With the right risk management and the right basket of investments, you can make money in the private investing market, no matter your budget or what the broad market is doing.
The daily market fluctuations we’ve seen so far this year make any sort of investing seem daunting right now. The S&P 500 is down nearly 8% year to date, and January was the market’s worst month since March 2020.
However, private investors – venture capitalists (VCs) – can mostly ignore the daily fluctuations in the market… to them, it’s just meaningless noise. They can focus on the bigger picture – where the world is moving.
While you may be nodding along with us so far, you may also be asking yourself: “Don’t you have to be rich to invest in private companies? What does this have to do with me?”
In fact, while it’s not well-publicized, you don’t have to be rich to be a venture capitalist anymore.
Today we’ll share how you can maximize your stake in private investing with just a little capital…
In the past, investing in private companies really wasn’t an opportunity regular people could take advantage of. Depression-era income requirements ensured that only “accredited” investors – i.e., the ultrawealthy – could capitalize on private investing offers. They, in turn, would share opportunities with their rich friends, and that world became closed off to people with more modest incomes.
Before the mid-2010s, income requirements meant investors had to have an annual income of at least $200,000 ($300,000 with a spouse) or a net worth of $1 million+ (not including your home).
In 2016, however, Title III of the JOBS Act of 2012 kicked into gear, changing the laws so that nonaccredited investors could participate in early-stage startup deals. You no longer need $1 million dollars or to be a high-net-worth client at a Wall Street bank to get in on these investments.
Now, the once-exclusive world of private investing is wide open to nearly everyone. A few thousand dollars – or even a few hundred – could pay off big in the VC world, depending on your goals, timeline, choices, and passions.
But there are a few rules and caveats to keep in mind.
What’s Your Private Investing Budget?
The JOBS Act still safeguards investors from losing everything in a deal that goes south. Nonaccredited investors – those who make less than $107,000 annually – can invest $2,200 or 5% of their annual income or net worth (whichever is greater) every year in private deals. If both your income and net worth equal or exceed $107,000, you’ll be able to invest 10% of the greater of your annual income or net worth each year.
Be sure you only use disposable income – or income you can do without. Investing in private companies takes time and patience to pay off, and there is a great deal of risk involved (more on that in a minute).
It may not sound like a lot, but a few thousand – heck, even a few hundred – dollars can go a long way.
Imagine investing a few hundred bucks in the next Alphabet (NASDAQ:GOOG) or Amazon (NASDAQ:AMZN) when they were first getting started. That little chunk of change could pay off handsomely. Just $500 invested in Netflix (NASDAQ:NFLX) in 2010, for example, would be worth nearly $25,000 today, according to Netflix’s own investor calculator!
How Much Should You Invest?
You’ve worked hard for your money and want to stretch it as far as possible, right? We all do.
As I mentioned above, you should only be investing disposable income, especially when it comes to private companies.
Even if private investing fits your budget, it may not fit into your risk profile. Are you willing to wait years for your investment to pay off… if it ever does?
Investing in a startup company with a brand-new product or emerging technology is risky. And most of the time, your money will be locked up in an investment for at least a year.
Private investing platform Republic.com says, “You should be prepared to lose your entire investment.”
It sounds dramatic, but as groundbreaking and necessary as a new company may seem, it still does not yet have a record of being lucrative or successful.
A good investor does their due diligence on any company or investment firm before handing over their money. But that information can be limited as a new company or operation develops its business plan, personnel, and operations.
If you can diversify your funds among several companies, you’ll have a much better chance of getting a return on your investments.
Private Investing Benefits
So if the odds are against profitability, you face a long wait for a return on investment, and you don’t know much about a company, then how could you succeed as a private investor?
Let’s track back to that due diligence. There are many ways to research and find promising new companies.
First, identify emerging trends. For example, fintech was all the rage in 2021 and minted numerous unicorn companies (startups valued at more than $1 billion). This year, the metaverse and Web3.0 are huge.
Look at privately held startup companies poised to be acquired by other larger companies, like how Amazon bought Ring.
Examine the company’s principal players. If you can’t find information – their experience, passions, expertise, etc. – on the people in charge, then that’s a major red flag. Also look at funding rounds and whether they’ve been successful.
Now it’s time to take that cash and make the most of it. The sky’s the limit – which opportunities will you pursue?
On this date of publication, Vanessa Rush did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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:
- Greater chance of failure
- Risk of fraudulent activity
- Lack of liquidity
- Economic downturns
- Dearth of investor education
Read more: Private Investing Risks
Vanessa Rush is a former journalism instructor with more than 20 years of experience writing and editing in the trucking industry, health and fitness, law, B2B, and the financial industry.
