What Is A Pre
Before we can go into learning how you can invest in tech startups pre-IPO, we first have to understand what it is.
Pre-IPO stands for pre-initial public offering. This is the stage when founders would sell shares to their tech startup before its included in a public exchange listing.
Investing during a startups early stages helps its founders gain enough funding to launch and scale.
If early-stage investing sounds too risky, more conservative investors can still get in on the pre-IPO action by choosing to invest during the second or third rounds of funding.
This way, investors are afforded better insight into whether or not a small business is marketable for other, more aggressive investors as well as for their intended customer base.
This setup is favorable for investors who want to engage with most new companies in any industry, but especially with the more sophisticated tech space.
How To Invest In Startups On Syndicateroom
SyndicateRoom’s Access EIS tracks the performance data of over 1,000 active startup investors. It then selects and co-invests with some of the best-performing super angels with the aim of replicating their collective success. Our super angels’ notable investments include:
- Horizon Discovery .
- Magic Pony Technology .
- Swiftkey .
- Household names like Secret Escapes, Bloom & Wild, and Simba Sleep.
The fund aims to diversify your investment across at least 50 super-angel-backed startups to minimise risk and capture as many potential blockbusters as possible. The minimum subscription for Access EIS is £5,000.
Because it’s an EIS fund, eligible investors could benefit from generous EIS tax relief on their investment. SyndicateRoom’s dashboard aims to make light work of EIS paperwork with easily downloadable summaries that can simply be attached to your HMRC self assessment tax return.
Automatically invest alongside super angels – the UK’s best-performing startup investors.
Diversify across 50+ startups to replicate the super angels’ collective performance.
Get started in 10 minutes and invest from £5,000 with clear, transparent fees.
Get digital EIS certficiates with easy export from HMRC self-assessment.
How To Invest In Private Companies And Small Businesses
While not all private companies are small businesses and vice versa, they have similar investing processes. Regardless of its size, it needs to prove that it has the growth potential required to sell shares to shareholders.
In both cases, you need to invest in the company directly. That means that instead of purchasing stock on a stock exchange, you deal with the private business itself.
Private companies and small businesses each offer unique advantages over public company investments. You get to create a relationship with the business owners, and you have more say in the companys inner workings. For example, you get to help decide who gets elected to the board of directors for that business, and you may even join the board yourself.
Regardless of whether you decide to invest in a small business or a larger private company, the process of choosing the right company remains the same.
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Are You A Startup Or An Ongoing Business
The outlook for funding depends a great deal on the specifics of the business.
For example, many ongoing businesses have access to standard business loans from a traditional bank that would not be available to startups. Also, high-tech high-growth startups have access to investment funding that would not be available to stable, established businesses that show only slow growth.
How Much Do I Want To Invest
As mentioned above, the answer to this should not be your life savings. Remember the first golden rule: dont invest more than you could afford to lose, and make sure you have an emergency fund of 3-6 months income in case your business runs into difficulties. The amount you invest will therefore vary based on your personal circumstances.
Its also a good idea to get in the habit of investing little and often, rather than investing a lump sum when you start. This will help you resist the urge to time the market , as in practice, knowing when to do so is almost impossible.
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Purchase Dividend Paying Stocks
What you will need: You need an account with a stock brokerage.
One of the safest ways to invest your money is to purchase blue-chip dividend stocks.
Every successful stock portfolio has a portion dedicated to dividend paying companies. Why?
When you start earning money on investments, this money generates income itself, which generates even more money. This is the power of compounding interest.
Now, keep this in mind. The large majority of blue-chip stocks pay dividends, but companies that pay dividends are not always blue-chip stocks.
This is crucial to know because a lot of people fall into the trap of making investments in companies that are either paying out way too much in the form of a dividend to survive, or have been frequently decreasing the amount they pay out.
New investors seem to think a company that pays a dividend are automatically safer, but this couldnt be farther from the truth. Always do your due diligence and youll be raking in the dividend payments in no time.
How Indian Startup Culture Differs From The Us
With the emerging business opportunities in India, the biggest startups in the word are no longer just in America. India has now become a leading global startup hub just like its American counterpart.
Rising numbers of new companies in India, venture capitalists, and entrepreneurs are turbocharging the development of the top tech startup scene.
Just how many startups are in India you may ask?
The number of startups has grown from 7,000 in 2008 to 50,000 according to the latest report by KPMG on the startup ecosystem in india.
Startups in both USA and India carry the same structure and principles. Where they differ the most is in funding.
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The Basics Of Investing In Startups
Before you get started investing in early-stage companies, its important to understand that many startups fail and leave investors with nothing. It is a high-risk, high-reward kind of endeavor.
Sometimes, startups allow you to get your money back if a company is not successful in raising sufficient funds, and if they guaranteed the return of your money.
Its worth noting that startup investments are generally not tradeable like stocks. You should expect to hold onto your investment until the company goes public or is acquired.
While relaxed regulations have allowed for more individual investors to get a financial share of startups, there are some rules to follow. Due to the risks involved, the Securities and Exchange Commission limits how much you can invest in any 12-month period. This limit could be as low as $2,200 or as high as $107,000 depending on your income and net worth.
The platforms listed below offer a sampling of the avenues available to anyone who wants to invest in a startup with limited funds. While its unlikely that youll become the next Silicon Valley billionaire, these platforms can help diversify your broader investment portfolio and give you the satisfaction of supporting a young company you believe in.
Detectable And Addressable Risks
Each startup investment is usually preceded by extensive due diligence periods of in-depth research into the business. Key considerations include the management team, business model, target market, money and momentum often termed the 5Ms of startup investment.
During this process, in which you question every aspect of the company, you may unearth signs of systematic, financial or personnel-related risks. At this stage, you can uncover these risks and either decide not to invest or, if you intend to be reasonably hands-on as an investor, help the entrepreneurs address them.
Startup investing gives you some influence over the performance of your interests. This can be especially beneficial if you choose to back companies in your area of expertise
Stocks and shares do not generally offer any degree of influence to investors, save for the odd vote at an AGM. In their growth journey, the biggest risks to startups may be internal and addressable. For stock market investments, they may be unforeseen and market-wide, and for the latter, your only decision as they approach is to sell up or sit tight.
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Blackrock Future Tech Etf
- 1-Year Daily Total Return: 18.95%
- Expense Ratio: 0.88%
- 3-Month Average Daily Volume: 5,611
- Assets Under Management: $17.640 million
- Inception Date: Sept. 29, 2020
- Issuer: BlackRock
The BlackRock Future Tech ETF specializes in innovative companies within emerging technology fields, in industries “that can shape the global economic future.” It invests in firms of any market capitalization located anywhere in the world, its benchmark index being the MSCI All Country World Index.
The ETF keeps a fair amount in BlackRock cash funds. Its top five corporate holdings are:
Sutter Rock Capital/suro Capital
- 1-Year Trailing Total Return on Equity: 64.23%
- Expense Ratio: n/a
- 3-Month Average Daily Volume: 368,100
- Assets Under Management: $425.8 million
- Inception Date: April 28, 2011
- Issuer: n/a
Formerly known as GSV Capital, Sutter Rock Capital is not technically an ETF: It’s actually the stock of a publicly traded investment fund that seeks to invest in high-growth, venture capital-backed private companies. However, it provides the same function as an ETF, giving investors low-cost, diversified exposure to innovative, fast-growing young firms.
Sutter Rock’s portfolio contains around 39 companies. Its top five holdings account for approximately 54% of the total portfolio. These major holdings include Course Hero, Coursera, Forge Global, Nextdoor, and Blink Health. All of these companies have demonstrated strong growth in terms of users or revenue, and their IPOs are highly anticipated. An investor who expects continued inflation in private markets relative to public markets could play this theme by purchasing SuRo.
Fitting as a stock that invests in early-stage startups, SuRo has been quite volatile. The stock made its debut on April 28, 2011, at $15.00. At this time, it became a hot property, as it held Facebook and Twitter shares, allowing investors to gain exposure before their IPOs. However, once these companies debuted, demand cooled, and the stock tumbledto as low as $4 in 2017. Since then, it has slowly recovered to close at $12 as of December 2021.
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The Business Is Scalable
For a strong return on investment, sophisticated investors are looking for signs of major sales growth on minor incremental costs.
The true test of scalability is whether or not real customers in significant numbers will pay the full price for the product or service. Anything else is speculative and investors will rigorously question business plans to make their own assessment of how scalable the business is.
Startup Companies In The Us: Numbers
While there are no exact numbers on the number of organizations that can be strictly considered “startup companies” at any one point in time, outside financing, beyond friends & family, is a milestone that most startups will look towards achieving.
If we only qualify a company as a startup upon reaching this milestone, between 10k – 20k new startup companies in the U.S. reach this criteria every year.
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How Startup Investing Really Works
A few people get together and come up with an innovative solution to a common problem. They test out their new solution, iterate a little, and find something that works and that a sizable group of people actually want to use.
Inspired, this band of innovative thinkers decide to turn that early idea into a company. But to fulfill that dream, theyll need advice from seasoned entrepreneurs who have built successful companies before. And money.
This is where startup investors come in.
In Silicon Valley and beyond, early-stage startups can raise venture capital from VC firms and angel investors in various ways .
Were going to explore the different types of early-stage investments that give promising startups the cash flow they need to start chugging toward that IPO, and when investors are likely to encounter each investment type.
Equity investments and convertible investments are both securities, or non-tangible assets for example, shares of stock in Apple or a government bond.
There are two main ways to invest in early-stage startups:
- investing in a priced equity round: investors purchase shares in a startup at a fixed price
- investing in convertible securities: the investment amount eventually converts into equity
Seed and early-stage investors often invest in startups via convertible securities, such as convertible notes and Y Combinators SAFE documents. Investors in later-stage startups will more commonly invest in priced equity rounds.
Being A Part Of Growth
While some angel investors remain in the background as their investment grows in value, others want a piece of the action. Although tough, growing a startup is an adventure that many investors love being part of.
Compared to stock market investments, which angels can only buy and sell, startups give them an opportunity to actively influence the outcome of their investment. A seat on the board, next to entrepreneurs eager to listen and take advice, gives them a rewarding role helping to lead the company to the promised land.
Its also a speculative game of high risks and rewards. Many angels, steeled by their experiences in business, are more than eager to bring their expertise to the table to play it.
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Lend Someone Money With Interest
Risk: HighReward: LowWhat youll need: Someone who needs a loan.
The thought of doing this to a friend makes some of us cringe, and not to mention it isnt exactly topping a list of where to invest money to get good returns. But, if it can garner a positive ROI, we included it!
Your buddy is in desperate need of money and youve got some stashed away. Youre going to help them out, but at a cost.
Unfortunately, there are some extensive risks to consider when doing something like this.
First, the lesser of the two risks, your buddy pays you back the initial $1000 and tells you where to stuff the interest.
Second, your buddy simply spends the $1000 and never pays you back.
This happens all the time. Which is why we dont really recommend this method of investing.
If youre interested in a bullet proof loan that youre always going to be paid with, check out bonds or even Canadian bond ETFs.
Interested in this method? No link needed! Just find someone who needs the cash.
Start A Dropshipping Store
Risk: LowReward: Low
Ever dreamed of owning your own store? A lot of people have.
Buying and selling marked up goods to make money is pretty appealing to a lot of people.
The problem? It mostly all lies in the inventory. It can cost tens of thousands of dollars in start up costs to open a store, but with drop shipping the process is much much easier.
What is drop shipping? Youre simply building a store and letting a website like Amazon handle the inventory.
When a person purchases an item Amazon usually handles the shipping as well.
The problem with this method is profits are severely limited, and its completely justified. Youre simply giving users the option to buy a product, while another company has to house the inventory and ship the product.
All that being said, if you start multiple succesful drop shipping websites, there is the potential to make some decent cash.
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Why Do Startups Need Money
As explained in the previous section, startups are companies that operate with a hyper-growth mindset. They obviously need huge amounts of capital and resources to achieve the same which in most cases has to come from external sources. External sources means the capital which is used in running a business is not just the personal capital of the founders or directors of the business but people and firms external to the business.
These people and firms believe in the business and thus give money and other ancillary resources to help the founders make the startup a success. In return they are given ownership of the company and/or interest on the amount extended . These serve as incentives for people to invest in the business.
Can Investing In Startups Be The Best Way To Diversify Your Portfolio
Diversification means spreading your investments as widely as possible. Not only does this mitigate risk, but also increases your exposure to growth opportunities.
Truly diverse portfolios may have investments spanning several asset classes, as well as geographies and industries. And whilst investors often have their favourite assets, deciding on one asset class as your definitive route to diversification can be counterintuitive.
All asset classes have their individual merits and opportunities for diversification. With it most commonly seen across stocks and shares and property, startup investing can be just as fantastic as a route for the investor looking to diversify – and there are numerous reasons why.
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Why And How To Invest In Startups
Before you part with your hard-earned money, it makes sense to learn how to invest in startups. While all types of investment come with risks, a startup investment can be especially tricky. New companies dont always make it, and you could lose your entire investment.
For companies that do pull through, though, the return on investment could be very high. Imagine investing in Amazon, Microsoft, or Apple when they first started.
While investing in startups is not for the faint of heart, its a great option for those looking to diversify their portfolio.
Get Your Free Guide To Investing In Startups
Risk Warning: Investing in startups and early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. SyndicateRoom is targeted exclusively at sophisticated investors who understand these risks and make their own investment decisions.
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