When prominent startups make their market debut and early backers find themselves in a financial windfall, it’s only natural to think, “Why can’t that happen to me?” Well, with a touch of luck and the right opportunity, it just might! Thanks to the newly implemented JOBS Act regulations, effective immediately, you no longer need to earn a six-figure salary or possess a million-dollar net worth to invest in startups; all you need is some available cash.
You’ll be able to explore investment options through a fresh wave of equity crowdfunding platforms, such as Crowdfunder and Wefunder. Unlike traditional crowdfunding sites like Kickstarter, where you support a project, here you’ll be purchasing shares in an actual company. But don’t just randomly invest your hard-earned money in any idea that comes along. We consulted experts to gather essential tips for making wise investment decisions.
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Evaluate Credibility
Ensure that a trustworthy management team operates the crowdfunding portal you choose. Be discerning; these platforms are new, with the first few launching this month. -
Invest in What You Understand
If you’re not well-versed in legal matters, avoid legal tech startups. If you’re an experienced parent, you might have unique insights into promising ventures in parenting. Generally, products catering directly to consumers can be a safer investment than B2B options.
“Crowdfunding is most effective when individuals invest in areas they understand—like dentists putting their money into dental software.” —Chris Dixon, Andreessen Horowitz Partner -
Be Open-Minded
Stay receptive to unconventional ideas and founders who might not fit the typical tech mold. As these platforms progress, they might even expand funding options to include areas like scientific research or local businesses. -
Research the Founders
Understand why the founders are turning to equity crowdfunding. If they’ve had difficulties securing funding through traditional means or if they’ve previously failed at a startup, tread carefully. Nontraditional backgrounds can be risky but also rewarding. It’s a positive sign if their friends and family have already invested significantly.
“A typical white male from a prestigious university in cities like San Francisco or New York often finds it easy to secure funding. So, why are they resorting to crowdfunding?” —Ethan Mollick, Professor at Wharton School, University of Pennsylvania -
Know Your Co-Investors
In niche sectors like biotech, make sure that fellow investors have some level of expertise, but also ensure that you’re not surrounded exclusively by professionals from the same field. -
Beware of Scams
Be cautious if founders seem evasive or if the online community appears disengaged. Opt for platforms that have a history of promptly addressing fraudulent activities. -
Diversify Your Portfolio
If your goal is to achieve financial gain—let’s be real, most investments won’t yield returns—consider investing across a broad spectrum of startups and ideas.
“Diversifying your investments means supporting multiple startups—aim for 60 or even 100. The most successful VCs are betting on the rare startups that truly excel.” —Christian Catalini, Professor at MIT’s Sloan School of Management - Stay Informed
Familiarize yourself with SEC regulations, read all terms and conditions of the portals, and examine the startups’ disclosures thoroughly. Know your rights and what could happen to your shares if new investors come on board later. Always be aware of the risks involved, and only invest what you can afford to lose.