- You don't need to be a big-shot VC to invest in hot startups.
- Instead, you can be an investor yourself through the equity crowdfunding platforms like Republic, WeFunder and StartEngine, where you can invest in startups for as little as $10.
- The key, says Republic cofounder Kendrick Nguyen, is to find a business or product you really believe in, which the platform can help you do.
- While equity crowdfunding is on the rise, there are those who believe it comes with risks.
- Visit Business Insider's homepage for more stories.
Think only millionaires and big-shot venture capitalists can invest in promising young startups?
Not so. Not since 2016.
That was the year when legislation first passed enabling startups to offer equity in exchange for retail investments through a process called equity crowdfunding. The legislation applied to non-accredited investors, allowing virtually anyone to put their money in private companies, regardless of their income or net worth.
Today, crowdfunding platforms like Republic, WeFunder and StartEngine allow anyone to invest in startups like Nada, Popshop, and Upshift.
Republic, for instance, was founded only weeks after the new regulations were announced in 2016, and has been helping individuals put money in companies approved to fundraise through the platform for years, often at an amount as low as $10.
The whole process of investing in a startup takes "less than a minute," Republic's founder Kendrick Nguyen told Business Insider.
Once an investor registers on Republic's website, they can immediately scroll through dozens of companies to invest in, loosely categorized by type (gaming, retail, media, etc.). Other info about the company is also available such as if their founders are immigrants, women, or minorities.
It also shows comments from previous investors about a company alongside the investment amount they put in.
All of these features, Nguyen says, are designed to help investors figure out the most important component of startup investing: finding a company or product you really care about.
"If it's a business or a product that you yourself can use and you yourself really believe in, and if you find it compelling and say 'hey, this is really cool and I think this team is going to be able to achieve this,' invest a small amount of money," he said.
Nguyen added that diversification is also an important component of startup investing.
"If you have a thousand dollars, you should invest in 10, 20, or 50 companies. And if you have a hundred dollars, you should still invest in 10 companies. Don't put all of your eggs in one basket," he added.
To be sure, private investing comes with risks. Between 65% and 90% of all small businesses fail within the first five years, researchers find. And even if your investment does grow and the company flourishes, it's difficult to sell securities purchased on crowdfunding platforms like Republic, at least in the first twelve months after purchase. And there are limits to how much you can invest, depending on your income.
For example, if your annual income or net worth is less than $107,000, you can invest $2,200, or 5% of either your annual income or net worth.
But that still allows almost anyone to make investments in dozens of different startups, given that most companies on the platform require just a $100 minimum investment, though that number can go lower.
What's more, the opportunity for equity crowdfunding today may be greater than it was four years ago.
That's because the Securities and Exchange Commission last month more than quadrupled the amount that startups can raise through crowdfunding platforms, from $1.07 million to $5 million a year.
The expansion, combined with a decline in seed funding this year from traditional VCs who spent the spring and summer in cautious mode because the pandemic, may mean that more early-stage startups have more space on their cap tables for equity crowdfunding.
Republic says that it's completed over 250 deals in the last year, with more than $200 million deployed by over 700,000 private investors.
Not everyone supports the changes. For example, SEC Commissioner Caroline Crenshaw voted against this year's new regulations, arguing that they failed to provide adequate protections for private investors.
But Nguyen believes the equity crowdfunding movement can transform the future of startup investing.
"Imagine if a dorm-mate of Mark Zuckerberg was able to invest 50 bucks. He may still go on to become a historian, or a doctor, but nonetheless now has a foot in entrepreneurship," he said.
"This whole new world of everyone investing and owning companies that they want to see in the future is the mission, or the vision, that we're going for," he added.
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