How to Invest in Startups: A Beginner’s Guide

Learning how to invest in startups is the easy bit. Keeping your money while you do it? That’s where people trip. Most startups fail, the shares are hard to sell, and a payout can take years to show up, if it shows up at all. Nobody puts that in the ad.

I’m not a financial advisor, and I don’t have an investing track record to brag about. So this is general information, not advice. Think of it as a rough map of the options and where the potholes are.

Can anyone invest in startups?

Yes, but your options depend on who you are. US rules split people into accredited investors and everyone else. Accredited means an income above $200,000 a year ($300,000 with a spouse) or a net worth above $1 million, not counting your home. Those thresholds get updated now and then, so check the current definition before you act.

Not accredited? You still have routes. Equity crowdfunding sites let you buy small stakes, with limits tied to your income and net worth. Pooled funds are another way in. So are public companies that have startup exposure, though that one feels like a stretch to me.

Before you pick, read this explainer on who gets to invest in startups. It clears up the rules better than most.

How can I invest in startups as a beginner?

You have five main routes. Which one fits depends on how much money you have and how much hassle you’ll tolerate.

• Equity crowdfunding. StartEngine and Wefunder let everyday people buy small stakes. For most beginners, the crowdfunding investment route is where it starts.
• Venture capital funds. You pool money with other investors. Some funds list minimums as low as $25,000, which isn’t exactly pocket change.
• Secondary markets. You buy shares from earlier investors. Some platforms are open to all, others only to accredited investors.
• Angel networks. AngelList and Gust mostly serve accredited investors.
• Friends and family. You back a company someone you know is building. Awkward if it goes badly.

Benzinga has a decent guide to ways to invest in startups from October 2023. It also admits it may be paid by issuers for promoting offerings. So take its examples with a pinch of salt. That’s fair warning, and I’d rather you saw it here.

How do early-stage investing rounds work?

Startups raise money in stages, and each stage tells you something about what you’re buying.

A pre-seed investor backs a company at the idea or prototype stage. A seed investor comes in a bit later, but it’s still early. Seed investment is small and risky. A Series A investment usually follows once the company shows some traction, and the checks get bigger. Every new round can dilute the people who came before, unless they put in more money.

Our guide to pre-seed to Series E funding walks through the stages and typical check sizes. Read it before you choose where to start.

There’s also the early stage investment fund, which bundles many startups into one product. That spreads your risk. Sure, that sounds great. But fees and long lockups come with it, so check both before you commit.

What do investors look for in a startup?

Investors want a big market, a strong team, early traction and a believable path to returns. They also care about how the founders handle risk, which people forget.

• Team. Founders with the right skills who actually get along.
• Market. A problem big enough to build a real business around.
• Traction. Customers, revenue or strong early usage.
• Business model. A clear way to make money, not a vague promise.
• Terms. A valuation and ownership split that leaves room for you to earn. Our explainer on advisory shares shows how small stakes work.

You can run the same checklist as an individual. Ask why the company needs outside money, who else is investing, and what happens if growth stalls. If a founder can’t answer plainly, walk away. I’d walk away fast.

Which startups should you invest in?

I can’t hand you a list of startups to invest in. The same goes for any business to invest in or any pitch that claims to be the best way to invest in small companies. Pre-seed investors and angels see hundreds of pitches, and most still lose. Anyone who gives you a sure thing is selling something.

What I can give you is a filter. Start with sectors you understand. If you work in software, you’ll judge a software company better than a biotech one. Read the pitch, the financials and the risk section. Check whether professional investors are in the round too.

AI has pushed plenty of people toward tech startups. Our list of the hottest AI startups shows what’s getting attention. But attention isn’t value, and hype fades quickly. If you invest in tech startups, accept up front that many will fail.

What are the risks of investing in startups?

The risks are serious, so read this part twice.

• Total loss. Only a small share of startups succeed, and you can lose everything. Our piece on how long startup success really takes shows why patience matters.
• Illiquidity. You may not sell for years until an acquisition or a listing.
• Dilution. Later rounds can shrink your slice.
• Hard valuation. With little revenue, nobody really knows a fair price.
• Scams. Anyone promising guaranteed returns should make you nervous.

Benzinga’s rule of thumb is that a startup can take two to three years to turn profitable. It suggests spreading your money across several startups, industries and stages. I agree with that. Only invest money you can afford to lose, and I mean actually lose.

Is investing in a small business different?

Yes, quite a bit. Small business investment opportunities, from a corner shop to a local manufacturer, play by different rules. You might buy into a shop, fund a founder you know, or lend against a business. The risk and reward mix is different from a venture-backed startup and often easier to see with your own eyes.

Our guide on how to invest in small businesses covers those routes in detail.

The other side of the table matters too. For businesses looking for investors, expect questions about numbers, plans and legal structure. Founders who show up unprepared get filtered out quickly.

Frequently Asked Questions

What to do next

In a nutshell, learn the stages, start small and spread your bets. Read every document. And remember, the best deal is the one you understand, not the one that sounds exciting. If you’re on the founder side instead, our incubator vs accelerator comparison shows what programs actually offer.