Investing in private, pre-IPO (initial public offering) companies is an exciting opportunity now available to nearly all investors. But unlike investing in companies that are listed on the public markets, to invest in private companies, you often need to create an account with an equity crowdfunding platform.
Today, I’ll provide you tools you need to start investing in private companies.
Investing in private companies is one of the best ways to build lasting generational wealth for you and your family.
So how can you grab your share? Let’s get some of your most pressing questions answered…
Can Anyone Invest in a Startup?
The short answer… YES! Anyone can invest in private startup companies.
But that wasn’t always the case.
Before April 5, 2012, when a landmark piece of legislation called the JOBS Act became law, investing in private companies was limited to accredited investors. (An accredited investor is someone who hits strict income and net worth requirements. Think the ultrarich.)
The JOBS Act changed all that.
Under these new rules, and a recent change from the U.S. Securities Exchange Commission (SEC), startups are now allowed to raise up to $5 million from nonaccredited investors.
This is huge!
Now, anyone can grab a share of these tremendous profit opportunities – before they hit the public market!
The best part is that it’s really easy to get started thanks to a number of equity crowdfunding platforms. (More on those in just a moment.)
Is It Smart to Invest in Startups?
As with any kind of investing, investing in private startups carries risk. But with a smart risk-management strategy in place, you can make big gains from these exciting companies.
That being said, private investing does have some key differences that are important to be aware of…
Private markets aren’t liquid like the public markets.
You can’t sell a private stake in a company the same way you can sell a stock. The money you invest will be locked up for at least a year… sometimes longer.
In the private markets, investors make money when a “trigger” or liquidity event occurs.
This could be the company going public via an IPO or getting acquired. You could receive shares of the company or a cash equivalent of your stake in the company.
The return depends on how much you invested, the valuation of the company at the trigger event, and the terms outlined in the deal.
It can often take years for one of these events to occur.
To make money as a private investor, you should anticipate holding through the trigger event.
So it’s important you only invest with disposable income – money you don’t need to pay the bills.
(For a detailed rundown of the unique risks when investing in private companies, go here.)
Most Popular Equity Crowdfunding Platforms
Unlike stocks, you can’t just go to your online broker and place a trade. You’ll have to visit the crowdfunding platform the private startup is using and register yourself just like you would any e-commerce site.
Just like opening a new bank or brokerage account, the crowdfunding site will ask you for some basic information (name, address, date of birth, etc.), you’ll create a username and password, and you’ll give them the necessary banking information to fund the account. While funding can take anywhere from a few minutes to a few days (depending on the site), the process of setting up an account shouldn’t take you longer than 10 to 15 minutes.
Here are some of the most popular equity crowdfunding platforms out there right now:
- Republic: “Republic curates private investing opportunities with high-growth potential across startups, gaming, real estate, and crypto.” The platform has helped raise funds for companies including SpaceX and Robinhood.
- Wefunder: Wefunder prides itself on making angel investing available to everyone. “All of the companies that raise successfully on Wefunder have a loyal community of people who believe in them.”
- SeedInvest: SeedInvest will “help you become an angel investor and back the newest crop of visionary companies.” With a community of over 620,000 investors, SeedInvest believes “everyone should be able to invest in the next big thing.”
- NetCapital: NetCapital wants to make private investments work for you. The company aims to enable “entrepreneurs and investors to work together to build value.”
- StartEngine: Backed by Kevin O’Leary – Shark Tank’s “Mr. Wonderful” – StartEngine offers “a hundred different investment opportunities and [the chance to] invest in the ideas and people you believe in.”
- OurCrowd: With OurCrowd, you can “invest in pre-vetted startups and exclusive venture funds. Build a diversified portfolio alongside trusted VC funds and angel investors.”
- Fundable: With $568 million in funding raised, Fundable boasts that they’ve “built the largest business crowdfunding platform dedicated exclusively to helping companies raise capital.”
When a company is raising funds, it will often list on one of the platforms available. If you are interested in investing, you’ll just need to set up an account to get started. Remember, it shouldn’t take longer than 15 minutes.
Now you are armed with the basics to get started with private investing. Be sure to continue to follow us here at InvestorPlace for opportunities in this space.
Investing in startups through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:
1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education
Read more: Private Investing Risks
Jessica Zeller has spent over a decade following the financial markets and bridging the gap between retail investors and complex investment strategies. Her focus has been in technology and high-growth investment strategies.