When startups need additional funding to get off the ground, they can look for venture capitalists (VCs) who are willing to help them. Venture capitalists are investors who offer emerging companies financial support in exchange for an equity share. Once the startup goes public, investment firms can sell off their equity stakes, hopefully for a sizable profit.
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One of the newest trends in venture capitalism is the rise of micro VCs. These investment firms focus on funding companies at a lower price point than traditional VCs. Total fundraising is usually between $25,000 and $500,000. If you’re wondering how you can invest in a startup through a micro VC, here’s what you need to know.
1. Who Can Invest?
Unless you belong to a micro VC investment firm, one of the easiest ways to wade in is through a crowdfunding platform, such as MicroVentures or Fundable. Up until recently, only accredited investors were allowed to invest in startups through a crowdfunding company.
An accredited investor is someone whose net worth is at least $1 million or whose annual salary for the past two years was $200,000 or more. The income requirement increases to $300,000 for married couples. If you don’t meet those standards, you’re considered a non-accredited investor.
In October 2015, the U.S. Securities and Exchange Commission finalized rules concerning crowdfunded investments from non-accredited individuals. Under Title III of the 2012 JOBS Act, non-accredited investors now have the opportunity to take part in crowdfunded ventures. The new rules are set to take effect in May 2016.
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2. What’s the Minimum Investment?
One of the great things about investing in a startup through a crowdfunding platform is that it doesn’t require a lot of money up front. Fundable, for example, allows investors to join an equity fundraising campaign with as little as $1,000. Investors who would prefer some sort of tangible reward in lieu of equity (such as one of the startup’s products) only need $1 to get started.
That’s a plus if you don’t have a lot of cash to spare or you want to make several small investments in multiple startups. Because micro VCs target smaller companies, many of them do place a cap on how much you can invest in a particular startup.
3. What Are the Pros and Cons?
Micro VCs offer convenience and flexibility for individual investors who are interested in helping startups raise their seed money. Since you can invest with very little money, they offer very few barriers to an Average Joe or Jane who’s hoping to expand their portfolio to include this asset class.
But there are a couple of downsides to consider, starting with cost. Crowdfunding platforms act as the middleman, connecting startups with investors – and they’re not doing it for free. If a company is charging excessive fees, that can diminish your returns.
Another drawback is that backing a startup through a micro VC usually means there’s going to be a longer holding period. It can take years for a startup to go public, especially if it’s only receiving small amounts of cash at a time. In the meantime, you won’t be able to liquidate your initial investment. If you’re not comfortable tying up your cash for that long, you may want to rethink whether it’s the right move.
Investing in startups is risky and it’s important to be aware of what you stand to lose. While a micro VC may have a vetting process to determine which startups can initiate fundraising campaigns through their platforms, that doesn’t guarantee that a company will be successful. It’s best to do your own research and assess your risk tolerance before investing in a new company.
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