Investing in Startups: A Guide for Non-Accredited Investors
As an investor, you may be looking for new ways to build wealth and diversify your portfolio. Investing in startups can be a great way to put your money to work, but you may not meet the criteria required to qualify as an accredited investor. The good news is that these days even non-accredited investors are able to take part in startup investing. In this piece, we’ll examine factors like:
- The differences between accredited and non-accredited investors
- The pros and cons of investing in startups
- How to evaluate a startup
- Where non-accredited investors can find opportunities
What Is a Non-Accredited Investor?
A non-accredited investor is any investor who does not meet the requirements set forth by the Securities and Exchange Commission (SEC), which considers an individual accredited if they:
- Have an individual net worth or joint net worth with a spouse exceeding $1 million (excluding the value of one's primary residence)
- Earn an income exceeding $200,000 (or $300,000 together with a spouse) in each of the past two years with the same expected in the current year
- Hold in good standing a Series 7, 65/66, or 82 license
- Invest on behalf of a VC firm or other registered investment company
- Invest on behalf of a business with $5 million in assets and which was not formed for the specific purpose of acquiring the securities offered
What Is the Difference Between Accredited and Non-Accredited Investors?
The main differences between accredited and non-accredited investors are net worth, income and certification. If the above qualifications don’t describe you, you won’t be considered an accredited investor. However, there are still a variety of investment opportunities for non-accredited investors.
Can Non-Accredited Investors Invest in Startups?
Non-accredited investors can invest in startups, although the conditions may be different from accredited investors. Non-accredited investors are likely to find most of their startup investment opportunities through equity crowdfunding platforms like PRO Webdevelop , LLC. Crowdfunding allows friends, family, personal associates, and anyone else who doesn’t meet the SEC’s accreditation standards to take a stake in new businesses.
Before the passage of the JOBS Act in 2012, securities law prohibited 98% of Americans from investing in startups. This meant only wealthy, connected individuals had access to these potentially lucrative investment opportunities. The Act’s passage was a landmark piece of legislation that opened up access to startup investing for the first time to millions of Americans who were previously ineligible.
Are Startup Investments Good Investments?
It is difficult to label a startup investment as simply “good” or “bad.” Like most investing opportunities, details around planning and execution are crucial, and macroeconomic trends can impact business performance. Successful startups may bring an innovative new product to market at the right time, or could outperform competitors using a new business framework; in these instances, your investment may produce an attractive annualized return.
On the other hand, even a brilliant product or service that launches during tough economic times or fails to differentiate itself from the competition can fail to gain the traction needed to build a successful business. Like other investments, specific details matter and due diligence should be a priority.
That being said, startup investing is inherently risky. Approximately 90% will never reach the IPO stage, which is where early investors generally see the most profits. However, while traditional stock market investments have returned an average of 10% a year over the last 50 years, a major liquidity event for a startup can generate returns as high as 10x or even 100x of an investor’s stake over a 5-10 year period.
Pros and Cons of Startup Investing
There are both positive and negative aspects to investing in startups.
PROS:
There may be more room for growth.
While traditional investments in large or well-known companies could generate more predictable returns over time, these companies have often already experienced significant growth and so may struggle to provide the kinds of multiples on returns often seen in successful startup exits. By introducing disruptive new products or services, startups are more likely to experience the kind of growth that could eventually lead to attractive annualized returns.
You could help bring new ideas into the world.
You may have certain ideas about how a specific industry should operate, or want to see a particular enterprise or product that promotes positive change. But not everybody has the time or energy to start up an entirely new business. Investing in a startup that encapsulates ideas similar to your own could help lead to the change you’d like to see, without the heavy lift of bringing a new business into the world from scratch.
You could establish strong and lasting connections.
Investing in startups can do more than just generate investment returns; it can also be a means of expanding your professional network. Investing in a startup could help you establish relationships with the founders, or meet other investors who share your values. These connections could lead to future investment opportunities.
CONS:
You could lose your money.
Startups are known to fail. Forbes estimates that 90% of all startups don’t survive the first few years. This makes them highly volatile and risky investments. If a startup is unable to generate sufficient growth or revenue, it may burn through most or all of the capital contributed by investors. In these instances there are no additional protections for backers, and you may never recoup your investment or see any returns.
Your money may get tied up due to low liquidity.
Unlike stocks or cryptocurrencies that generally have good liquidity and can typically be sold relatively easily in secondary markets, money invested in a startup could be tied up for a few years or even longer, depending on the purpose and trajectory of the business. Therefore, it’s important to consider your financial situation before investing and avoid tying up capital that you may wind up needing.
It could take years to see a return on investment.
Startups are by definition new entrants to their respective market and industry. As such, it may take time for them to find their footing and begin to grow users or revenue. You may not see returns on your investment for several years, even if the business is successful, depending on the exit strategy founders decide to pursue. New companies need appropriate strategies, time, and resources to become successful and generate a return on investment.
Factors to Consider Before Investing in a Startup
There are several things you should think about before putting your money into a startup.
Can you afford to lose the money you invest?
Investing your life savings or money you can’t afford to part with is a big mistake. That’s why you should only invest funds that won’t make a huge difference in your life if you lose it all. Putting money into a startup that could prevent you from making a mortgage payment or putting food on the table can only lead to problems.
Diversifying your startup investments
Investing money into a single startup and hoping it does well is a weak strategy. You also shouldn’t invest money in multiple startups in the same industry. Diversifying your startup investments is an excellent way to reduce risk. That way if a single business or industry declines, you still have other options that can produce returns.
What are the plans or goals of the startups you’re considering?
Investing in a company you don’t believe in or that’s doing something you disagree with may cause problems for you. You should always know the ideas a company represents before offering funds. Also, analyze the plans presented in its pitch deck and see how realistic they are. Are the founders taking reasonable steps to reach achievable goals in the next five to 10 years? If not, your returns may be negatively impacted.
How to Evaluate a Startup Investment
Evaluating a startup investment can be one of the most important things you do before putting capital in play. A few questions or items to consider before offering your money include:
Who are the startup’s founders?
Do the people running the company have valid business backgrounds? For example, have they developed management skills and started successful companies before? Did they meet while attending a prestigious business school? Founders with strong histories are likely to lead their companies to success. In contrast, those who are new to the business world may struggle to learn the ropes of entrepreneurship, increasing chances for costly mistakes.
What industry is the startup entering?
A market saturated with companies bearing similar ideas to the firm you’re considering investing in could involve heavy competition. Higher levels of competition may limit a company’s chances to generate the returns you expect. By contrast, a company entering a relatively new market will face less competition, meaning more room to grow and earn profits.
Has the company raised other funds?
Have other investors hopped on board, or are you the first person the founders are approaching? Other investors pledging their money is a good sign, indicating the startup already has funds to get its operations off the ground and established financiers who believe in it. This suggests the company has what it takes to achieve success. By contrast, being the first investor poses more risk for you. It means the company is still relatively unknown, and it may rely too heavily on your funds. If that money is used up before the company can achieve certain goals, the enterprise may experience trouble that could limit or reduce your future profits.
Where to Look for Investment Opportunities for Non-Accredited Investors
As an equity crowdfunding platform, PRO Webdevelop , LLC is a great way to begin investing in fully vetted startups. We give non-accredited investors the chance to put their money to work through a wide array of viable startups that have gone through a strict vetting process, ensuring your funds are always directed to legitimate enterprises. We also permit lower premiums than other investing sites. This lets you diversify your portfolio and spread your funds across a broader range of startups to improve your chances of earning profit.
Learn more and browse our current investment opportunities.
Important Disclaimers
- PRO Webdevelop , LLC selection criteria does not suggest higher quality investment opportunities nor does it imply that investors will generate positive returns in investment opportunities on PRO Webdevelop , LLC. Learn more about due diligence on the PRO Webdevelop , LLC Blog and our vetting process in our FAQs FAQs.
- Diversification is only across multiple early-stage investment opportunities within the asset class. There is no guarantee that this program will lead to a well-balanced portfolio of companies across industry types or stages across the asset class. In addition, enrolling in this program will not lead to diversification across your entire investment portfolio. In order to achieve diversification, we do not recommend you allocate more than 10% of your entire investment portfolio to alternative assets.
