So You Want to Fund a Startup? Here’s What You Need to Know
When big startups go public and all those early investors become gazillionaires, it’s like: “Why can’t that be me?” Now, with a little bit of luck, it can! Thanks to the newly approved JOBS Act rules, which go into effect today, you no longer have to make $200K a year or have a net worth of $1 million to invest in a startup—you just need to have some cash. You’ll do your shopping on a new crop of so-called equity crowdfunding portals, with names like Crowdfunder and Wefunder. Instead of backing a project, as you would on Kickstarter, you’re buying shares in a company. But don’t just throw your hard-earned savings at any ol’ idea. We asked the experts what you need to know to make a smart investment.
1. Check for credibility.
Determine whether a reputable management team is running the portal you choose to use. Be critical. These portals are brand-new—the first batch will go live this month.
2. Look for what you know and like.
Don’t have a clue about law? Steer clear of legal tech. Are you a world-class parent? You may have an advantage in identifying viable parenting upstarts. Products for people rather than businesses may also be a safer bet.
3. Think different.
Be open to ideas and people you wouldn’t expect to see in the tech world. As the platforms evolve, they may develop into the best way to fund things beyond startups, like scientific research or local franchises.
4. Investigate the founders.
Why are they using an equity crowdfunding portal in the first place? Did they have trouble raising money elsewhere? Bad news. Did they tank their last company? Proceed with caution. Do they have a nontraditional background? Risky but OK. Have their friends and family contributed a lot already? Great!
5. Know your fellow investors.
If you want to invest in a biotech startup, make sure the existing funders aren’t just amateurs. But you don’t want all scientists either.
6. Watch out for fraud.
Be skeptical if founders are cagey or the community is quiet on the message boards. Find a platform with a record of taking quick action when there’s evidence of a scam.
7. Diversify your investments.
If you’re hoping to make money—real talk, most of you won’t—invest in a wide array of people and ideas.
8. Don’t be a dummy.
Learn the SEC rules, read the fine print for the portals, and scrutinize the startups’ filings. Know your rights as an investor and what will happen to your shares if more people contribute later. Remember the risks. Don’t invest money you can’t afford to lose.