Until recently, it was difficult to become an early-stage startup investor due to the many risks that governed startup funding. Thankfully, two years ago the Securities and Exchange Commission adopted rules which allowed companies to raise money through crowdfunding from anyone who is interested in investing.
Since these new rules were adopted, more than 1,000 companies have filed with the SEC to raise money on online platforms. According to Crowdfund Capital Advisors, $137 million has been committed to these businesses.
Not only are tech companies filing with the SEC to raise money, startups have been funded in over 80 different industries ranging from restaurants to salons to logistics companies. Some startup investment platforms include Republic, NextSeed, Microventures, SeedInvest, StartEngine, and Wefunder.
“We thought it was fundamentally unfair that only a very small part of the US population had access to the profits of early investing,” says Caroline Hofmann, Cheif Operating Officer of Republic. “More people should have access to early-stage startup investing whether they are looking for returns, if they’re early adopters of a technology offered by a startup or true believers in the problem a company is solving.”
On the Republic platform you can invest with as little as $40 currently but, at one point, the minimum investment amount had been as low as $10. The Cut is a recent startup being featured on Republic and is an app that assists a user with booking barber shop appointments. Hofmann reports that the company received a little over $93,000 from 421 investors. Companies now have the chance to empower their customers to hold a stake in their company.
Hofmann adds, “It was their actual users that were investing.” African American and Latino investors compromise much of the company’s customer base and almost half of The Cut’s investments came from these populations.
While startup investors can hope for a decent return on their investment, there is always an inevitable risk. “It is a high-risk investment,” says Hofmann. “This should only be 5% to 10% of what you invest. Putting smaller amounts of money in many companies is better than putting a lot of money in fewer. But it can be part of anyone’s portfolio diversification strategy.”
Sherwood Neiss claims there is efficiency in these numbers and that investors are coming together, without knowing each other, and they are putting money into companies that are beginning to take off while avoiding companies that are not.
“The reality is bad campaigns aren’t getting money. Most of it is going to companies that are successful,” he says. “If more money was committed to companies that failed, I would think there is something wrong with the system.”
While the reward potential is there, it will most likely take an acquisition at a high price for one of the companies to produce large returns. Neiss says there will not likely be any big jackpots for investors.
Due to all the risks that come with investing, the amount a person can invest is limited. The government caps how much an individual may invest during a twelve-month period based on how much money the individual has. They also cap the amount of money startups can raise through crowdfunding, although the industry that facilitates this kind of investing is asking the SEC to raise the cap from $1.07 million to $20 million in hopes of including more investors and bringing crowdfunding to larger companies.