The Essential Guide To Investing In Startups In 2021

June 23, 2021

Tesla, Amazon, Apple, Microsoft, Google, Facebook, Twitter. What do all these companies have in common? They all began life as startups. What do all startups need? Money to build for the future.

When these companies began building, they would have raised money from their network – close friends and family and a small number of investors willing to give these pioneering tech companies money to build their companies from their garages.

Imagine being one of those early-stage investors, giving Steve Jobs or Bill Gates as little as $100, $1000, or $20,000 to build their respective companies. The return of such an investment would be extraordinary.

But are the Microsofts and Apples of next year still out there today? Is it possible to still find such unicorns in today’s saturated marketplace, and if so, should you invest in them?

As an entrepreneur, do you know how to find investors? Or how to pitch to others for them to break out the checkbook and support your venture?

This article aims to answer these questions and guide you down the path of what it takes to invest in startups in 2021 and why the next trillion-dollar company may still be out there.

You can find investments through a investment site and any pages it has

While it may be part of your strategy to diversify your portfolio by increasing the amount of equity you hold in multiple businesses, investing involves some risks.

The Basics of Investing in Startups

When discussing the true basics of investing in startups, it’s important to understand that when you invest in a startup, you essential agree to be bound to the company for the long term, whether that business succeeds or not.

While it may be part of your strategy to diversify your portfolio by increasing the amount of equity you hold in multiple businesses, investing involves some risks.

Research into the startups your planning on investing in is key, while building a network of accredited investors can help you identify companies worth putting your money into and those that are not.

Investments in New York are often for private llc securities

Early Stage Startup Investing

When startups raise money, they traditionally go through rounds of funding. Series A, B, C, D, and so on.

Often, when a startup moves through the rounds, the amount of capital raised increases as the company grows along with its value.

As an accredited investor, you will have to wait for startups to open these seed rounds before you can invest your hard-earned cash. However, it may still be possible to invest in startups before seed rounds.

If you directly know the founder, friend, or family member, you can invest in startups initially. Just make sure you draw up a term sheet and go through the proper channels with the securities and exchange commission before investing.

You can also contact a registered broker-dealer before investing. These brokers may give you early access to startups in their network but are likely to take a cut of any deal they help to make.

the founder of a financial platform may value their business more than you

Is It Only Limited To Venture Capital?

No way, Jose.

While venture capital is the money-burning machine behind all of silicon valley’s most successful businesses, individual investors can also invest in a business they feel is worth trading cash for equity.

The internet has also made it much easier for the average investor to invest in startups all across the globe. Crowdfunding sites such as Indigogo and Kickstarter have made it possible for companies to raise capital from the public.

While most of these investments don’t trade money for equity, they often give perks to their earlier investors by offering future discounts on products or first refusal to invest for equity later.

A financial profile is essential in crowdfunding

Invest In Founders Building The Future

One of the major trends in startup investing is to bet on the future. Electric cars, AI technology, Clean Energy, and Fintech are hot topics in the venture capital and funding space.

Subscribe to newsletters like “The Hustle” and “Morning Brew” to keep on top of trends in the finance and investment world. You can even sign up to “WeFunder,” whose opening salvo on their website is “Invest in founders building the future.”

There are also a whole host of blogs available on the net. Ones that profile founders, companies, and offer investment opportunities that could provide offerings.

These can also help keep you on top of exciting fundraising opportunities for you to join and get involved in the early stages of a company.

As an angel investor you can fund a logo and team process

Easier Diversification

A common trait of most Angel investors is that they like to diversify. Diversification is necessary for spreading your risk throughout an investment portfolio. Investors like to be risk-averse, and investments that prove too risky can force investors to pull out or not invest at all.

However, even if an investment looks like a home run, things can easily turn south – look what happened to businesses and startups during the pandemic.

Startups provide an easy way for investors to diversify their portfolios. Using the sites listed below, which require minimum investment amounts of between $100-$1000, investors can easily spread the risk of their portfolios across various startups.

With the general rule that 4 out of 5 startups are likely to fail, investors should consider investing in several companies while only putting up money they can afford to lose.

Fundraising can be a long process before you can fund your business

How Much Can You Invest?

All non-accredited investors are limited to how much they can actually invest in a startup. These guidelines are in place to protect people from investing money they can’t afford to lose into risky investments.

According to the securities and exchange commission (SEC) guidelines, there is a maximum amount you can invest into crowdfunding ventures during a 12 month period:

  • If your annual income or net worth is less than $107,000, you can invest up to $2,200 or 5% of your annual income or net worth.
  • If your annual income and your net worth are equal to or more than $107,000, you can invest up to 10% of your annual income or net worth, whichever is less. This amount, however, cannot exceed $107,000.

Some investors may think this is unfair; however, just because they have the money does not mean they should go all-in on any startup investment.

In fact, when it comes to investing in anything when building an investment portfolio – stocks, bonds, an IPO, startups, real estate – the golden rule is not to invest what you aren’t comfortable losing.

Startups are a risky business, with many not achieving the success investors believe they can. If the startup you invest in goes bankrupt, you don’t want your life savings tied up in it.

When investing in startups, it’s recommended to first, of course, do your due diligence on any investment.

Private market llc securities can often be worthy investments

Generally speaking, you should look to diversify and spread your risk. Experts recommend making several small investments first, rather than just making one big investment in one startup.

Don’t put all your eggs in one startup basket.

Before you invest, if you’re unsure about which companies to give your capital to, seek out investment advice first.

This can come on an investment platform -listed below – where you can communicate with other angel investors first and work out what investment opportunities are worth exploring.

If you invested in a private market platform early you could return your investment

There really is no earning ceiling for any startup for what you can return; it really depends on whether you have the stomach for it or not.

How To Make Money In Startup Investing

When investing in a startup using a crowdfunding platform such as AngelList or WeFunder, you enter into an investment contract with the company you intend to fund.

Before doing this, it’s necessary to understand the 4 different types of contracts, all of which offer different ways to make money from the capital you invested.

  1. Debt – When startups take your capital in the form of a loan, you can earn interest on that loan. Depending on the contract, the investment may pay out a fixed or a variable return. However, interest payments are only paid depending on the performance of the startup.
  2. Stock – Similar to how you would buy shares of a company during an IPO, a stock contract lets you buy shares of stock in a startup. However, unlike when you buy from an IPO or on a stock exchange, you cannot sell your shares of stock. With this kind of contract, you only make money when the company goes public with its IPO or until it is acquired.
  3. Dividends – A successful later-stage startup may offer investors to buy a stock that pays annual dividends – a distribution of the company’s earnings. Dividends offer an attractive option for investors since, especially for reliable companies or startups that are in their Series D or later, the prospect of receiving regular financial offerings in the form of dividends provides consistent value to a diversified portfolio.
  4. Convertible Note – Similar to the debt – see above – instead of paying out in a fixed or variable return along with interest, a convertible note converts into shares of stock only after the company reaches a certain goal. The return on investment here occurs once the company is acquired or goes public.
Market your llc on a site where you can find private investors

The Pros & Cons

Investments made in a startup that operates in any industry can have both pros and cons. Before investing, it’s important to understand each since you’re likely to be in it for the long term.

Pros

Earning Potential – While it’s much less risky to invest your money into a stock that’s listed on the NYSE, the growth potential of your investment is limited. A $1000 investment in Amazon isn’t going to offer the same returns as a $1000 investment in an early-stage startup. There really is no earning ceiling for any startup for what you can return; it really depends on whether you have the stomach for it or not.

Investing in the future – Not all investors are money-hungry capitalists that watch their balance sheets like a hawk. And, while there is nothing wrong with that, many investors also want to create a legacy and invest in companies that are striving to have a positive impact on the future. Some would rather invest in a company that creates clean energy than another sugar-filled soft drink company, for example. This sense of fulfillment is part of the fun of investing and knowing that your money is going toward something positive.

Money invested in securities can offer a less risky return

Creating lasting connections – Investing in a private company not only puts your money to work but also opens you up to forging new connections. Connections that could help other companies you invested in. Your network can often be as valuable as the investments you make, so paying a couple of thousands of dollars to work with an exciting new founder or to gain access to a range of influential people in a new industry could be worth it.

To help a friend in need – You may have a friend or family member trying to escape the rat race and join the business world but need a little funding to get on their way. You believe their product is great and has the potential for success. Many fundraising in startups occurs because the founders and investors are in a network that promotes such connections.

investing in startups requires some risk management

Cons

Risk – Let’s start with the obvious one here. Most startups fail, and they can fail for any number of reasons. Often it doesn’t have anything to do with the amount of money invested. For any investor thinking about investing in a startup, even if you’ve done your research and due diligence, be prepared to lose all that you put in. If you’re not willing to do so, don’t invest.

You’ve got to be in for the long haul – It takes a long time to see the investment results in a startup, regardless of what industry they are in. They may have the most amazing social media page with fantastic marketing and a platform you are certain will be successful. However, it could still take years for you to see a return on what you invested. Patience is a virtue, and if you don’t have it, don’t invest.

Cash is rare – If you invest in a startup and change your mind, it’s not easy to get your money out. Startups are extremely illiquid, which means that anything you invested is likely to be tied up in the company for years. Maybe avoid punting a million dollars on a startup until you fully understand the risks.

There is a site where you can market your llc to interested parties

Where to Find Investment Opportunities

So you understand the risks associated with startup investing, and you want to give it a go anyway? Start by browsing the sites below; while some require you to be an accredited investor, others don’t.

There may be a minimum amount you need to invest, depending on which site you use, but it’s worth looking to see what works for you.

On an investment platform securities are not sold

Final Word

Investments made in any industry or potential asset have the ability to turn into a liability very quickly. The risks associated with startup investing are clear, and whether you believe there is a market for the company you are investing in or not is often not the real reason startups fail or succeed.

Startups offer a fantastic way to send your investments to the moon, but those valued at $1B or more are called Unicorns for a reason.

If you choose to invest in a company that you believe can increase in value, then do your research, speak to accredited investors, and put together an investment process that protects your portfolio in the long run.

Just make sure you manage your expectations and don’t go into startup investing, believing that whatever you invest in will make you a millionaire overnight.

Unicorns don’t come along that often. But that doesn’t mean they aren’t out there.

Sell parts of your business after creating a profile online

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About the author: Joe Silk -

Joseph is a Start-up Consultant, Copywriter & Business Owner with 9 years of PQE. He is extremely client-centric, able to work on a wide range of topics and deliver high-quality standards on projects of all sizes for clients all over the world. View on Linkedin

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