Ways to Invest in Startups
If you do a quick Google search on “How to invest in startups?” you may find about 120 million results . There are numerous paths to follow that may end up with an investor investing in a company with the hopes of it becoming the next Peloton or Zoom. However, what this blog will explore are the potential pros and cons to investing with the current methods available. If you are brand new to the startup investing world, you may want to read our other blog first: What is startup investing. You may consult with an investment advisor, CPA, or attorney before making any investment decisions. Now, we can proceed…
Method #1: Do it all yourself.
The first method is investing in one startup company at a time, by yourself, using your own connections. You may learn from your friend or coworker that there is this new company with an idea that may “disrupt” an industry. The first seed investor in a startup typically uses a convertible note or a SAFE Agreement (Simple Agreement for Future Equity). The pros of investing in startups this way may include, but not limited to:
- Ability to choose which companies to consider investing in
- Typically, some flexibility in the terms of the deal structure
- Potentially a high return on investment since you are one of the first investors.
The downsides to doing everything yourself may include, but not limited to:
- Difficulty in sourcing deals and doing proper due diligence by yourself
- It can be a long process from the first meeting to finally handing over the funds
- Lower diversification in companies as the overall investment in each startup is larger than other methods discussed below
- There may be a higher risk with investing in idea stage or pre-revenue stage companies that may potentially have many rounds of further financing
- Limited information with potentially inexperienced first-time founders.
Method #2: Follow the Crowd
Next up, we have the crowdfunding option. Some may have the option to invest in the next “big thing” through crowdfunding platforms like GoFundMe, WeFunder, and KickStarter. There are numerous startups to choose from across a wide range of industries. The pros of investing with the crowd may include, but not limited to:
- Investor can select deals, since there are thousands of startups to choose from
- Quick process to register on the platform and invest
- Community investing platforms, so you can follow other investors
- May not need to be an accredited investor
- Can diversify investments since you can invest in small increments, some as low as $100.
The downsides to crowdfunding may include, but not limited to:
- May be high risk as these companies can be in idea stage with first-time founders (see parallel to Method #1 above)
- Limited information from the startup may be shared through the platforms
- Cannot negotiate terms as crowdfunding investors have the same deal
- No Board seat.
Method #3: Angel Networks
Joining a group of fellow investors through an Angel Network may allow investors to tap into a larger pool of startups than investing by yourself. You can use the platform Angel.co or join networks like Band of Angels or Golden Seeds. The pros of investing in startups through an Angel Network may include, but not limited to:
- Investing at an early stage (better valuations) than VC’s
- More options over deal terms in startups through an Angel Network than Crowdfunding
- Angel Network investors may have a board seat
- Joining a community of like-minded investors.
Some of the downsides to angel investing may include, but not limited to:
- Minimum investment per deal may be higher than Crowdfunding or EquityBee
- Long process from initial interview with a startup and final investment
- May need to be an accredited investor
- Company may require multiple rounds of further financing.
Method #4: The Big VC’s
Investing through Venture Capital firms, like Sequoia Capital and Greylock Partners, may allow the investor to hand over portfolio management to an experienced team. The pros of investing in startups with VC’s may include, but not limited to:
- Professional portfolio management
- Extensive due diligence performed by VC
- GM may have a Board seat and can offer vast resources to startups to help them succeed
- Access more startup companies that may not be available to individual investors
The downsides to investing through Venture Capital firms may include, but not limited to:
- Limited options of investments, as the VC’s make the investment decisions
- Long time horizon, as the life of a fund can extend years
- Expensive with annual management fee (ex: 2%), plus GP carry (ex: 20%)
- Typically reserved for ultra-high net-worth investors, as VC’s may require a large commitment of capital from investors.
Method #5: Investing with EquityBee
The last method discussed here today is investing through the EquityBee platform! With our platform, investors may consider investing at potentially discounted prices in a wide array of startup companies. Investing right alongside the VC’s, EquityBee investors can fund the stock options for employees at startups in the United States. The pros of investing this way may include, but not limited to:
- More options over deals, as the investor can select which companies to invest in
- Quick to invest with a simple onboarding process
- Potentially discounted prices to current valuations, based upon when the employee was granted the stock options
- Minimum $10,000 investment
- Can invest in companies that have VC investments without investing through a VC. EquityBee only deals with startups that have investments from top tier VCs.
The downsides to investing through EquityBee may include, but not limited to:
- Don’t own shares/units of the startup company, as you sign a Simplified Financing Options Agreement with EquityBee
- Limited information on the startup company, as you are not a direct investor
- No Board seat
- Do not have control over when the employee sells the shares
- Need to be an accredited investor.
In summary, there are numerous ways to invest in startup companies, based on your risk tolerance, amount of available funds to invest, time for due diligence, and experience level. Investing in startups can be exciting and potentially profitable Here at EquityBee, we allow the investor to access startup companies at potentially discounted prices to current valuations through our easy to use investor platform. We encourage you to check out our other blogs or contact us for more information on how to get started!