Want to Invest in a Startup? Here's What You Need to Know. Invest in founders first, and ideas second.
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Fifteen years ago, the funding landscape for startups looked entirely different. Through the development of new startup funding options, entrepreneurs now have more ways than ever to get their idea off the ground. And just about anyone can invest in the next unicorn if they play their cards right.
The rise in new, non-traditional funding options allows entrepreneurs to evade traditional VC fundraising and consider a whole new class of investors who can spark innovation and keep the lights on.
One of the first non-traditional ways to fund a startup came through Kickstarter. With the introduction of crowdfunding, anyone can now back a project or campaign in exchange for early access, or a product discount. Crowdfunding gives anyone a chance to fund a successful startup, but doesn't provide much return for the investor. It did open the door to the "average Joe" investor who could sort through various ideas and determine which was deserving of a small personal investment.
But, before May 2016, only accredited investors earning $200,000 or more a year or having a net worth of $1 million (excluding your primary place of residence) were given the opportunity to invest in private companies for equity return.
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 really stepped up the stakes for the everyday investor and changed the playing field for startups on the hunt for funding.
In exchange for equity, now anyone can invest as much or as little as desired, which could result in some big bucks if the investment succeeds. But, because that option is now available, doesn't mean it's right for everyone.
Here are my tips for investing in startups in the 21st century:
Invest in founders.
The idea of investing is exciting and daunting all at the same time. As a first time investor, how do you know where to start? How do you make a savvy investment that keeps the roof over your head and makes money in the long run?
Seems like a gamble -- and it can be if you're not smart about where you put your money. Remember that about 90 percent of startups eventually fail, which means your investment might have the same trajectory. It's easy to get excited about a cool, innovative new idea. But, who are the people steering the ship?
At Techstars (the accelerator I co-founded), we receive tens of thousands of startup applications to join our programs and obtain funding as a result. Each company that we accept (and invest in) goes through an intense vetting phase. There are plenty of startups with great ideas coming to the table every day, but at Techstars we invest first in the founders. If there's a strong leadership at the helm of a good idea, they have the best chance to execute on their mission.
Don't be a follower.
You should never invest in a startup just because everyone else is. Would you jump off a bridge if everyone else was doing it? Not unless you knew the landing was safe or the jump was secure.
The same necessary research applies to investing in startups. It's a common misconception that following the masses will save you from making poor investments. The only thing this guarantees is that you will lose your money with the masses when things go south.
Remember Juicero? It raised over $100 million, with backing from numerous VCs, but shut down operations four years after it was founded. Many bet big on its product due to the others who backed it.
Do your homework and develop a deep understanding on why you think the company is destined for success. This homework can include seeking advice from other investors or even the company itself.
Don't bite off more than you can chew.
As you've heard time and time again, 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're likely to do a little of both. Make sure that you're financially secure enough to lose the amount you're willing to invest.
Diversifying the startups you invest in will also increase your chances for success. Putting all of your chips on black can result in a big return, or a complete loss. If you spread your startup investment chips across the board, making smaller investments in more startups, you increase your chances of walking away with some money in your pocket.
You may even consider diversifying the types of startups you invest in, but if you're very knowledgeable in one area it's best to stick to what you know.
Here's where to get involved.
If it's your first time investing, it would behoove you to look into the many platforms and websites available to assist with your investment decisions. Below are a few of the resources I generally suggest:
Netcapital (disclosure: Netcapital received investment from and partnered with Techstars) is a website that lets you buy and sell stock in private companies and startups. It connects investors to entrepreneurs to help private companies grow, and encourages companies to raise capital by offering investment opportunities to the public including friends, family, customers, angels and others.
Indiegogo is a website that focuses on rewards-based crowdfunding, engaging investors by providing them with the benefits they would receive based on the amount of their investment.
Crowdfunder is an equity-based investment platform for raising funds for various ventures through a network of entrepreneurs and investors. Crowdfunder gives you the option to purchase stakes in a company rather than rewards.
Related Video: How Much Research Do You Need to Do Before You Invest?