How To Invest in Startups
Before the JOBS Act in 2012, investing in startup companies was only possible if you were an angel investor or a venture capital firm. Venture capitalists, business angels, and accredited investors are all wealthy individuals with a sizable annual income and savings account. Today, however, anyone above the age of 18 can invest in startups. Title III of the JOBS Act, also known as the CROWDFUND Act, has opened crowdfunding as an additional way for companies to raise money and for non-accredited investors to contribute.
With the rise in popularity of crowdfunding, particularly equity crowdfunding, the way by which potential investors are engaging in this process has been democratized. Most entrepreneurs need to raise capital to grow and make their vision become a reality. Thanks to the internet, investing in startup equity via crowdfunding is easier than it’s ever been. Startup fundraising across various crowdfunding platforms allows early-stage companies to raise money from numerous private investors (crowds), rather than just from a select few wealthy individuals.
As a shareholder with one of these companies, you hold partial ownership of that organization. So, if the company manages to grow and turn a profit, you also stand to gain. But if the startup fails, you could lose your initial investment. Regardless of whether you’re an angel investor, venture capitalist, accredited investor, or a regular non-accredited investor, diversifying your investment portfolio and doing your due diligence on your startup investments should be a top priority.
Put simply, crowdfunding is a great place to find a startup in which to invest. Here are additional resources to help you find and analyze potential investments-
The U.S. Securities and Exchange Commission (SEC)
As previously mentioned, before the JOBS Act, only accredited investors were allowed to deal with startup investments. That meant that if you didn’t make over $200k per year and didn’t have a million dollars worth of assets, you were not a startup investor. Today, this is no longer the case.
The Securities and Exchange Commission still has several rules put in place to protect individual investors from putting all of their savings into a single venture, which they believe to be the next Facebook when, in fact, it’s the next MySpace. The SEC puts a $2,000 or 5% limit on annual income for people who earn less than $100k per year. People earning more than that have a 10% limit of their annual income or net worth – whichever is less.
Based on Regulation Crowdfunding, somewhat similar rules apply to startup founders looking to raise money. For instance, they are not allowed to raise more than $1.07 million in the securities offered via crowdfunding. The SEC also requires that all startups disclose their basic financial details. To ensure the adequacy, accuracy, or completeness of any information regarding their finances, some companies will also need to submit to a full audit.
Depending on how much capital each company is hoping to raise, the SEC has created several tiers that require startups to provide different degrees of information. Companies raising less than $100k, for instance, don’t have to submit to an audit but still have to provide their financial documentation. You can use the SEC’s database to search for and inform yourself about the companies you want to add to your investment portfolio.
With these rules put in place, individual investors looking for startups and startups looking for potential investors can turn to a registered broker-dealer or an online funding portal. Similar to reward-based crowdfunding platforms, such as Indiegogo or Kickstarter, equity-based crowdfunding platforms will also collect and provide you with disclosures based on the SEC regulations on all early-stage companies that exist on these portals. These online platforms started showing us just how easy it is to invest in startups
Each investment platform will help potential investors determine which startups will make the most sense for them. Some of these platforms will also provide additional information regarding each startup’s potential long-term viability, while others allow investors to gauge what investment opportunities are worth the risk. Below are some top startup crowdfunding platforms that make it easier to find and support a young company-
SeedInvest is a crowdfunding platform that helps non-accredited investors fund early-stage companies that have been screened for their potential viability. They state that because of this pre-money valuation, only about 1% of startups are accepted on their funding portal. However, since its launch in 2013, the platform gathered over 250,000 investors and helped fund more than 150 companies.
When you sign up, you will be presented with a list of companies alongside pre-money valuations. In addition, you’ll know how much money each company is looking to raise, as well as the amount already raised. Each startup will have its own minimum investments and due dates by which that capital needs to be acquired. Alternatively, you can build your portfolio with the platform’s auto-invest feature. There is, however, a $200 minimum and a 2% processing fee for each investment.
Republic is another investment platform that allows you to buy startup equity for a minimum investment of just $10. Similar to SeedInvest, also does some due diligence before putting a company up for investment. It analyzes the product, mission, founders, and proof of growth. In addition, the platform hosts six different investment groups and allows independent investors to exchange ideas, advice, and best practices. Republic advises and encourages investors to invest together.
Similar to Republic, Microventures allows for startup investing for as little as $10. Founded in 2009 for accredited investors, the platform is home to some top startup companies, such as Twitter. When it comes to what companies receive approval for its funding portal, it remains selective.
Like the other crowdfunding platforms mentioned above, Microventures offers information about each company, including its fundraising goal and the number of days left in the investment round. In most cases, the company informs startup investors what they intend to do with the money.
Since its inception in 2012, WeFunder has helped over 250 startups to raise more than $110 million in investments. Minimum investment on this platform is $100, and Wefunder allows investors to purchase stock with or without dividends, as well as debt, or convertible notes. WeFunder places all invested funds into an escrow account. The company will receive the money if it succeeds in raising enough capital during the investment round. If not, WeFunder redirects money back to you.
For those searching for how to invest in startups, these website are a fantastic place to start. While some of these crowdfunding platforms provide additional information about potential investments, doing your own due diligence is always critical. This is where KingsCrowd comes in. For more information regarding how to invest in startups, check out our related article: “The Complete Guide To Investing in Startups.” We will help you make the most informed decisions and lower your risk. If you want to learn more about startup investing best practices, subscribe today!