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How to Invest in Startups

04.15.2019 by admin // 5 Comments

Invest in startups: Room full of people with a whiteboard that says startup day

Recently Lyft went public and Uber filed their IPO. There is finally an opportunity for the average investor to start investing in some of the tech unicorns. With this comes the news about the original investors and how much money they stand to make in the IPO. You begin to think wow, I wish I invested then. When Snap went public, one high school invested $15,000 and made millions. There are also stories about startup investors that lost it all. The most public recent example of course is the investors that lost money in Theranos. Whether or not this type of alternative investment will appeal to you will depend on your risk level. Wondering how to invest in startups? Before you make you make your first investment, start by doing your research and learn how to find your first investment opportunity.

Why Invest In Startups?

According to Fortune, while the number of U.S companies continues to grow, the number of U.S. companies that are traded on stock exchanges has plunged 45% since peaking 20 years ago. Additionally, new companies have been completely disrupting traditional business models but many of these companies aren’t yet public. If you only invest in public companies, you are limiting your investment options more so than previous generations.

What Startups Can You Invest In and How Much

First, understand what startups you can invest in and how much are you willing to invest. Certain investments are only open to accredited investors and you’ll want to understand if you qualify before doing research on companies you’re unable to invest in. If you’re not an accredited investor, you’ll want to look further into crowdfunding.

You’ll also have limits based on how much you want to invest. Startups will have different requirements but in general, the later the stage the easier it is to get priced out. Additionally, you need to be comfortable with a lack of liquidity and that you may lose your entire investment. When you invest in the stock market, you can sell any time you want. When you invest in a private company though, you can only sell when the startup provides you the option to do so.

Startup Stages of Financing

Seed funding is the first official round of financing. There are many potential investors at this stage and can range from the founders, friends, family to accredited investors. Typically, this is the easiest time to invest in a startup but it’s also the riskiest. Companies are typically just starting out and they’ll have no proven track record. After raising capital at this stage, a company may decide to pursue a Series A.

For more details on each stage here are two helpful articles:

  • 5 Stages Of Startup Funding
  • Series B And C Funding, What It Is And How It Works

How to Value a Startup

Investopedia talks here about methodology to use to value a private company. There is a lack of strict reporting requirements for private companies, making it harder to value. If you’re investing in a seed round though, there may be no historical numbers to even look at yet. When you’re meeting with the founder, review their pro forma. Ask a lot of questions about their business plan, about the market and what their exit strategy is. If the business doesn’t have a track record yet, does one of the founders have a history with building businesses from the ground up?

Investing in Startups Negotiation: What Should You Get For Your Investment

When I’ve invested in startups, I’ve yet to encounter a “Shark Tank” like scenario and have always been told this is what they are offering. One company decided not to bootstrap and instead raise initial funding from friends and family. In that case they offered the same deal to everyone – a certain amount of money (say $5,000) equaled a certain percentage of the company. In other cases, the company bootstrapped for a little and then offered a SAFE (simple agreement for future equity) by Y Combinator. With this, founders are able to calculate how much ownership has been sold and investors know how much ownership of the company they have purchased. Understand that if / when the company raises more money your ownership will be diluted.

Where to Find Opportunities to Invest in Startups

The easiest way to find opportunities to invest in startups is to look to your own network. If you know friends that have invested in startups before, ask for introductions. Check your LinkedIn and other social media to see if anyone recently started their own business. Do you have connections that are more likely to know entrepreneurs? For example, everyone has that friend that seems to know everyone. Doctors are known to have high salaries and may have been asked to invest in startups. Do you have any connections that started a Kickstarter to raise money for a business idea – perhaps they will entertain the idea of having an equity partner if you reach out.

There are limitations to advertising that a startup is raising money, so it’s likely you already know people who are raising money, they just haven’t publicly mentioned it. It’s up to you to reach out and let people know you’re interested in investing.

Have you invested in a startup? How did you get started?

Categories // Invest Tags // Invest in startups, Passive investing, Startups

Accredited Investor – What It Is And Why It Matters If You Want to Invest In Startups

01.06.2019 by admin // Leave a Comment

What is an accredited investor, accredited investor definition

In order to invest in startups you must be an accredited investor. The SEC creates limitations on who and who can’t invest in private companies. The logic behind it is that most of these investments are risky and illiquid so the SEC put rules in place to limit who can invest in these types of investments. With these guardrails, the hope is that these investors have enough money so should they lose their entire investment, or not have access to this investment for years they will still be in good financial shape. So, how do you know if you are an accredited investor and how can you become an accredited investor?

What Is An Accredited Investor?

An accredited investor is defined as someone who has income that exceeded $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and they reasonably expect to reach that same amount of income in the current year. A person is also considered an accredited investor if their net worth exceeds $1 million (individually or jointly with a spouse), excluding the value of their primary residence.

The full definition is on the SEC website.

Why Is It Important To Be An Accredited Investor

Accredited investors have many more opportunities to invest than non-accredited investors. They are able to invest in private companies which opens up the door for a lot more investment opportunities. There are opportunities for non-accredited investors to invest in. However, these investments are limited to the stock market and legalized crowdfunding opportunities.

How To Become An Accredited Investor

Understand where you are income wise and net worth wise. Will it be faster to make $200K (or $300K for married couples) for 3 years in a row, or have $1 million net worth? Estimate how long it will take you to reach that salary and add 2 years. Use this calculator to identify how long it will take you to have $1M. Identify which way is fastest, and then identify ways to hit that target faster.

See Also: Make More Money Through Your Career and Side Hustles

Qualify to Become an Accredited Investor Through Income

Income doesn’t equal your salary. Income includes money you make from everything including your investments and side hustles. If you or your spouse don’t have line of sight to hitting the yearly income threshold look for opportunities to create additional income streams.

Qualify to Become an Accredited Investor By Reaching $1M Net Worth

The more money you make, the easier it is to reach $1M net worth. Increasing your income should always be your first focus. To reach the $1M threshold though, you need to keep the money you make – and have that money make you even more money. Automate your savings and increase your savings rate as your income increases. Then, invest that money. Be smart with your spending so you can put additional money towards investing as well. Thanks to compounding interest, the first $100K is always the hardest but it’ll get progressively easier as you go. Your primary residence doesn’t count towards the $1M net worth so you need to consider if it’s worth paying your mortgage off early for this circumstance.

Research Potential Startup Investments

You don’t want to wait until you’ve met the accredited investor requirements to start thinking about investing in startups. Research the different types of investments that are only available to accredited investors before you qualify. If you’re interested in investing in a startup, what industries are you interested in? Many of these investment opportunities develop through word of mouth. It takes time to network with the right people, identify what types of companies you’d like to invest in and then identify companies that meet the target profile that are also raising money.

Accredited investor, what is an accredited investor, accredited investor definition

Categories // Start Here Tags // Angel Investor, Invest in startups, Passive investing, Personal Finance Terms to Know

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