Investing In Startups: A Comprehensive Guide For Beginners (2024)

For many average investors, investing in startups seems difficult and out of reach. It is indeed risky to invest in startups.

However, if you are successful, the return is quite high. Hence, if you plan properly and do your research, investing in a startup business can be a real deal for you. 

In this article, you will learn how to make money by funding startup businesses. This article will guide you to what steps you need to take to start investing.

If you are looking for ways of investing in startups with little money, you must learn about the different stages of startups. Thereby, you can channel your investments accordingly.  

Hence, to learn more, read on to the end of the article. 

Investing In Startups: Which Stage The Startup Is Currently In?

Generally, four out of ten startups fail in their early years, while another three/four startups return your investments. In the end, only one or two startups succeed.

Furthermore, for the startups that go public, the returns multiply manifold. Hence, if you invest early in the proper startup, you can get very wealthy. 

Depending upon the current stage of the startup, there are various opportunities and risks for investors. Here are the three stages where a startup generally falls in: 

Startup Stage 1: The Idea Phase 

The basic thing necessary to build a startup is an idea. In this phase, the idea is the primary aspect of the startup. Here, the founders need a working product, customers, or even a stream of income.

Basically, at this stage, the startup funds itself through founders’ savings, startup loans, or by issuing equity shares. 

By issuing equity shares, startups get seed funding. Mostly, startups that start growing procure seed money from their founders, family, or friends. Generally, these funds are small. However, these allow entrepreneurs to prove their idea has a good enough chance to succeed. 

Startup Stage 2: Bona Fide Phase 

Here, the company starts its operations and collects revenue. Here, the company authorities pitch their ideas to angel investors. These investors specialize in early-stage companies and come with sizable wealth. These investors mainly act as early sources of money for startups. 

However, these investments are low for startups, and hence, the future prospects of the company become risky. Moreover, startups use this money to support initial marketing efforts and start moving into their production phase. 

Startup Stage 3: Venture Phase 

At this stage of the startup, there is a solid business plan, which leads to the formation of the business strategy. Thereby, the business makes projections for the future. However, the company still needs to earn profits. Still, the company is gaining momentum and reinvesting its revenues for growth. 

This is where the startup needs venture capital. These fundings come from mainly a single individual/ private partnership/ pooled investment fund.

The people or groups that invest in a startup venture demand an active role in the company. For example, a venture investor might want to sit on the company’s board of directors and take on an advisory role. 

Investing In Startups: Tips To Consider 

Investopedia notes – “Investing in startup companies is a risky business. The majority of new companies, products, and ideas simply do not make it, so the risk of losing one’s entire investment is a real possibility.” 

Hence, investing in startups can seem out of reach or elusive for an average investor. However, since there is a high possibility for returns, the risk is worth taking for some people who think big.  

The following are the steps you need to take if you want to start investing in startups: 

1. Decide On A Goal 

Not just a beginner, the first thing you need to understand regarding investments is that having a goal is of primary importance.

This is because every investor has a unique set of goals, and returns are not everyone’s driving factors. For example, certain investors do not look for higher returns as much as they look for social impact. 

Apart from that, while chalking out your investment goals, you should also be fully aware of your risk tolerance. Risk tolerance is the percentage of your portfolio that you can allocate to high-risk investments.  

Basically, if you are starting young, you have a high-risk tolerance as you have a longer time horizon. Additionally, you also need to consider your risk tolerance and willingness to tolerate losses in the short term. Primarily, it would help if you planned by thinking for the longer term. 

2. Never Stop Your Research

Most investment options are diverse. This is true for startups, as there are many companies and industries to consider. Hence, it is always a better option if you invest in those sectors where you are willing to invest and have the passion to make a big impact. As a result, you can inspect and determine a variety of opportunities in an effective manner.  

Moreover, whenever investing in a startup, you will need to research the founder and the team’s expertise. Apart from that, you also need to be aware of their track record and knowledge of the industry. 

Here, you need to consider how the company is looking to make money. Also, check whether the company has a unique advantage in the competitive market.

Furthermore, you must understand the company’s valuation and determine whether the company compares well with startups in the same stage. 

3. Connect With The Startup Founders 

If you want to get good access to potential investment opportunities, you need to connect and network with startup founders. This is because doing so will give you a lot of advantages at the initial stages.  

Generally, connecting with startup founders and inside experts will help you gain more insights into market shifts and emerging trends. Therefore, you can make your investment decisions more realistically with the help of better information sources. 

However, the question arises: How can you do it? Actually, there are various ways through which you can network with a community of startup founders.  

Starting from there, you can attend industrial conferences where startup founders meet each other. On the other hand, you can also visit local hackathons where developers and entrepreneurs collaborate on projects. 

Moreover, you can use various social media platforms, especially LinkedIn and X. Furthermore, you can join communities like Product Hunt or Indie Kackups. Thereby, you can have multiple opportunities to network with founders throughout the year. 

4. Join An Investment Group

A group is always stronger than an individual. Although you can choose to invest in startups on your own, you can always join an investment group focusing on startups. Hence, such a step can allow you to pool your money and knowledge with other investors.  

For example, you can start by joining a group of angel investors focusing on early-stage startups. Or you might want to join a venture capital fund. Apart from that, you can also join a crowdfunding platform to invest in startups. 

However, you need to understand the pros and cons of joining these investment groups. Depending on your situation, you need to make sure which group you want to join and if you wish to join a group at all. 

5. Make Your Startup Portfolio Diverse 

You are already aware that most startups fail in their initial years. This is one of the foremost facts that show the reality of startups in the United States.

Hence, you need to be aware of all situations that can lead to the failure of a startup. In fact, you will be in a much better position if you anticipate failure beforehand. 

Hence, you must consider not to store all your eggs in one basket. It means that you must always try to diversify your investments and maintain a diverse investment portfolio. Therefore, when a startup fails, you will avoid getting into trouble and losing all your money as a result. 

6. Be Aware Of Changing Trends 

With changing trends in tech startups, things can go out of hand pretty quickly. Hence, it is important for both companies and investors to remain flexible as per the impact of market forces.

Therefore, you need to ensure you get all the information on recent developments with companies, especially the ones where you invest. 

Although it might be possible for you to exit a bad investment, by having enough information, you can know where the startup stands. As a result, you can identify future opportunities for investments. 

Wrapping Up 

There was a time when investing in startups was only for wealthy individuals. However, with the democratization of investments, more and more people are considering investing in startups.

Hence, as a beginner investor, you must consider defining your investment goals early and research the market properly.  

Do you have some suggestions on how to invest in startups? Consider sharing your ideas and opinions in the comments section below. 

Read Also:

• Navigating The Investment Landscape: Exploring Diverse Market Opportunities
• How To Diversify Your Investment Portfolio Through Real Estate Holdings
• 5 Best Investment Options For Students