup is acquired by another company
It will likely take five to seven years, and in some cases longer, for you to receive a distribution from your investment.
Since 2012, WeFunder has raised $144.5 million in funding for 404 startups (as of July 14, 2020). The platform allows you to invest in a variety of companies, from local businesses to new technology. You can get started on WeFunder with as little as $100, and many companies offer perks to investors, such as discounts and early access to new products.
Once you sign up and select a startup to invest in, your money will be held in an escrow account until the startup reaches its fundraising goal. If the company does not succeed in reaching its goal, your money will be returned to you. Otherwise, the timing of your distribution will depend on the type of investment contract offered by the startup.
You’ll find four investment options on WeFunder:
- Debt: Earn a fixed return on your investment when the business grows
- Convertibles: Your investment is converted into stock when the company raises funding from major investors
- Stock, no dividends: Earn a return once the company is acquired or goes public
- Stock, dividends: Earn a percentage of profits or fixed dividend per share
The amount of time it will take to see a return will depend on the type of investment contract you agree to.
Depending on how you pay, WeFunder charges a 2% to 3.5% transaction fee with a minimum of $8 and a maximum of $100 per investment.
Republic is an online crowdfunding investment platform that has been around since 2016. It allows everyday investors to invest in private startups with as little as $10. Unlike most other platforms, there’s no fee to use Republic; the company makes money by collecting a percentage of the funds raised from the startup. Republic screens startups thoroughly, and only about 3% of companies make it onto the platform.
It’s easy to sign up for an account and start investing in minutes. You’ll need to pass a quiz to ensure you understand the risks before you’re able to select startups to invest in. After you make your commitment, your funds are held in an escrow account until fundraising is complete; if the startup is unsuccessful at reaching its goal, your money will be returned to you.
Republic notes that it can take four to six years, and sometimes longer, to see a return on your investment. Your investment will be converted to equity in the event that:
- The startup is acquired by another company
- The startup undergoes an initial public offering
The amount you can earn will depend on what you invest and what the company is worth when one of these events occurs.
AngelList is a website that connects job seekers with job opportunities at startups and provides a platform for investors to buy shares of startups for as little as $1,000. Founded in 2010, AngelList is the world’s largest community of more than 100,000 startups of all sizes, and 36% of all top-tier U.S. venture capital deals are funded on AngelList, according to its website.
Although the AngelList Access Fund, which provides you with a diverse portfolio of investments, requires a minimum investment of $100,000, you can invest in individual startups with a minimum investment of $1,000. However, AngelList recommends that you only invest if you have enough capital to invest in 15 to 20 startups. AngelList also requires you meet certain accreditation requirements: You’ll need to have earned at least $200,000 in income the past two years individually ($300,000 with your spouse) or have assets totaling more than $1 million.
StartEngine is an equity crowdfunding platform that has raised more than $150 million for more than 350 companies since it was founded in 2011. Minimum investment amounts vary by company, but some startups don’t have a minimum investment. StartEngine also accepts investments from non-accredited investors, but you can only invest a maximum of 10% of your net worth or 10% of your annual income, whichever is greater.
For most startups, StartEngine doesn’t charge fees to investors, but some startups may elect to charge a processing fee. Most of the offerings are common stock, but you might also find companies fundraising through a convertible note, debt, or revenue share. When you pick a startup you want to support, your investment will be held in an escrow account until the offering closes. Your money will be returned to you within 10 business days if the startup you chose doesn’t meet its fundraising goal in the time allotted.
Investors on StartEngine can also look forward to the trading platform set to launch in the future, which allows investors to sell their securities after a one-year period.
MicroVentures is an equity crowdfunding platform with more than 400 investment opportunities designed for everyday people. Founded in 2009, the site has raised more than $220 million for startup businesses from more than 110,000 investors. Past investment opportunities have included Airbnb, Slack, and Uber.
To get started, you’ll sign up and provide some personal information to receive customized recommendations. From there, you can browse investment opportunities, which have been pre-vetted by the experienced team at MicroVentures. You can back a startup for as little as $100.
As with other platforms, your money will be returned if the startup you choose doesn’t reach its fundraising goal. Otherwise, you should plan on holding onto your shares until the company is acquired or goes public. This won’t happen for an average of seven years and could be longer.
NextSeed is an equity crowdfunding platform founded in 2014 that allows everyday investors to invest in local businesses. NextSeed carefully vets all opportunities, and only 3% of startups make it through the rigorous process. You can get started with as little as $100 for some investments, which allows you to invest in multiple companies and achieve a diverse portfolio. However, note that some startups on NextSeed may require you to be an accredited investor.
NextSeed has an intuitive dashboard that makes it easy to keep track of your investments online or in the app. You make investments and receive payments through your NextSeed investment account, which is FDIC-insured. This way, when it’s time to receive returns, you’ll get your payout automatically, and your money will be kept safe.
Depending on the startup you choose, you may be able to make the following types of investments on NextSeed:
- Debt investments
- Preferred equity investments
- Simple agreement for future equity
Once a business reaches its fundraising goal, your investment will show up as invested in your account. If the business fails to meet its fundraising goal, your money will be returned to you.
Investing in startups: Evaluating the risk
Startups probably shouldn’t be the first place you start investing in a recession. It can be risky, and you should invest in startups only if you can afford to lose your entire investment. Make sure you also have money stashed away in a retirement account and invested in the stock market. Then, if you’re looking to diversify your portfolio with some alternative investments, you can purchase shares of a startup. Take the following steps to invest smartly in startups:
- Choose an industry you’re knowledgeable and passionate about
- Know the founding team
- Review the numbers
- Get to know the legal documents
- Understand your risks/timeframe
1. Choose an industry you’re knowledgeable and passionate about
If you find a startup with a mission you care about in an industry you have experience with, that can be an indicator of a smart investment for you. It's not advisable to invest in something you don’t understand. If you invest in what you love, you’ll feel good about helping the company, even if it doesn’t succeed.
2. Know the founding team
A business can fail if the leadership team doesn’t have the knowledge or experience to make their idea work. Research the founders’ backgrounds, including their education and previous work experience, to ensure they have both specialty expertise and business experience.
Also, what are their hiring plans? To succeed, the startup may need professionals in marketing, sales, or finance. Ensure there is a plan to fill any gaps in knowledge and experience. You may also want to ask questions of the founding team to evaluate their competency and evaluate their business plan so you have a clear picture of the market opportunity.
Check to see whether there is already buzz around the founders or media interest in the business as well. This can be a good sign that the business could potentially succeed.
3. Review the numbers
The company you choose should have provided fundraising documents with the SEC. These documents are typically available on the investment platforms we mentioned, and you can also search for them in the SEC’s EDGAR database. When doing your research, you’ll want to find out:
- Financial projections for the next several years
- How your investment will be used
- How quickly the business expects to break even
- Any disclosed risks
- Disclosed dealings between the company and stakeholders
4. Get to know the legal documents
You’ll want to check to make sure the startup has the legal aspects of the business in order before you invest. How is the company structured? Does it have the proper licenses and permits to conduct business? Does it have someone doing bookkeeping and paying taxes? Does it have or plan to hire legal counsel? If the startup runs into legal issues after you invest, that could be a problem. Do your research to make sure the company is well-protected.
In addition, review the deal terms for your investment and make sure you understand your rights and how you will receive returns.
5. Understand the risks/timeframe
Startup investing is extremely risky. For example, you might find a thoroughly experienced founder who has even had success with a past company. But that doesn’t mean the new business will be successful. And even if you review a startup’s plans, the business could change course at any time.
Finally, know that you’re in it for the long haul. Most startups won’t undergo an exit for five to seven years or longer. While you may see a return before you reach retirement, you should be comfortable with having your money tied up for a decade. And you should also be able to afford to lose your investment if the business fails.
FAQs about investing in startups
Can anyone invest in startups?
Any adult can get started investing in startups through crowdfunding. Minimum investments typically range from $0 to $1,000. However, investing in startups shouldn’t be your primary method of investing. Also keep in mind that some companies may require you to be an accredited investor. That means you’ll need to meet certain thresholds for household income or net worth.
How do you make money investing in startups?
When you invest in a startup through crowdfunding, your money is held in an escrow account until the business reaches its fundraising goal. After that, it is invested. There are a few types of agreements that companies use to make distributions to investors, but the most common is an agreement for future equity. That means when the company gets acquired or goes public, your investment will be turned into equity, and you’ll be able to receive returns or sell or trade your stock.
Can you invest small amounts of money in a startup?
Yes. Minimum investments vary by company and platform, but some startups on StartEngine don’t have a minimum. Typically, you can expect to buy shares through crowdfunding at $100 to $500 each, but because you’ll want to diversify your portfolio by investing in 15 to 20 companies, you should probably be ready to part with at least $1,500 to get started.
How do you buy shares in a startup?
You can either buy shares online through a crowdfunding platform, or you can work with a local company to buy equity directly. Crowdfunding allows you to make a much smaller investment than would normally be acceptable.
Alternatives to investing in startups
Investing in startups is a type of alternative investment that comes with high risks and high rewards, and it’s not for everyone. If you’re looking to diversify your portfolio, there are other options that may be safer for you, including ETFs, mutual funds, and other alternative investments.
If you’re interested in art, consider whether you’d like to own a share in a famous painting. With Masterworks, you can invest in a work of art. You can get started with as little as $1,000.
If that’s not quite the right fit for you, another way to expand your portfolio is to invest in real estate. Although buying up commercial properties and selling them at a profit isn’t an option for everyday investors, it is possible to invest in property with as little as $500 with Fundrise. The investment platform allows you to invest funds that are allocated across private real estate asset portfolios. You can buy shares of commercial or residential properties. Real estate investors have seen higher average returns than the S&P 500 in the past, but that’s no guarantee of future success.
The bottom line on how to invest in startups
Every once in a while, a unicorn startup makes it big, and leaves investors rich. But startups can fail, leaving investors with nothing. That’s why you should never invest more than you can afford to lose, and you should pursue less risky investments in addition.
When it comes to investing in startups, taking that risk gives a small business owner a chance to succeed. So if you invest in something you care about, you can feel good about doing good for your community, even if you don’t make out with millions.
If you want to explore other ways to easily invest from your smartphone, check out our roundup of the best investment apps.