Publication number: ELQ-79592-1
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How to Make Money By Investing In Entrepreneurs
Since 90 percent of startups fail, investing in startups is different world from conventional stocks & bonds, learn how!
Introduction
Investing in entrepreneurs and startups is a fun but different world from investing in conventional stocks, bonds, and commodities. First of all, it’s more of an investment in people than in a business, since the startup is usually an idea barely half-baked when they need your money. Secondly, the risk is very high, since as many as 90 percent of startups fail within a few years.
On the plus side, it’s an opportunity to get in early and really help make things happen that will change an industry, or change the world. It’s an opportunity for that “big bang” return of 10X to 100 times your initial investment, like early investors in Google, Microsoft, and Apple. Finally, it’s an opportunity to “give back” what you have learned in your own career for the next generation.
Today most startup investors still register with the SEC as “accredited” investors before they buy any startup equity in the U.S. This requires a simple signature that you have a net worth of at least $1M or have made at least $200K each year for the last two years. These requirements for equity investing have been relaxed only a bit, with caveats, with recent crowdfunding changes.
With all these considerations, I recommend the following steps and strategies for any investors newly interested in startups:
- Step n°1 |
Build a balanced investment portfolio.
Just like a seasoned stock investor would never put all his investible resources into a single stock, don’t put all your money into startups. Begin with perhaps 5-10 percent of your total investment base, and be prepared to lose it all. The growth target should be 5-10 times your initial investment in five years.
- Step n°2 |
Start in a business domain you know well.
Since there are no bellwethers like Apple or IBM in the startup arena, your best bet is to pick one in a business area you know well. Don’t be fooled by thinking that social networks are hot, so you should invest in the next startup you see in that realm. Remember that 9 out of 10 startups fail in every realm. - Step n°3 |
Fund an entrepreneur you know and trust.
In the business, this is called investing at the first tier for startups - “Friends, Family, and Fools (FFF).” Most entrepreneurs start asking for money from this tier, when they have very little more than an idea. Here you are definitely betting on the person, rather than the idea, but the upside potential is huge.
