f you are trying to break into venture capital, a great way to show off your investing chops is to go out and invest in startups in your own time, and on your own dime. That way, you can show VC firms why you decided to invest in a specific startup, your thought process, and all the research you did that led you to make that choice.
Today, thanks to the internet, there are plenty of ways those just dipping their toes in the world of startup investing can invest small amounts of capital from the comfort of their apartment or home.
But like with any new subject, as a new investor, there are a few things you should learn before jumping in headfirst.
First, let’s take a look at several of the available online outlets for investing online. Then we’ll go over how much you can invest based on your annual income. Finally, we’ll talk about some of the research you can do to adequately evaluate a startup – no we do not want you investing blindly.
Where to invest online
Online investing has gained traction in recent years thanks to the advent of crowdfunding, where startups collect small amounts of capital from many investors by marketing their companies online.
There are several platforms that enable average people to invest small amounts of money into startups:
AngelList - With a minimum of $1,000, consumers can invest in individual deals, build an index fund filled with multiple companies, or even invest in a rolling fund, although the indexes and funds have much higher minimum investing amounts.
One thing to note, however, AngelList is a tad more restrictive and only allows accredited investors to invest on the platform, which I’ll further explain in the next section.
SeedInvest - This platform carefully vets startups before they are allowed to raise money on the site, so you can take some assurance knowing that another set of eyes is reviewing these startups. People can invest with as little as $500, making it easier to diversify and invest in more companies.
Republic - Republic is similar to SeedInvest in that the companies raising money through the platform are carefully vetted. Technically, investors can invest with as little as $10, although the startups raising will likely set a higher minimum investment amount.
Republic also seems a little more crypto-oriented and actually has its own crypto token called Republic Note. The digital asset invests in a basket of companies on Republic and then pays out dividends to token holders when one of the companies successfully exits.
Wefunder - Wefunder is seen as the largest player in the equity crowdfunding space, so you might find a wider variety of companies on the site. Wefunder also appears to vet companies less so than competitors like SeedInvest and Republic.
Under its frequently asked questions, the company says, “While we don’t vet ideas, we do our best to screen for fraud, such as researching the founders and verifying that the documents they’ve provided comply with the law.” People can invest with as little as $100.
How much can you actually invest?
It may surprise you to know that there are limits as to how much you can invest. The main difference is whether you are an accredited or non-accredited investor. As mentioned above, AngelList only allows accredited investors to invest in companies through their website.
The Securities and Exchange Commission (SEC) defines an accredited investor as an individual with an annual income of more than $200,000 or a joint income with a spouse of more than $300,000 in each of the last two years. People with a net worth or joint net worth of more than $1 million also qualify as accredited investors.
Non-accredited investors have limits as to how much they can invest.
If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest either $2,200 or 5% of your annual income or net worth, whichever is less.
Or, if both your annual income and your net worth are equal to $107,000 or more, then during any 12-month period, you can invest up to 10% of your annual income or net worth, but again the lesser amount
The research you can do
Now that we’ve covered what platforms you can invest on, how to qualify as an accredited investor, and investing limits under non-accredited investors, it’s now time for YOU to do some research on the companies you might want to invest in.
Investing in startups is incredibly risky, so take your time and do your due diligence – investing without doing due diligence is akin to gambling.
Because startups are private companies, there is only so much information that will be provided on their financials, but there is still a lot of research you can do.
The first and easiest place to start is with the founders. Make sure you research their experience. LinkedIn is a good place to start. Have they launched any prior startups? Does their prior experience give them specific knowledge in the industry their company operates in? If it’s a young founder, look at what they studied in school and what extracurriculars they participated in. Are they working full-time on their venture?
Most venture capitalists will tell you that the majority of the time, they're investing in the founder. So knowing this, you really should make sure you have some sense as to what kind of experience they have. Heck, maybe reach out and try to talk to the founder! There’s a good chance that they might respond back if they think you might invest.
Then, it’s time to take a look at the size of the market. Remember, it doesn’t matter how good the idea is if there’s nobody to buy the product or service!
We recommend looking at public companies in the same sector as the startup and then finding their annual reports on the SEC Edgar database. In these reports, public companies will post all sorts of information about how they make money, their total addressable market, as well as revenue and profitability.
For instance, maybe there is a new ride-sharing app trying to raise capital on one of the equity crowdfunding platforms. If you’re interested in investing, you could go to the SEC database and look at the most recent regulatory filings for companies like Uber and Lyft Bird to get an idea of how they make money, the unit economics behind their business, how close they are to profitability, and of course what problems they might be having.
Another useful exercise is to think about how easily replicable the startup you are considering investing in is and what are the barriers to entry. Are there other startups doing the same thing? If so, what makes the startup you like different? Is the company differentiating itself or winning on price or convenience?
Then think about the industry. What is regulation like? Has your target had to clear a bunch of hurdles just to operate as a business? Will it be tough for potential competitors to do the same?
Finally, if you know anybody in your network that has knowledge on the sector, talk to them. What are their thoughts? They will be able to give you information that you can’t find anywhere else and also tell you about what challenges or advantages the company you are considering investing in faces.
Think about it this way - everything you’re doing here is essentially a microcosm of investing money on a larger scale, so if you can practice, level up your knowledge and skills and eventually succeed at the crowdfunding level, you can probably succeed at the institutional level as well!
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