So you want to invest in startups? Bravo!
But how do you get started?
Folks decide to invest in startups for many reasons — for the outsized returns, for the excitement, to escape the volatility of the stock market.
But then they get stuck. They have questions.
If this describes you, you’ve come to the right place. We’ve been helping investors take the first step into private investing since we founded Crowdability more than ten years ago.
So today, let’s look at the three questions you should answer before you jump in.
Question #1: “I’m Just an Ordinary Investor. Can I Even Invest in Startups?”
Most first-time startup investors wonder if they’re even eligible to invest in private companies. After all, maybe they heard that investing in startups was off-limits to them.
And it’s true: for almost 85 years, only wealthy “accredited” investors could invest in private startups.
But that’s no longer the case. Since 2016, it’s been 100% legal for anyone — regardless of their income or net worth — to invest at least a small amount into startups.
Furthermore, you can invest in every startup opportunity you see on Crowdability.
Question #2: “How Many Startups Should I Invest In?”
Here’s one of our favorite sayings at Crowdability:
You can’t bet it all on black!
In other words, you can’t put all your chips on a single startup. Instead, over time, you should invest in many startups. This is how the pros do it. It’s diversification.
Picture yourself at a roulette table. You could bet your entire bankroll on a single number. And if your number hits, you’ll win big. But the odds of winning are so slim. Statistically speaking, it’s more likely that you’ll lose it all.
Startup investing is similar. Many early-stage startups won’t succeed. So if you only invest into a single startup, the odds that you’ll make any profits are terrible.
But if you invest in many startups, you’re more likely to earn the average returns — which are a whopping 55% per year. And if one of your investments turns into the next Uber or Facebook or Nvidia, you might earn enough to never work again.
How many startup investments does it take to become diversified? Simply put, over time, we recommend building a portfolio of two or three dozen of them.
Question #3: “How Much Should I Allocate to Startups in Total — and How Much Should I Invest into Each Startup?”
Now you need to figure out how much capital you should allocate to startups as an asset class, and how much you should invest into each startup.
As a general rule, you might consider allocating a total of about 5% of your total portfolio towards startups. Maybe a little more if you’re on the younger side. So, for example, if your total portfolio is worth $100,000, perhaps you’d allocate between $5,000 and $10,000 to startups.
According to private-securities expert SharesPost, moving 6% of your assets to startups can boost your portfolio’s overall returns by 67%. And with a 67% boost, instead of earning, say, 10% a year, you could earn 16.7% a year.
Let’s see what that adds up to over ten years:
At an average return of 10% a year, in ten years, a hypothetical $100,000 portfolio of stocks and bonds would grow to about $259,000. Not bad. But in that same timeframe, a portfolio that includes just a tiny 6% allocation to startups (just $6,000) would grow to $468,000.
In other words, an investor could potentially double his or her portfolio by making a small allocation to startups.
But remember: you wouldn’t invest this $6,000 into one company. Instead, you’d spread that $6,000 across two or three dozen different startups. That means you’d aim to invest about $200 into each one. ($6,000 / 30 companies = $200 per startup investment.)
These figures may seem low. But keep in mind that a $200 investment into META (formerly Facebook) in 2005, back when it was private, would today be worth more than $300,000.
Ready to Roll
Startup investing is exciting. And it’s tempting to dive right in.
But before you do, make sure you can first answer the three questions we covered in this article. From there, you can start to focus on which startups to target. Speaking of which…
Keep an eye out for my next article, where I’ll review some tips and tricks to help you identify the right early-stage startups to invest in.
Until next time, happy investing.
Best Regards,
Editor
Crowdability.com
