How to Invest in Startups (When You're Not a VC)

ivelina

Published

October 10, 2024

So you’ve got money in one hand and a pen in the other, ready to write that first check.

Or, perhaps…that sounds a bit old school. Do people still use pens? Most likely a mouse, or mobile phone.

Well, whatever you’re using, investing in startups is rewarding both personally and financially, but also highly risky. Even if you have every single detail planned out, building a business is well…risky business. So, if you’re planning to invest in startups, get comfortable with making and losing money.

With that said, the two golden rules for startup investors are:

Never invest more than you can afford to lose,
Don’t invest unless you're prepared to wait at least 5 years to see a potential ROI.

Why do it, if it’s so risky?

Massive returns‍

With a strong investment thesis, skill, and luck, it is possible for one or two investments to cover the cost of an entire portfolio. This is the goal of many professional angel investors.

Guide and support entrepreneurs

Investing can be a way to not only support causes and ideas that you care about, but also potentially earn a profit. If you make it to the cap table of a startup, it’s not just because you have money, but because you have a set of skills that the founders find valuable. This means you’ll be able to support founders on their journey to building a successful business.

Intellectual stimulation and constant learning

It’s tricky and challenging to assess the potential success of a startup. But, if you have a particular area of expertise, such as fintech, you’ll be able to use your knowledge and skills to make informed investment decisions in that particular industry.

How do I invest in startups?

There are 3 main ways to invest in startups - angel investing, community investing, and crowdsourcing.

Let’s start with the most popular one - angel investing.

1. Angel investing

Angel investing is, to a large extent, a numbers game, meaning you need to make a higher number of investments, so at least one or two of them will pay for all the rest that are not successful and generate a handsome return on your investment. As an angel, you can support and help grow businesses you are passionate about while earning a higher return on your investment than more traditional investments options.

However, you need to have quite a bit of capital to start off with, which many people don’t. On top of that, you need to be an accredited investor. The requirements for being an accredited investor are pretty hefty:

Your gross income must exceed $200,000 per year for the last two years, or;
You need to have a net worth exceeding $1 million individually or combined with a spouse or spousal equivalent (excluding value of primary residence).

This makes angel investing difficult to access unless you’re already quite wealthy.

Another drawback is getting access to startups unless you have an established network. Many new angels join an angel investing syndicate, which is a group of individual investors who pool their money and resources to invest in startup companies.

They are typically formed by experienced angel investors who have a track record of successful investments and are looking to increase their investing power and reach by working with other investors. When you back a syndicate, you’re not required to invest in every deal. You’ll be invited to all the available deals and you get to choose which ones you want to be part of.

Syndicates can help to diversify the risk of investing in a single startup, as the syndicate's members spread their investments across multiple companies.

The good news is that there is a way to become a startup investor without being accredited.

2. Invest in startups as a community (aka investment club)

This is a novel and unique way of investing in startups that has never been available before to investors. Starting or joining an investment club is the best way to invest as an unaccredited (and accredited) investor. By starting an investment club with your community, you’ll be exposed to great deal flow and networking opportunities.

PIN is the first-ever company to provide access to startup investing to those who are not accredited and who can only afford to invest small amounts. PIN handles all the legal work so you can focus on leading the club or participating in it. What would typically take 6 months in setting up a club, will only take you 3 weeks with PIN.

The most time consuming part will be getting the first leaders of the club. Once you have the first few people to help you lead the club, you provide PIN with the name of your group, the names of the leadership team, and the legal address of at least 1 member on the leadership team. We'll use this info to register a legal entity and generate all necessary documents to begin fundraising.

Find out more about PIN and how to invest in startups as a community here. ‍

3. Crowdfunding

Being part of a crowdfunding campaign is another way to dip your toes in the water. Crowdfunding is a popular way for startups and small businesses to raise capital, especially for projects that may not be able to secure traditional forms of funding. Creators can connect directly with their audience and build a community of supporters around their project.

Crowdfunding campaigns are often organized through dedicated crowdfunding platforms, which provide a platform for creators to pitch their idea and for backers to contribute money and support the project.

Quick recap

Startup investing is great, but as with everything, there’s positives and negatives.

The Positives: ‍

Opportunity to help a company grow: Being on the cap table means you can be involved in the growth and development of a company, which can be a rewarding experience.

Potential for networking and mentorship: Investing in startups means you’ll get to build relationships with entrepreneurs and other investors, which can be beneficial for your own professional development.
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Potential for high returns: If the startup is successful, you’ll see significant returns on your investment.

The Negatives:

Long-term commitment & limited liquidity: You need to be patient and wait at least 5-7 years before seeing a potential ROI.

Time intensive: If you’re investing as a community this is not an issue, but if you’re a full time and serious angel investor on your own, it can be a time-intensive endeavor, as you may need to review pitches, conduct due diligence, and participate in board meetings.
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High risk: Startups are high risk investments, as many of them fail.