How To Invest In a startup

How To Invest In A Startup

Kate Ashford, John Schmidt

Contributor, Editor
Updated: Sep 24, 2021, 10:49am
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

It can be challenging to offer a precise definition of a startup: It can be a business creating a new product or service under conditions of extreme uncertainty, or a company aiming to solve a problem where the solution is not obvious and success is not guaranteed.

However you define a startup, it used to be that you needed both wealth and good connections to invest in them. This is no longer the case, however, and average investors can easily grab a piece of an exciting startup opportunity using crowdfunding sites.
Startup investing is potentially lucrative, but it’s important to understand that it comes with big risks. The vast majority of startups fail—even if you do your research, you could end up with a pocket full of nothing. Here’s what you need to know to begin investing in startups.

How to Make Money Investing in Startups

When you invest in a startup via a crowdfunding site, you enter into an investment contract with the company. Broadly speaking, there are four different kinds of investment contracts, each of which offers different ways to make money from your investment:

Debt. This type of contract treats your money like a loan that earns interest. The contract may pay out a fixed return, such as two times your investment, or a variable return. When you receive interest payments depends on how the business performs over time.

Convertible note. Instead of earning interest, this contract is a form of debt that converts into shares of stock when a startup archives certain goals—like gaining new rounds of funding. You make money on your investment once the company is purchased by another firm or eventually goes public.
Stock. Later-stage startups may let you buy shares of stock in the company, much like you would buy shares of a publicly traded company. Just be aware that you can’t sell your shares of startup stock. To make money, you need to hold on to your shares until the startup goes public or is purchased by another company.
Dividends. Successful later-stage startups offer investors the ability to buy shares of stock that pay annual dividends.
Why Invest in Startups?

Investing in startups gives you a ringside seat to solutions for challenging problems or the development of new technologies.

Growth potential. Large-cap stocks in the S&P 500 are far less risky than startups, but there’s seldom room for exponential growth. If you pick a successful startup, however, the sky’s the limit. “There’s so much opportunity for expansion,” says Tom Schryver, who teaches entrepreneurship at the SC Johnson College of Business at Cornell. “There’s an enormous multiplier effect that could be huge. That’s part of what an investor would be buying.”
Belief in a new idea. Startup investing may appeal to you because it’s about entrepreneurs pursuing a new idea. “People often invest in what they want to see in the world, whether it’s more sustainability or a really cool sneaker company,” says Elias Stahl, founder of environmentally friendly shoe company HILOS. “There’s no better opportunity to see something that you want in the world and to support that.”
Personal connections. Maybe your brother is launching a great new product, or perhaps it’s your neighbor. It seems like an innovative idea, and you want to help finance the project of a friend or relation. “A lot of people invest in startups because they’re in a network and being supportive of a project they know,” Schryver says.
A sense of fulfillment. For some investors, startup investing is something they do for the feeling it gives them—helping someone found a business, watching something new get created, learning about different industries or getting in on the ground floor of something exciting. “If it’s something somebody is committed to doing, there’s no substitute to just starting,” Schryver says.
Why You Might Not Want to Invest in Startups

Startup investing is not for everyone, least of all investors who want low risk and reliable income.

Startups are super risky. About 90% of all startups fail, due to a lack of product-market fit, marketing problems, team problems or other issues. “There’s possibility for total loss,” Schryver says. In general, startups are only a good investment if you’re prepared to lose 100% of what you’re staking. The vast majority of your investing dollars should ideally be in index funds and exchange-traded funds (ETFs), or even just individual stocks.
Startups are illiquid investments. If you bought a stock today and changed your mind tomorrow about your choice, you could easily sell it. Startups, on the other hand, are highly illiquid. When you invest in a startup, you should expect that your money will be tied up for at least three to five years, if not more. “Although you can have the opportunity to liquidate through secondaries, it’s not a guarantee, and your investment will likely take years to mature and materialize,” says Ammar Amdani, a partner at early stage venture capital firm Adapt Ventures.
It takes time to see results. Even if a startup succeeds, it still could take years before there’s a result from your investment. “You have to be patient and have holding power in order to give your portfolio companies time to grow,” Amdani says.
How to Decide If a Startup Is a Good Investment

How you approach startup investing will be unique to you and your financial situation. Experts recommend doing plenty of research before putting your money on the line. You should be able to answer these questions before making a startup investment:

Forbes advisor https://www.forbes.com/advisor/investing/invest-in-startups/ saytidan tarjima qilindi

Startap tushunchasiga aniq ta'rifini berish qilish qiyin bo'lishi : bu o'ta noaniqlik sharoitida yangi mahsulot yoki xizmatni yaratadigan biznes yoki yechim aniq bo'lmagan va muvaffaqiyat kafolatlanmagan, muammoni hal qilishni maqsad qilgan kompaniya.
Qanday startapni tanlasangiz ham, ularga sarmoya kiritish uchun sizga pul va yaxshi aloqalar kerak boʻladi. Biroq, hozirgi kunda oddiy investorlar crowdfunding saytlaridan foydalangan holda koʻplab startap imkoniyatini osongina qo'lga kiritishlari mumkin.
Boshlang'ich sarmoya potentsial daromad keltiradi, ammo bu katta risklar bilan kelishini tushunish muhimdir. Ko'pgina startaplar muvaffaqiyatsizlikka uchrashi mumkin - hatto uni oldindan oʻrganib chiqsangiz ham, bunda siz pulingizdan ayrilishingiz mumkin. Startaplarga sarmoya kiritishni boshlash uchun quyidagilarni bilishingiz kerak.