History is full of stories of humble startups that grew into gigantic global empires, such as Microsoft or Apple. Today, there is no end in sight to the number of opportunities providing great returns for the savvy private investor.
When Jeff Bezos started Amazon, he had 60 meetings to raise his first 1 million dollars. 22 people said “yes” and invested $50,000 each. Back in 1994, Amazon’s IPO valuation was $438 million. Today, it’s a trillion dollar market cap company that has changed the lives of most of its early investors.
The world is changing, and you only need to look at the explosion of smartphone usage to understand the types of investment returns provided by Instagram, WhatsApp, Snapchat and others. And new technologies are constantly just around the corner, promising high potential returns in areas such as artificial intelligence, biotech, and crypto.
Private early stage investments can result in some of the highest returns of any investment class. And today, thanks to platforms like Republic, it’s easier than ever to get started.
When you invest in startups, you’re getting in at a very early stage. Get it right and your returns can be enormous, turning an original investment of a few hundred or thousand dollars into millions.
The downside, however, is that the earlier the stage, the higher the risk. It has been estimated that up to 80% of startups fail. But despite these high failure rates, the rewards are made up by those businesses which grow quickly and generate sometimes billions of dollars in value.
Investment crowdfunding - getting in early, online
Until recently, you had to be an “accredited investor”, earning $200K/year ($300K/year for couples) or having a net worth above $1M, to invest in private startups. This effectively locked out most investors. But this all changed with the 2012 JOBS Act which cleared the way for small businesses to raise money from their customers and other individual investors.
Investment crowdfunding is one key outcome of the JOBS Act. The principle of crowdfunding is simple: startup founders can raise money from hundreds or thousands of smaller investors. Now anyone can be a startup investor, and build a large portfolio with minimum investments starting at $20. Startup investing is no longer a game for just the chosen few.
Spreading risk through diversification
Generally speaking, the earlier the startup stage, the higher the risk and potential reward. By investing online and spreading investments across a larger number of early-stage companies, you increase your chances of investing in very successful companies.
It has never been as easy as it is today to build a portfolio of private startups. Before investment crowdfunding was available, minimum investments in startups were often $25,000 to $50,000. Now you can invest in opportunities for as little as $20 to $100 each on Republic.
How Republic helps you invest in startups
Guidelines: Although Republic cannot advise on which companies you should invest in, we do provide a number of investment education resources.
Screening: Republic carefully vets which startups have the highest chance of success through rigorous screening, research, and due diligence. Of the thousands of startups that apply, less than 5% of startup applicants are accepted onto Republic’s platform, and have to go through a four-stage process:
- Stage 1: Initial screening: Republic assesses the founders, the product, evidence of traction, as well as the company’s stated mission.
- Stage 2: Due diligence includes pitch deck reviews, interviews, and independent research.
- Stage 3: Prequalified startups are then selected for campaigns on Republic.
- Stage 4: Preparation of formal documentation is prepared, campaign launch and monitoring by Republic.
Access: Republic was spun out of AngelList— a leading platform for accredited private company investing and retains the experience, expertise, and contacts of the Venture Capital industry. This is “smart money insight” for small investors, providing access to high-quality “deal flow” via a network of partners.
Republic’s additional investment guidelines
Age: Investors need to be over 18 to invest.
- If either your annual income OR your net worth is less than $107,000, you can invest up to the greater of either $2,200 OR 5% of the lesser of your annual income or net worth during any 12-month period.
- If both your annual income AND your net worth are equal to or more than $107,000, you can invest up to 10% of the LESSER of annual income or net worth -- up to a maximum of $107,000 during any 12-month period.
Net Worth: Republic investors have their investment limits calculated for them when they register.)
Deal Terms: Once you know how much you want to invest, you’’ll want to know what you’ll get in return for your investment, based on a fundraising campaign’s deal terms. Republic investors will usually receive a Simple Agreement for Future Equity”, “Crowd SAFE” security in exchange for their money. This is not the same as equity - it is an agreement that may provide investors with equity upon certain future events (“Crowd” updates this technique by funding a “SAFE” through crowdfunding as a JOBS Act regulation compliant transaction with Republic as the approved platform).
EXITS: Selling your startup investments
For every investment, there’s an “exit”. Typically, an exit is when a startup is purchased or becomes a publicly-traded company, although there are no guarantees this will happen. It can take 5-10 years, or longer (or never), for a startup investment to exit. You should plan on holding startup investments for at least this long.
Investors can offer their crowdfunding investment for sale but there are a few rules, and no guarantees that anyone will buy.
Closing Takeaways - Make sure to remember the following key points:
- Early-stage startup investing can lead to high returns, but the risks are also high. Don’t bet the ranch on one company. Manage the risk of loss through a diverse portfolio of investments.
- Allocate no more than 10-15% of your investment pool into such high-risk investments.
- Invest small and for the long term. Crowdfunding platforms are a great way for new investors to spread their risk.
- Do your research.
- Republic’s platform is a straightforward way for investors to find vetted startup companies to invest through crowdfunding.
Start here to find promising startup investment opportunities on Republic.
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.