Benzinga | Oct 7, 2021 01:05PM EDT

How To Invest In Startups Online

By KingsCrowd

Investing in startups is one of the few ways investors can add high-growth assets to their portfolios. Historically, most investors have been prevented from investing in startups. But thanks to the recent development of equity crowdfunding, all investors can now get in on the ground floor of today's fastest-growing early-stage startups. Think of it as your chance to invest in the next Amazon, Uber, or Beyond Meat.

This article will explain why startups should be part of your investment portfolio, what equity crowdfunding is, and how you can invest in startups online.

Why Invest In Startups?

When Amazon (NASDAQ:AMZN) went public in 1997 at $18 per share, it had a market value of $438 million. Amazon's current market value is $1.67 trillion.

Microsoft (NASDAQ:MSFT) has a similar story. It went public at $21 per share in 1986. By the end of its first day on the market, Microsoft had a market value of $777 million. Microsoft's current market value is $2.13 trillion.

If you had invested $1,000 in either company at its IPO price and held onto it until today, you would easily be a multi-millionaire.

And that's because Amazon and Microsoft were still growing companies when they went public. Unfortunately, most companies are done growing by the time they go public these days. Thanks to record amounts of cash saturating the private markets, companies are staying private now longer than ever before.

As of last year, companies were staying private for about 11 years. In 2011, that number was five years. As a result, investors in the public market are missing out on the growth stage of most companies. And that's where investors make the real money.

Consider some of the high-profile IPOs in recent years. Uber went public 10 years after it launched at a $75 billion valuation. DoorDash went public almost eight years after it launched with a $39 billion valuation. And Airbnb went public 12 years after it launched with a $47 billion valuation.

Can you imagine Uber as a $286 trillion company? That's what it would have to do to match Amazon's returns on the stock market. Airbnb and DoorDash face similar challenges. As do most startups that go public. They're done growing.

Sure, you might be able to generate 8% a year in income in the stock markets. Heck, let's give you a 13.6% return, which is the average return for the S&P 500 over the past 10 years. That still doesn't compare to what startup investors are making.

Let's revisit Uber. Fortune did the math on how well startup investors did on the ridesharing company before it went public (when it was valued at $17 billion).

Uber's first angel round of investment--a $1.5 million deal led by First Round Capital--came with a $4 million valuation. Investors in that round, assuming reasonable dilution, saw their investments grow to between 400x and 600x in the round that valued Uber at $3.5 billion. At $17 billion, they're worth around 2,000x, according to people familiar with the deal.

That means even a tiny little $20,000 angel investment is now worth around $40 million. Even investors from the $3.5 billion round have now almost quintupled their money in less than a year.

Startups have massive potential (along with significant risk). That's why it's important for all investors to put a small percentage of their portfolio in startups. And thanks to equity crowdfunding, that's now a possibility.

What is Equity Crowdfunding?

In 2012, President Obama signed the JOBS Act into law. The JOBS Act was enacted to remove barriers to capital formation, especially for smaller companies. This revolutionary law consists of multiple titles that cover different aspects of investing, including crowdfunding. The most relevant portions of this law include:

* Title III (Regulation Crowdfunding): Better known as Reg CF, this is an exemption that allows companies to raise up to $5 million a year online from both accredited and non-accredited investors, each year, every year.

* Title IV (Regulation A): Also known as Reg A+, this is an exemption with two tiers. Tier I issuers may raise up to $20 million. Tier 2 may raise up to $75 million. Both accredited and non-accredited investors may participate.

Before the JOBS Act was signed into law, only accredited investors could invest in startups. According to the SEC, this is about 10% of American households, though other sources report the number to be far less.

Traditionally, crowdfunding has been known as a way for individuals and companies to raise money from the public for their ventures or projects, primarily through crowdfunding websites like Gofundme, Indiegogo, and Kickstarter.

Equity crowdfunding, on the other hand, takes this concept a step further by allowing anyone to invest in startups. With the JOBS Act, anyone can invest in the next Uber, Facebook, or Tesla on any one of the more than 45 equity crowdfunding platforms registered with the SEC.

Best Equity Crowdfunding Investment Platforms

Approximately $211 million was invested in startups through Regulation Crowdfunding (Reg CF) deals in 2020. The majority were raised through one of the top five online crowdfunding investment platforms:

Minimum Investment 2021 Investment Total*

Wefunder $100 $106.8 million ::Visit Button::

StartEngine $100 $82.7 million ::Visit Button::

Republic As low as $50 $63.75 million ::Visit Button::

Netcapital $99 $18.8 million ::Visit Button::

SeedInvest $200 $6.23 million ::Visit Button::

*As of 8/31/2021 according to KingsCrowd data.

This year, Reg CF investments are expected to exceed $500 million, while Regulation A startup investments should exceed well over $1 billion. Every day, more and more investors are waking up to the power of investing early in fast-growing startups.

What are the Risks and Rewards of Investing in Startups Online?

Reward #1: Lucrative investment opportunities

As we wrote earlier, investing in startups can be very lucrative. A $500 investment can turn into $5,000, $50,000, $100,000, or more. In the equity crowdfunding sector, this potential is enormous.

Reward #2: Easy to start investing

For investors, the ability to invest via an equity crowdfunding portal makes the entire process a lot easier. The way angel investing used to work, accessing deal flow, performing due diligence and making the actual investment were all difficult to do. Equity crowdfunding has made the process dramatically easier. All the campaigns are available for the public, and you don't need to have the right connections. Just visit a company's raise page on a crowdfunding investment platform to learn about the startup and decide whether or not to invest in it.

Reward #3: Small minimum investments

Regardless of how much money you have to invest, there will always be opportunities in the equity crowdfunding environment. Some investment platforms allow people to invest in startups for as little as $100, while real estate crowdfunding platforms often set a minimum limit of around $1,000. Remember, part of what makes equity crowdfunding powerful for startups is the ability to raise capital through thousands of small checks. This benefits investors by making startup investing affordable -- and lucrative.

As lucrative as startup investing can be, each investment comes with serious risks. So as you read through the risks below, make sure to remember the first rule of startup investing: Don't invest money you can't afford to lose.

Risk #1: Illiquidity

Startup investments are fundamentally illiquid -- which means they are harder to buy and sell. For example, real estate is an illiquid investment that takes money, time, and effort to sell. On the other hand, public stocks like Amazon, Google and Apple are liquid investments that you can buy or sell with ease. The private markets and equity crowdfunding are highly illiquid investments. Once you invest, your money will be locked up for many years. If you need your money back or change your mind, you can't just choose to sell. As a crowdfunding investor, you have no control over when you will see returns on your investment (if ever).

Risk #2: Lack of control

If you invest in an equity-crowdfunded startup, don't expect to be called on company meetings with the founders and team. Investing a smaller amount of money means that you won't get a board seat or voting rights. Also, early-stage businesses can provide limited information about their business operations and plans because they don't have a long trading history or fully developed operations.

Risk#3: Higher risk of failure

Most startups fail. Even the most promising ventures can fail -- including those with adequate support and a good business plan. If you have a portfolio of 30 startup investments, most of your returns will come from just two or three companies. The rest of your portfolio will be filled mostly with misses.

Risk #4: Dilution

Dilution occurs when a company decides to raise additional capital during future funding rounds. It results in initial ownership becoming a smaller slice of a larger pie. And that can reduce returns.

Equity Crowdfunding Success Stories

NowRX In May 2018, NowRX (a startup that's revolutionizing the way Americans obtain prescriptions via home delivery) was valued at just $20 million pre-money when KingsCrowd rated it a Top Deal. KingsCrowd rated it a Top Deal again in June 2020 at a $65 million valuation. Today, NowRx is valued at $275 million, a more than 1,200% increase from when KingsCrowd first rated the crowdfunded startup.

Coinbase: Founded in June 2012, Coinbase is a digital currency wallet and platform where merchants and consumers can buy and sell digital currencies like Bitcoin, Ethereum, and Litecoin. While you may know Coinbase as a publicly-traded company worth approximately $60 billion, what you may not know is that $268,700 of Coinbase's early funding came from equity crowdfunding via FundersClub in 2012.

Mevo: Mevo produces cameras for live streaming events, including personal moments like weddings and gaming as well as professional situations like classrooms, conferences, and red carpets. Mevo was raising funds from investors via a raise on Wefunder in early 2020 when it was rated a Top Deal by KingsCrowd. It also received 5 out of 5 possible stars from KingsCrowd's proprietary patent-pending Merlin startup rating algorithm. On February 1st, 2021, Mevo announced that it had been acquired by computer peripherals giant Logitech at a premium.

Start Investing in Startups Online Today

At KingsCrowd, we believe that everyone can invest in startups. That's why we provide everyday investors with the tools and knowledge needed to invest like a venture capitalist.

From startup ratings to data-driven market research to providing the education you need to become a better startup investor, KingsCrowd is there to help you benefit from startup investing.

You can request a free digital copy of a report on KingsCrowd's #1 startup you can invest in today by clicking here.