3 Things to Understand Before Investing in Start-Ups

Sherita Edwards

3 Things to Understand Before Investing in Start-Ups

Everyone is familiar with investing in stocks, as that seems to be the new interest for Millennials preparing for their financial future. However, I wonder if they are familiar with investing in start-ups? As Millennials are trailblazing the entrepreneurship lane, being able to invest in power house startups before they become household names is a great way to establish long term wealth. Start-ups are just as risky as stocks, but the return could be just as great.

So before moving forward with investing all your funds into 401ks, ETFs, bitcoins, or the latest IPO, take a moment and learn a new way of investing – “Start-ups.”  As we capitalize on the age of entrepreneurship, this can be a great way to invest in a company before the world knows who they are.  Imagine if the founder of Amazon walked into your living room and said, “would you be interested in investing in our book company?”  Yes, Amazon was simply an online bookstore before anything else, but you would have been able to get into the company before it was even thinking about selling stock shares, turning Walmart into its competitor, or acquiring Whole Foods. Your funds would have bought immediate equity within the company, offering a better return, as well as stock options at the lowest rates.

How to find startups to invest in

Well of course you could browse social media and find a million startup companies, as well as look on GoFund.me to access new entrepreneurs looking for angel investors. But before shooting your arrow into complete darkness, the new technology has made finding companies easier than ever. There are several platforms that cater to those interested in start-up investing and investors. WeFunder.com, Nextseed.com, and Gust.com, just to name a few. These are 3 sites that provide the everyday individual an opportunity to invest in local, national, and international start-up companies.

Wefunder.com will allow you to invest with as little as $100 with the options of debt, equity, or convertible debt. Nextseed.com is an investment crowdfunding site that allows anyone to invest in vetted startups. Gust.com is similar to both Wefunder.com and Nextseed.com in providing anyone an opportunity to invest in start-ups. Each site provides education to inform and guide the investor as well as multiple financial entry points from $100 to $1000 minimum investments. The platforms also allow for any start-ups to campaign potential investors serving a dual purpose.

But before you invest in start-ups here are a few things you should know first:

Multi stage process

Investing in start-ups is a multistage process, which is unlike stocks. You can invest at different stages of a start-up. The different stages include Seed or Series rounds of investing where the stage of investment determines your return. You may also be offered to invest at other stages as the start-up may need more capital. And even after several rounds of investing, the start-up may still require more capital before being completely public. So be aware that your initial investment is contingent upon the start-up receiving all required funding to move forward.

Not an overnight celebrity

As you may notice from the multistage process, investing in start-ups are far from “get rich quick” or overnight success. Those who invest in start-ups have a long-term goal of financial wealth. Assuring the companies are vetted and have the financial statements and business plan to support the company goals is essential. So now that you have invested in the startup, you’ve vetted the company, and your interest is long term, most wonder when will they see a return. There’s no set time, but there is at least a 5 year minimum. After that time, funds may be liquid for the investors.

Liquidation

Returns on Investments are offered upon a liquidity event. Liquidity events can be triggered by a merger or acquisition, IPO (initial public offering), secondary market transaction, or funds to be released. Venture investors hold stocks in startups for up to 10 years before seeing a return. Unlike most investments in the public market, you don’t choose when you liquidate your position, the fund chooses for you.

So now we are more aware of the ins and outs of investing in start-ups, would that be an option for your financial future?

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3 Things to Understand Before Investing in Start-Ups