Do you want to invest in silicon valley startups without being an accredited investor? If YES, here are 7 easy steps to invest in startups online with little money.
Investing in startups is trending because it is currently known as a profitable source of passive income, but the million dollar question now is ‘how do you invest so as to generate massive returns on your investment?’
Table of Content
4 Reasons People Invest in Startups
A lot of things motivate people to invest in startups, and some of them are;
- Generating huge returns on investment: financial returns is the biggest motivating factor where business investment is concerned. People who have some money stashed away somewhere always look for ways their money can get to work and make increases instead of lying dormant in the bank somewhere, especially when the perk is outsized profits.
- Building financial portfolio for retirement and others: we work to secure the future, and the more you gather, the more comfortable your future would become. So some people invest in startups in order to build up their retirement nest egg. The idea is that if they invest in a startup that would take about 10 years to yield profits, by then they may have retired and would then live off that profit.
- The desire to be involved in change: there is this pride that comes when you know that you were part of the biggest trend that is currently being witnessed in the world. Some people just crave to be involved in driving positive change, bringing new solutions to life.
- Bragging rights: we all need a reason to brag every once in a while, and what better bragging subject is there than that you invested in something that is currently yielding fortunes.
Is It Possible to Invest in Silicon Valley Startups Without Being an Accredited Investor?
Before May 2016, only accredited investors earning $200,000 or more a year or having a net worth of $1 million (excluding their primary place of residence) were given the opportunity to invest in private companies for equity return. This law made investing in startups the exclusive preserve of some moneyed people.
This however got to change in 2016 when the Title III of the JOBS Act eradicated this requirement, making it possible for anyone with some spare cash to invest in a startup. The JOBS Act did raise the stakes for the everyday investor and changed the playing field for startups and investors. In exchange for equity, now anyone can invest as much or as little as desired, which could potentially result in some big bucks if the investment goes the way it was supposed to.
Today, if you don’t earn $200,000 or own a million dollars in assets, you’ll be referred to as a non-accredited investor but you can still be an angel investor and partake in Silicon Valley startups investments through something known as Equity Crowdfunding.
Take for example, if you had invested just $10,000 in Amazon, Dell, Apple, or Microsoft, when they went IPO, you’d be a million dollars richer just from that investment according to the IPO Playbook. This is what you get after the IPO, but imagine you invested before the IPO, that would have meant mega returns for you. This is the reason why startup investment is a business worth considering at this point, that is if you have the wherewithal.
What is Equity Crowdfunding?
Equity Crowdfunding is when multiple investors combine their financial resources together for the purpose of providing seed capital for a startup, in exchange for equity shares in the business.
How Equity Crowdfunding Works
Equity Crowdfunding is similar to buying publicly traded shares in a company. You give the startup some of your money and in exchange, you receive a chunk of ownership in the business along with a right to receive dividends from the profits made by the business.
It is also possible to sell off your shares in the business to another investor if you decide to cash out.
How to Participate in Equity Crowdfunding
Now, this is where the similarities between Equity Crowdfunding and Stock Investing end; unlike publicly traded stocks, there’s no stock exchange market for Equity Crowdfunding. However, there are a few online platforms designed for interested investors to meet entrepreneurs who are looking for seed funding for their startups.
7 Steps to Invest in Silicon Valley Startups With Little Money Without Being an Accredited Investor
A lot of people desire to invest in startups, but they generally put it off because they feel it is a mysterious and complicated venture that should be reserved for the gurus. Well, the truth is that investing in startups is way easier than some investors make it out to be, and the journey can also prove to be very interesting because you would be involved with a whole new kettle of fish.
It should be noted that the basic principle of startup investing is that you give a startup money and they give you stock. Besides this technique, there are other easier ways you can invest in startups and get returns.
- Invest through Venture Investing Platforms
Some of the venture investing platforms you can start your startup investment journey with may include, but are not limited to;
- Angel Kings: Built by Ross Blankenship and launched to the public in 2015, Angel Kings has grown to more than 75,000 subscribers and interested angel investors. This investment platform invests in Startups Cybersecurity, Biotech and SaaS Technology. Though a lot of startup investing platforms exist, but Angel Kings continues to win awards for the most popular (and successful) investing website to help founders, investors, and startup companies launch out.
- FundersClub: FundersClub is one of the larger crowdfunding angel investment platforms that pride themselves in their rigorous vetting process of the start-ups they represent. In fact, only 2% of startups get to make their cut. With an average investment between $3000 and $5000, their investors are able to diversify to increase rewards and minimize risk. According to the platform, an investor who had put money into every company on the platform in the previous year would see a 104.8% return.
- SeedInvest: SeedInvest offers equity funding for dozens of startups, though some are limited to wealthier investors (officially known as “accredited investors”— investors with net worth exceeding $1 million or annual incomes of $200,000). SeedInvest is a fully regulated broker-dealer, meaning they do extra amounts of vetting on the companies they display on their platform.
- OneVest: OneVest takes a more hands-on approach than other crowdfunding angel platforms. A prospective investor fills out an application and gives details about what sort of investments he or she is looking for. An investor specialist then contacts the investor by phone to discuss investments that might be a good fit. Despite the high level of hands-on involvement, investors are not charged a management fee or commission. The minimum investment is $5000 per start-up. They advise investors that it may be 2 to 5 years before investments reach liquidity.
- WeFunder: WeFunder claims to be the largest funding portal by dollars raised, number of companies funded and number of investors: more than 100,000, according to the company. Under the JOBS Act, WeFunder plans to allow non-accredited investors to invest as little as $100 at a time on start-ups. This interface will be familiar to crowd funders who’ve used Kickstarter or IndieGoGo. They currently have over 40,000 investor accounts and have funded per 75 start-ups.
- Indiegogo: Indiegogo is an international crowdfunding website founded in 2008 by Danae Ringelmann, Slava Rubin, and Eric Schell to help enterprenures raise money for their projects and products. By giving entrepreneurs everywhere a platform to launch new and groundbreaking products, they help surface innovations in tech, design, and much more, all before they go mainstream.
- AngelList: AngelList is a U.S. website created in 2010 for startups, angel investors, and job-seekers looking to work at startups, though it started as an online introduction board for tech startups that needed seed funding. AngelList is basically like matching platform for startups, helping them get connected to both investors and employees.
Here are the steps you need to take to start participating in Equity Crowdfunding:
a. Check to see if you qualify: The Securities and Exchanges Commission (SEC) has a few rules guarding investments in equity crowdfunding. Investors who earn less than $100,000 per year or whose net worth do not exceed $100,000 are only allowed to invest 5% of their income or no more than $2,000 per year.
If your assets are worth more than $100,000 or you earn an annual income that exceeds $100,000, then you can only invest 10 percent of the lesser of your annual income or net worth. Every non-accredited investor is however limited to investing no more than $100,000 in equity crowdfunding annually.
b. Conduct Due Diligence: Equity Crowdfunding is a risky investment just like stock investing, you can make a lot of money but you can also end up losing all your money so make sure you conduct thorough due diligence and look deeply into any startup before you part with your money.
- Invest through your IRA or Self-directed 401k
An IRA is defined as an account set up at a financial institution that allows an individual to save for his or her retirement with tax-free growth or on a tax-deferred basis.
Startup equity can turn out to be a good investment to fit your long-term goals if you don’t plan on withdrawing from your IRA for few years. Exist from a startup investment is known to be at an average of 7 years, thus making it a long term commitment that would secure your finances. This is essentially why people are allowed to invest in startups with their IRA.
Investing in a startup through your IRA may limit your control over the company but it doesn’t limit you from being on the board or acting as an advisor. As long as you are not the head employee or are in possession of over 50% of the company, you can be as involved in a startup as it will allow. A self-directed IRA can legally own a variety of things, such as real estate, promissory notes, gold, and gas.
- Investing through Personal Connections with Entrepreneurs and Founders
Yet another way to invest in startup is to make use of your personal connections with entrepreneurs and founders. If you have some sort of connection or relationship with the founder of a startup that you feel has a lot of future profit potentials, you can choose to bypass investment platforms and approach the founder with the request to invest in his startup company. This method of investing actually makes it easy all round.
- Attend Pitch Events
Attending networking and pitching events plays a tremendous part in the lives of almost all entrepreneurs. By attending pitching events, you would meet a lot of startup founders looking for funding. Some may get to pitch publicly, while others may pitch privately to you. This is a great way to find startups as you get to assess the founders and their business ideas without being pressured to make a commitment.
- Join a Syndicate on AngelList If You Prefer to Follow Other Investors
This is another option a startup investor can consider, but you have to note that before you are welcomed into a syndicate, you have to have the financial resources to back it up.
- Lend Rather than Invest
If waiting a long time for an investment return (or possibly never seeing one at all) frightens you, you can decide to make a business loan to a promising startup instead. This loan could take the form of a revenue share agreement in which you are repaid from a portion of the business’ revenue annually. The potential for reward here is lower but so is the risk, plus, you won’t wait long for a return. You can expect to make about 8 percent interest on your money immediately.
7 Tips You Must Note When You Intend Investing in a Startup
Investing in a startup can be very profitable if you invest right, but you can also lose your resources if you do a wrong investment. Here are a few tips you need to follow when you want to invest in a startup.
- Invest in startups you may be able to add value to: well, it really makes no sense to invest in a startup that overwhelms you, unless you just want to throw in your money and look the other way till it matures. You as a startup investor would be more fulfilled if you are able to invest ideas that would lead to the growth of the company.
- Diversify wisely: diversification is encouraged when investing in startups, but it is advised that you do so very wisely. Blindly spraying your investments across every pitch any entrepreneur presents is guaranteed to result in a myriad of losses, even if one win makes up for those.
Instead consider going heavy into a select handful that you really believe in. Diversify across different industries such as healthcare startups, real estate startups, and something else just to be buffered from potential industry fluctuations. But focus on funding individual companies with promise. By putting your capital and energy into fewer select firms you’ll make far more positive impact on the success of that venture.
- Examine their legal documents: Startups may be so intent on the big ideas for their business that they don’t always have their corporate records in order. You really have to look into whether the company is legally incorporated, if the shares are properly issued, and that the leases and contracts the company claims to have are ratified, preferably with an experienced securities attorney. Doing all these may save you a few heartaches in the future.
- Know the risks: Startups require bold, patient investors because such investments take time to mature, and may not always go as expected. Always remember these investments are high risk, and you should not expect to see a return on your money for up to 10 years. In fact, your investment may not pay off at all, so you should be prepared to lose some money too.
- Review the company’s management’s past and present qualifications carefully, and don’t take anyone at their word. Even if the company’s owners are friends of friends, always verify what they tell you.
- Invest in founders: It is easy to get excited about a great, innovative new idea. But, who are the people steering the ship? If there is a strong leadership at the helm of a good idea, then know that they have the best chance to execute on their mission. So it is best to invest in startups with strong founders.
- Invest only what you can lose: investing in startups is risky; you can either win big or lose bigger. Depending on the amount of investments you have in your portfolio, you are likely to do a little of both. Make sure that you are financially secure enough to lose the amount you are willing to invest.
- Invest in pre-vetted startups: in order to reduce your risks, it is advised to invest only in pre-vetted startups.
How to Cash Out from your Startup Investment
Investing in a startup is one thing and cashing out on your investment is another thing. Some of the gains from investing in startups may be realized in several ways.
- When the startup is acquired by another company
The reality is that 99% of successful companies are usually acquired by larger companies, who pay for the purchase in either straight cash, or stock in the company doing the acquisition. When that payment is made, the investors would then collect the various percentages of their investments.
Say for example, if a startup investor gives a startup company a check for $100,000 as part of its investment, the company would in turn issue shares of stock to the investor that represent 10% of all the outstanding shares. This means that both the investor and the company are agreeing that the whole company, after the investment, is worth $1 million.
When the company expands, and a big company eventually comes along and buys the startup for, say, $10 million, the money is divided up, and 10% of it (in this case $1 million) goes to the investor…who has now received a 10 times return on the original investment. This is one way startup investors profit from their investments.
- When the startup goes public
An initial public offering (IPO) is the process by which a company first sells its stock to the public and becomes a publicly traded company. The primary benefit of going public via an IPO is the ability to raise capital quickly by reaching a large number of investors. A company can then use that cash to further the business, and to as well pay off its investors. Additionally, a startup investor may decide instead of cashing out, to own shares and become a part owner of the company.
- When the company begins paying dividends
Payment of dividends is equally a way a startup investor can reap the benefits of his investments in a company.
- When investors sell their shares to other investors
Investors can also cash in on their investments in a startup company by selling their shares to other investors. This is typically done when an investor wants to get out of the investment earlier than planned.
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