Updated: Mar 10, 2021
Owning a stake in a business you believe in can be a rewarding experience. Not just in making a lot of money, but also for personal happiness knowing you're supporting something you're likely passionate about. Plus, if there was ever a time to support businesses, it would be during a pandemic when they're hurting the most. Thanks to the internet, there are now many websites that help investors find and fund businesses of all kinds, big and small. While investing large sums of money might not be feasible for most people, not all sites require a large investment. In fact, some sites cut out the middle man and let you buy equity directly from the company itself. This article will explore some of the best websites in this space.
How Does Investing in Startups Work?
The idea is pretty simple. Startups and small businesses are looking for money to help get their companies off the ground or to expand operations and services. They often can't go to a bank, and they often aren't big enough for venture capitalists and financial services companies such as Merrill Lynch. An investor makes a deal with the company in which he or she exchanges cash for equity. The company then uses the money in whatever way it deems necessary to generate future profit. If the business succeeds, then so does your investment and you earn a profit. If it fails, then you lose money on the investment.
Investing Versus Lending Money
When an investor makes an investment, he or she's not actually loaning money to a company; he or she's buying equity in it just like buying shares of Microsoft stock on Wall Street. By buying equity, you own part of the business (you're an owner now) and share in any success that follows from you putting up the cash for it.
What to Look for When Investing in a Business
It's difficult to spot a business with potential. Even the most seasoned venture capitalists get it wrong over 90% of the time. The key is to be very profitable with the few businesses that do prove to be successful. Blockbusting companies like Oculus and Starbucks have made early investors extremely rich in comparatively little time. It's a similar business model for movie studios. Most of the movies they release on a yearly basis end up short in profits. However, a few of their movies make outsized gains, enough to keep the company profitable in the long run.
When investing in a company, an investor should align his choice with his or her personal beliefs, risk tolerance, and financial goals. Why personal beliefs? Well for instance, no one should invest in a pork ribs company if he or she is a passionate vegan. It's always better to invest in something you're passionate about. It makes the profit-taking that much sweeter.
Here's four things to consider when deciding on what business to invest in:
1) Find Value. Not much different than buying farmland knowing there's gold secretly buried underneath.
2) Competitive advantages. Look for businesses that can succeed where few can. When Oculus first started selling equity (prior to Facebook buyout), there were few if any virtual reality companies that advanced in its tech.
3) Businesses that can scale. It's important the business you choose can scale to a bigger and bigger customer base, even if its within a niche market.
4) Fair evaluation. It's not an exact science, but if a company is asking for too much money for too little equity, research its previous investment rounds. If the company is already profitable, the evaluation may be fair.
Best Websites for Investing in Startups
The market for crowdfunding websites has been growing rapidly for a while. Now anyone can invest in Moonshots like flying car companies and fusion reactors -- to neighborhood businesses like cafes and breweries. The following is a list of brief reviews on the 8 best, established platforms in this space:
Seedrs is an equity crowdfunding platform, headquartered in East London's Tech City. Founded by Jeff Lynn and Carlos Silva in 2012, after they were disappointed with the current funding options available to small businesses. Initially oriented toward UK businesses, Seedrs expanded into other geographic markets such as Germany, France, Sweden, Spain and Ireland during 2014 and 2015. The platform is aimed at everyday investors who want to have a financial stake in their favorite startups but are looking for low minimums to invest. Currently, there are more than 400 businesses seeking funding on the site ranging from around $15K to around $1.5M. On average Seedrs investors invest about $3K per investment into an individual company's campaign.
Individuals from the UK and Ireland can sign up to be an investor on Seedrs for free. However, those individuals must first deposit at least £5K (around $8K). Once that account has been verified, investors can begin to invest in campaigns on the site for a minimum of as little as £10 ($15). Each investment requires a certain amount of due diligence on the part of the investor, which includes learning about the business in general and specifically about its financial standing. As with any other investment, there is risk involved; however, Seedrs does take steps to ensure all businesses listed are legitimate in one way or another.
Seedrs also boasts that it allows investors to exit their investments by selling their shares early if they are not happy with the business' progress. This benefit makes it easier for investors to take advantage of opportunities outside their portfolios without having to liquidate their entire investment(s) in order to do so. Seedrs also offers benefits typically not available through other crowdfunding sites such as dividend payouts based on company performance and a right of first refusal when new shares are issued by a company.
Each month, small businesses can have their campaigns listed on Seedrs for a maximum of seven days. After that, only selected candidates will be displayed to potential investors. The minimum investment is £100 (around $160) for each campaign.
"Like Kickstarter but for actual investing." Founded in 2012 by Nick Tommarello, Mike Norman, and Greg Belote. Wefunder is predicated upon the notion that anyone, regardless of wealth, should be able to invest in a company. Initially a private equity firm with investment assets in excess of $5 billion before becoming a blockchain-based crowdfunding platform in June 2017, WeFunder allows anyone to invest in startups worldwide, whether they are wealthy or not. Currently, there are about 675 businesses seeking funding on the site ranging from £10K (around $15K) – £1M (around $1.5M). On average investors typically invest around £75 ($120) per business's campaign page.
WeFunder boasts a broad range of investor benefits that include equity upside possibilities like those found on traditional crowdfunding sites as well as more unique opportunities like EquityShares that allow investors to profit from increases in WeFunder's value over time. These benefits are not offered by any other crowdfunding platforms in existence and have been developed in house by WeFunder itself. However, many of these benefits may be restricted depending on each company's business model. For example, startups who plan to issue additional shares may not be eligible for its equity upside potential if they are required for further funding from outside sources such as venture capitalists or private equity firms.
WeFunder also features a proprietary rating system that allows investors to compare and evaluate each business based on the information provided in their campaign page. These profiles are updated and maintained by the individual companies themselves. This system goes above and beyond typical crowdfunding sites where investors typically rely on reviews left by other users to help make an informed decision.
There are currently no fees associated with investing in companies on WeFunder; however, there will be a 0.5% transaction fee for withdrawals from deposit accounts, a 1% fee for withdrawals from credit or debit cards and a 2% fee for withdrawals made using bitcoin or ether. More details can be found on its FAQ page.
MicroVentures was founded by Bill Clark in Austin, Texas in 2009. Prior to starting MicroVentures, Clark worked as a credit-risk manager with GMAC Inc., PayPal, and Dell Financial Services (DFS). Clark decided to create the company after he noticed an issue with many of the small businesses seeking funding online after the 2008 financial crisis. In addition, they didn't have enough money to hire someone like him (or any other professional) to help them brainstorm ideas, draft business plans, identify target markets and more before presenting their ideas to potential investors. That's when Clark decided to solve that problem and create MicroVentures as a way for small business owners to connect with investors who share their commitment to long term success.
MicroVentures allows all potential investors to evaluate a company before investing in it by creating an investment profile for each entrepreneur on the site. For free, an individual can create their own investment profile, while registrants can use the premium option which includes additional features including the ability to track portfolio performance, manage investments and receive alerts when MicroVentures makes new offers in your portfolio. MicroVenture charges between 0.25% and 2% per year for management fees, although it does not take any of this fee until you have actually invested. However, rather than paying MicroVenture a percentage every time you invest or withdraw money from your portfolio, investors pay a flat fee of $199 per year or $299 annually if they make ten or more investments during that period – even if they do not make any withdrawals from their portfolios during that time period.
StartEngine is a crowdsource investment site where users can find startups of all sizes that need financing, read through financial statements, track new developments and even invest in them directly from the company itself! The company focuses on providing DIY (do-it-yourself) investor tools by not only creating links between investors and companies but also providing financial management services for companies using this online platform. StartEngine differs from other similar sites by offering greater transparency, more dependency on social networks and its ability to understand how people will invest in an emerging marketplace.
For those who don't know much about investing in startups, Sharespost is a great place to start. By purchasing stock in a company, you can help steer the direction of the next big thing. The site's interface makes it easy for anyone to invest their money in a business ranging from one person startups to large corporations with worldwide reach. Sharespost allows you to get in early on one of the newest businesses to hit the market while providing the opportunity for later investors to reap the benefits as product and revenue are developed.
At SeedInvest, you can make money investing in robotic startups, AI startups and more. Unlike many other platforms, SeedInvest allows investors to track and monitor advances within a company's development by viewing financial data, receiving updates from management and being included when major decisions are made (which is always exciting). With some companies, you can even talk directly with founders regarding future developments, labs and other important facts regarding your investment.
A bit more traditional in its financial operation than most, when you invest in SeedInvest, you are able to choose your own shares and are not bound by traditional buy/sell windows, meaning you have the flexibility to stop, restart, add more funds, or withdraw funds at any time. They also offer an investment minimum as low as $200. With that low of a minimum, you can easily diversify across multiple startups. Lastly, they vet all startups stringently before posting them. In fact, they've accepted just ~1% of startups that apply.
EquityBee is another wonderful site that allows users to invest by purchasing stock in small businesses. The ultimate goal is creating a profit for the investor while gaining credibility with friends and peers at the same time. The site has some similarities to Sharespost, but also offers a multitude of different opportunities to invest. In addition to stock in existing businesses, new companies are posted and available for potential investors to sink their money into.
Frequently in the news, Angellist is a significant, US fund-raising site for startups, angel investors and job-seekers looking for work in startups. Created in 2010, the platform has a mission to democratize the investment process, believing anyone with a passion for innovation should be able to invest in world-changing startups. With a long track record in this space, the possibilities you can be investing in a lucrative future product is high.
Why Invest in Businesses?
The number one reason most people invest in businesses is not even monetary. Instead, it’s a chance to be a part of the next big thing. You get to be a part of something potentially special, especially if it's in an industry you are passionate about. Who doesn't want to contribute to the culture of innovation by supporting entrepreneurs around the world?
Negatives to Investing in Businesses
Of course, there are negatives and risks to all investing. The main ones being:
1) The business fails, which means you will likely never get your money back.
2) The business succeeds, but your investment is probably illiquid. This is quite common in the early years no matter how successful the startup is. If you want to be in a more liquid investment, put your money in stocks instead.
3) Another great problem to have is dilution. If the startup raises more capital later on (which if it's successful, it definitely will), the percentage of equity that you own will decrease relative to what you originally purchased. However, keep in mind, the overall worth of the company is increasing.