|All content presented here and elsewhere is solely intended for informational purposes only. The reader is required to seek professional counsel before beginning any legal or financial endeavor.|
Investors who want their chance at investing in the next big thing should consider venture capital investments. Those considering this option can use this article as a guide on how to invest in venture capital.
- Venture capital investments come with high risks. But the potential rewards are high too.
- Venture capitalists get involved in the early stages of innovative businesses with major growth potential.
- Most investors should only allocate a small portion of their portfolio to this risky strategy as a means to diversify.
- Although this opportunity was only open to accredited investors in the past, more options are now available to ordinary investors.
How To Invest In Venture Capital
The world of venture capital investing has many opportunities. But depending on your status as an investor, you’ll have access to different options. You might want to start your journey by exploring how to become venture capitalist.
Of course, you’ll need to decide how much you want to invest. In most cases, you shouldn’t expect to see a return on your investment for several years.
And don’t forget the incredible amount of risk that comes with venture capital investing. It’s very possible to lose money on your investment. With that, don’t invest more than you are able to lose.
It’s critical to find the option that best aligns with your investment goals. Here’s a look at the venture capital investment options for accredited investors:
- Provide funds directly to startup businesses: If you find a business that you are excited to help grow, you can invest the funds directly into the startup.
- Invest through venture capital companies: As an accredited investor, you can work with a venture capital company. The company has experienced venture capital managers who seek out startups and invest your money for you. In many cases, these companies have funding from multiple investors.
- Only invest what you are comfortable losing: No one wants to lose money on an investment. But when investing in venture capital, the high risk makes losing money a real possibility. So, make sure you don’t invest more than your portfolio can stand to lose.
If you aren’t an accredited investor, that’s okay! Here are your options:
- Keep your limits in mind: You can still invest up to $2,000 or 5% of your annual income per year through venture capital opportunities, thanks to the Jumpstart Our Business Startups Act.
- Crowdfunding: As a non accredited investor, you can invest in venture capital opportunities through crowdfunding platforms.
Investors seeking a venture capital investment opportunity should consider the following options:
Buy publicly traded companies that invest in venture capital: Some venture capital opportunities are available through publicly traded companies investing in startups. For example, the Hercules Capital fund and Horizon Technology Finance provide loans to startups that can result in profits for the shareholders.
MicroVentures: This crowdfunding platform allows you to invest in startups with as little as $100.
Forge: Forge offers accredited investors the chance to invest in a venture capital fund with a minimum investment of $100,000.
SeedInvest: SeedInvest offers investors of all kinds to invest in different startups with various minimums.
iSelect: iSelect is a venture capital fund focused on investments in the food industry that allows accredited investors to make a minimum investment of $50,000.
Although these are not the only places you can find venture capital investment opportunities, it is a great place to start your search for the perfect fit.
How To Become An Accredited Investor
Many venture investors have also accredited investors. But what is an accredited investor? You’ll need to meet the following requirements to qualify:
Minimum income: You must have an annual income of at least $200,000 for the past two years. If you are married, that bar is raised to $300,000.
Minimum net worth: Accredited investors have a net worth of at least $1,000,000. And that can’t include the equity from your principal residence.
Specialized knowledge: If you don’t meet those financial requirements, you can still qualify if you are an investment professional or an executive officer of the company you are investing in.
The SEC sets these rules to protect investors: Although it may seem like too much red tape, the SEC createdthese rules to prevent inexperienced investors from making risky investments they can’t afford to go wrong.
Accreditation options: The SEC doesn’t offer an accreditation process. But a company will need to do due diligence on potential investors to ensure they meet the criteria. This often involves providing financial documentation during the investment process.
How Much Money Do I Need To Invest In A Venture Capital Fund?
The exact amount of money you’ll need to invest in a venture capital fund varies. But here are some figures to keep in mind:
Venture capital hit a record high in 2021. In the U.S., the venture capital market grew to almost $130 billion in 2021.
The minimum investments can be steep: It’s not uncommon to see a minimum investment requirement of $100,000. But if you go the crowdfunding route, your minimum investment will be much lower.
Investments vary per company: The median seed round investment was $1 million in 2020. But that number will vary widely based on the company.
Pros and Cons Of Venture Capital Investment
Every investment has some risk and reward. Here’s what to consider with venture capital investment.
Let’s start with the pros:
- Chance for high returns: The appeal of venture capital investing is the potential for high returns.
- Invest in change: Many startups are based on innovative technology that can change lives.
- Work with companies as a mentor: If you have experience in a particular industry, that could be invaluable to a growing company.
- Diversify your portfolio: Adding a startup to your portfolio is one way to diversify.
Now for the cons:
- High risks: Many startups fail, so it's possible to lose money.
- Liquidity: You likely won’t see a return on your investment for years.
- Limited transparency: Unlike the highly regulated stock market, you are investing in a private company that may not be required to disclose everything about its operation.
- High fees: If you work with a venture capital fund, you’ll pay high asset management fees. Plus, you have to split any profits with the fund managers.
Tips On Investing With Limited Funds
If you don’t have extensive funds available, there are still ways to get involved in the venture capital industry.
Find limited partners: If you have the time to work with startups but lack the funding, consider finding limited partners to provide the cash. As the general partner, you’ll get a share of the profits.
Trade time for management fees: If the management fees are too steep for your taste, consider offering up your services to the startups. Your unique expertise could be worth an offset management fee.
Team up with wealthy friends: Consider managing venture capital instead of putting it up yourself. You might wish to explore what is crowdfunding.
Consider a loan: Although not the safest move, a personal loan could be used to fund your venture capital investment, for example you could opt for a microloan. To discover more look into what is a microloan.
Be creative: Talk to venture capital firms to see what their needs are. If you can fill a gap in their roster, then you could earn your place without putting up funds.
Not In For VC Investing? Consider Other Alternatives
Venture capital investing isn’t the right option for everyone. Here are some alternatives to consider:
- Private equity: Consider buying equity in an established company.
- Stocks: Although the growth potential is often less, investing in stocks is one way to build wealth.
- Bonds: If you have a low-risk tolerance, bonds are a relatively safe investment opportunity.
- Real estate: Investments in physical properties can pay off big. But you’ll likely need significant capital to get started.
- Education: Investing in your own future through education is an important option to consider. For example, you might take a business course that kickstarts your own entrepreneurial journey.
Before jumping into a venture capital investment, you’ll want to weigh out all of the pros and cons. Although there is a big potential for rewards, you don’t want to take on more risk than you can handle.
Do your research when choosing your venture capital investment vehicles. With the right fit, this could lead to major changes in your financial trajectory.