How to Invest in Startups
Startups are newly formed companies that require capital to grow and expand. Investing in startups is highly regulated because they are considered high-risk ventures suitable only for wealthy, sophisticated investors -- "angels" and venture capitalists (VCs). Most regular investors can only invest in a startup by buying shares in an initial public offering (IPO).
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Instructions
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Consider the risks. The National Venture Capital Association data shows that out of thousands of VC-financed startups annually, few go on to become huge market winners. Individuals invest in startups through IPOs in hopes of uncovering the next Microsoft or Google, but the odds are heavily against them.
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Decide how much you are willing to risk and do not deviate from that amount. It's easy to get caught up in the initial excitement and buy a large position in an IPO. But IPO shares are very volatile and your quick gain may turn into a large loss in a matter of days.
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Monitor the pre--IPO market to select the best candidates in which to invest. Many free financial aggregator sites such as Yahoo! Finance provide information on upcoming IPOs.
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Buy shares in an IPO that interests you when the company begins trading on an exchange.
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Consider buying shares in a business development company. BDCs invest in small private companies, usually through debt and stock financing. Since most BDCs are established companies with trading histories, it's less risky to invest in them than in IPOs. Investors who buy shares in a BDC usually receive regular dividends comprised of interest and other profits derived from investing in private companies.
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Monitor your investment like you would any other stock. Once you buy an IPO or a BDC, treat the stock like you would any other stock by applying the same hold and sell rules.
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Tips & Warnings
Do not "get married" to your investment. Investors who put a lot of effort into researching an IPO often become emotionally attached to it and their hope and belief in what the stock should do often clouds their judgment and makes them hold on to a losing investment when the stock turns down.
