There is not an exact definition of a startup. But, in simple terms, a startup can be a business that creates new products or services under highly uncertain situations or a company that aims to provide a solution to a problem, which is not so evident and direct, and success is unguaranteed.
Startups are also those businesses in which investors, both individuals, and institutions invest believing in the potential of the startups’ business model and entrepreneurs. People or firms who fund startups have an object either to share in their profits or equity, which is quite considerable.
Startups as an investment opportunity are pretty lucrative. Nonetheless, the risks associated with the investment bring a significant risk that investors should not ignore. That is why it is better to know how you should invest in a startup than simply jumping into the pool without even knowing how to swim. So please read our guide on the steps to invest in startups and make a knowledgeable investment decision.
Startup Investing Platforms
Ordinary people who wish to invest by investing in startups can do so via crowdfunding sites. Platforms for startup investing offer a few hand-picked companies required to make minimum buy-ins varying from company to company. The major investors in the crowdfunding startup world include:
SeedInvest has over 500,000 investors and has raised more than $300 million invested in 235+ startup companies. This platform only targets highly vetted investment opportunities and comprises top angel investors and venture capital firms.
At Wefunder, you can start investing in startups and small businesses with an amount as low as $100. The platform has funded the dreams of 1,494 young entrepreneurs by making a total investment of $284 Million to date and has also created 19,167 job opportunities.
These funded startups have further raised more than $5 Billion in venture capital posy Wefunder. They have a total of 990,446 investors associated with them.
Republic is a multi-industry investing platform where investors can invest in industries other than startups, such as video gaming, real estate, and cryptocurrencies. The platform has invested $150+ Million through massive 1+ million investor members from both institutional and individual investor communities in the last year.
In addition, they have cracked about 250 deals ranging from A to CF to D and seed to pre-IPO funding.
StartEngine is an investing platform for everyday people, which serves them with a chance to become angel investors by giving them the opportunities to invest in startups.
Except for SeedInvest, where the minimum investment amount starts from $500, others mentioned above ask their investors to start investing with as little as $100.
AngelList or Angel Investors is another platform for startup investing. Those individuals or institutions, labeled as accredited investors with a net worth of a minimum of $1 Million or incomes of $200,000, which is $300,000 if married, excluding their primary residence, are called angel investors. On AngleList, the minimum buy-ins are at least $1,000. An accredited investor can be a business entity or an individual with the authority and rights to trade securities not registered with the stock market or financial authorities.
Participating in the venture capital phase by way of investing in private equity funds with a focus on venture capital funding is allowed to private individuals, which is an indirect investment in startups. Capital funding is a funding process where equity holders and lenders lend money to businesses to meet their daily and long-term requirements.
Investors who are willing to invest in venture capital funds or privately managed startups can do so by investing in pre-IPO opportunities, directly working with a local business to buy a percentage of their equity, or buy company shares online via crowdfunding platforms.
Stages Of Funding In Startups
Startup's first funding stage for their business is seed funding, followed by Series A, B, and C funding rounds. Let’s see the elaboration of each of these stages below.
A startup required pre-seed funding when its founders started their operations for the first time. Generally, the pre-seed funders are the startup owners themselves and also their close family members and friends.
The first official equity funding stage starts with seed funding, representing the first official money a startup raises. This funding has been named so because money procured from this stage is equivalent to a seed that helps the company grow and prosper into a full-fledged Tree.
The potential investors in this stage are venture capital companies, founders, friends, family members. Incubators, and more. And the most common funder being the angel investors. Startups can raise any amount ranging from $10,000 to $2 Million in this round of funding.
Once the startup has established its business and can develop a decent track record, showing some key performance indicators, consistent revenue figures, or a good customer base, it can enter the third stage of funding, which is Series A funding to help the business optimize its customers base and product/service offering.
This round raises nearly $2 Million to $15 Million. However, this range has increased on average owing to high technology industry valuations, also called Unicorns. In this stage, a single investor may become an “anchor.” And, when the startup secures its first investor, additional investors may start joining in.
Series B funding starts when startups cross their development stage and are on the mark to take their business to the next level. Series B funding is basically to help your startup expand and market and promote your business to a larger scale.
The estimated capital raised on an average in Series B funding is $33 Million. The type of investors who fund startups in the Series B stage is the same as Series A investors, including the anchor investor. The only difference here is that new venture capital firms invest in Series B, specializing in Later-stage investing.
In Series C funding, startups that are already successful are injected with more capital to develop new products, explore new market segments, or even acquire other companies. Investors funding startups in this stage invest with the mindset to receive more than twice the amount.
Startups who raise capital in this stage utilize it to improve their valuation with the expectation of launching their IPO. When in Series C funding, startups enjoy a valuation of approximately $118 Million. Even after getting Series C funding, if a startup fails to achieve its goals of launching its IPO, it may enter Series D funding for the final push before the IPO.
How Much Can I Invest In A Startup?
The SEC guidelines say that non-accredited investors should know that they have an upper limit to their investment in crowdfunding ventures, beyond which they cannot invest at the time of any 12 months. The guidelines say that:
- If their net worth or annual income is below $107,000, they can invest up to $2,200, whichever is higher OR 5% of their net worth or annual income, whichever is lower.
- If their net worth or annual income is more than equal to $107,000, they can invest up to 10% of the lesser of their net value or yearly income. Nevertheless, this amount cannot be more than $107,000.
A Few Last Words:
Investing in startups is very risky because you will have no notion about the startup's performance in the market. Startups and their exclusive and uncommon business model may seem to be intriguing and attractive, especially to our ears.
But, the reality can be far different if the business is not taken with utmost seriousness and passion. You can also take the help of different types of lawyers as they will guide you to the legal process of investment contracts.
Author Bio:
Jais Frank is a freelance content writer and enthusiastic blogger. He is the co-founder of The Parents Magazine. He contributes to many authority blogs such as Gossipment and The Legal Guides.
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