How to Invest in Startups

Investing in startups requires insights and past experiences. While startup investment opportunities can bring about substantial returns, such investments are delicate not least because many of them fail.

This blog provides relevant information to guide you on startup investing. If you are considering investing in a startup, you should also take advantage of expert guidance readily provided by financial advisors.

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

Key Takeaways

  • Startup investment paths include direct shares, co-investment, or specialized collaborations.
  • As you consider a preferable pathway, weigh the benefits (potential returns, adaptability) and risks (failure rate, limited data) of startup investing.
  • Before investing in any startup, evaluate startups based on team strength, market potential, scalability, transparency, and more, with expert guidance.
  • Ensure you leverage the wisdom of experienced investors and financial advisors for informed and secure startup investment decisions.


The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here.

Work with experts

Deciding which investment is right for you takes knowledge and practice. While you can and should learn all you can about startup investing, it is in your best interest to work with expert guidance.

Experienced investors who have been through startup investing can help you avoid investing in ideas that might look good on the surface but don't pan out. It's true that many startups fail, and getting advice from experts can be a big advantage.

You should work with investment firms such as Bay Street Capital Holdings; they focus on managing overall risk and volatility and helping you reach your investment goals rather than taking unnecessary risks with your money.

Now, let's look further into startup investing.

What is a startup?

startup team

A startup is a company or enterprise that concentrates its efforts on introducing a specific product or service to the market. The term "startup" characterizes a company during its initial phases of operation. Startups are established by one or more entrepreneurs with the intention of creating a product or service that they believe holds market demand.

In essence, a startup represents a company typically in its early developmental stages, aiming for rapid expansion. Startups commonly exhibit traits of youth, innovation, collaboration, and a growth-oriented mindset. They represent lucrative investment opportunities to those who aim to build wealth.

4 ways to invest in a startup

There are a number of ways into startup investing: bootstrapping, equity crowdfunding, angel investors, accelerators, venture capitalists, and more are pathways to funding a startup.

For example, many accredited investors prefer equity financing when investing in startups. This involves lending funds to founders to kickstart their business, and the founder must repay the borrowed amount along with an interest. This is just one of many ways to fund a startup. Overall, these financing options are applicable to startups of all kinds and varieties.

Let's consider some specific ways to invest in startups.

Invest in a loved one's startup

Investing in a loved one's startup is a great but complicated pathway. Money can strain even strong relationships. Consider these steps before investing in a loved one's startup:

  • Think like a professional, not just a friend.
  • Research the business plan thoroughly.
  • Establish clear boundaries.
  • Invest only what you can comfortably afford.
  • Provide advice rather than monetary support.

Crowdfunding investing

Crowdfunding platforms offer an alternative route to enter startup investing, catering to everyday investors who lack the necessary income to match the minimum investments for conventional private equity investments. Through crowdfunding, startups collect funds from non accredited investors in small increments, utilizing campaigns on these crowdfunding platforms.

Lend money instead of buying shares

Lending money is a form of investment with comparatively lower risks and moderate rewards. Private debt, also known as private credit, involves providing debt finance to companies through funds rather than traditional banking sources. This financing approach is used for buyouts, expansion, and acquisitions.

Work with companies who invest in startups

Engaging with enterprises that specialize in startup investments offers another avenue. Such partnerships can provide valuable insights, expertise, and resources to navigate the complexities of startup investing.

The best ways to invest in startups

startup CEO pitching to investors

There are other preferable pathways to invest in startups for wealth building purposes.

1. Purchasing startups

A smart approach to investing in startups involves buying shares in these budding companies. This can be a fruitful way to engage in the growth potential of new ventures.

2. Becoming an angel investor

If you don't have the funds to buy and run a startup, consider becoming an angel investor. This involves financially supporting small companies during their early stages, and it gives you access to early investors equity.

Generally, angel investors offer more flexible terms compared to venture capital firms and are often approached by startups seeking funding for their seed round and beyond.

To qualify as an accredited investor, you typically need to meet specific criteria such as having an earned income of $200,000 or more for the past two years ($300,000 with a spouse), or a net worth exceeding $1 million in investable assets.

3. Investing through venture capital firms

Venture capitalists and their firms invest in upcoming companies in exchange for an ownership stake. These investors take calculated risks, supporting startups with the anticipation that some will achieve significant success.

4. Participating in Initial Public Offerings (IPOs)

Another option is to invest in a company's IPO when it goes public. During this process, thorough evaluations set the price for IPO shares. Private ownership shares transition to public ownership, and the value of private shareholders' holdings is determined by the public trading price.

However, it's crucial to approach IPO investments thoughtfully. Media hype and high valuations surrounding an IPO don't always guarantee favorable returns. This approach may be more suitable for investors with a longer-term perspective, willing to retain their shares instead of selling them right away.

By considering these approaches, you can navigate the world of startup investing and potentially tap into their promising growth trajectories.

How do you buy shares in a startup?

startup team leader presenting

There at least 2 ways to acquire shares in a startup:

1. Direct investment in startup shares

One method to obtain shares in a startup is through direct investment. This entails purchasing shares directly from the startup company itself, without involving any intermediaries. This approach allows you to directly engage with the startup's founders or management team, negotiating terms and conditions as you secure ownership in the company.

Keep in mind that this approach may require a deeper level of involvement and due diligence on your part to ensure a successful investment. Steps for direct investment:

  • Research and selection: identify startups that align with your investment goals and values.
  • Engagement: reach out to the startup's founders or relevant representatives to express your interest.
  • Negotiation: discuss and negotiate terms of investment, including share price, ownership percentage, and potential involvement.
  • Due diligence: Conduct thorough research on the startup's business model, market potential, financials, and team.
  • Legal documentation: work with legal professionals to draft and finalize your investment contract and agreement.
  • Funding: transfer the agreed-upon investment amount to the startup as per the established terms.

2. Co-investment via startup investing platforms

Another avenue for acquiring startup shares is co-investment, often facilitated through online platforms. Co-investment involves joining forces with a group of fellow investors to collectively invest in a range of startup opportunities. These platforms provide access to a diverse selection of startups seeking funding, allowing you to choose opportunities that resonate with your investment preferences.

Steps for co-investment via online platforms:

  • Platform selection: Choose a reputable online co-investment platform that aligns with your investment goals.
  • Browse opportunities: Explore the startups listed on the platform, considering factors like industry, growth potential, and investment terms.
  • Joining investments: Select specific startups to invest in, typically with a minimum investment amount.
  • Collective funding: Your investment is combined with funds from other investors interested in the same startup.
  • Monitoring and engagement: Stay informed about the progress of your investments through updates provided by the platform.
  • Potential involvement: Depending on the platform and the startup's terms, you might have the opportunity to contribute insights or expertise to the invested companies.

have the opportunity to contribute insights or expertise to the invested companies. Both direct investment and co-investment via online platforms offer distinct pathways for obtaining shares in startups. Consider your risk tolerance, level of involvement, and investment goals when deciding which approach aligns best with your preferences.

The expertise of financial advisors who regularly deal with these investment opportunities will come in handy here. If you are seeking to purchase shares in any particular startup, speak with a fiduciary financial advisor today.

Pros and cons of startup investing

startup duo

First, let's consider the benefits of startup investing.

Pros of startup investing

1. Potential for high returns and long-term gains: Cash may be safe, but it doesn't often grow significantly over time. Investing in startups can offer the potential for substantial long-term returns on your investment.

2. Outperforming inflation: Startup investments can outpace the impact of inflation, helping your money retain its value and purchasing power.

3. Generating regular income: Some startups may provide a steady income stream, enhancing your overall financial situation.

4. Adaptability to your needs: Startup investing can be tailored to suit your evolving financial goals and circumstances.

5. Investing aligned with your finances: Tailor your investments to match your specific financial situation and goals.

6. Exciting new ventures: Invest in innovative and fresh ideas, becoming part of something novel and thrilling.

7. Early investment advantage: Get in on the ground floor of a promising company, potentially reaping rewards as it develops.

8. Portfolio diversification: Expand your investment portfolio by including startups, spreading risk across different sectors.

Cons of Startup Investing

1. High failure rate: The current startup failure rate is 90%, meaning many new businesses struggle. First-time founders have an 18% success rate in their endeavors.

2. Investment risks: Startup investing comes with significant risks. If you choose to invest, it's important not to invest more than you can afford to lose. Businesses can fail, leading to potential loss of your entire investment.

3. Limited information availability: Detailed information about startups may not be as widely accessible, making informed decisions more challenging.

4. Longer time commitment: Startup investments often require a longer time horizon to see substantial returns.

5. Difficulty retrieving funds: Getting your money back from startup investments can be more complicated compared to other types of investments.

Deciding if a startup is a good investment

startup team and investors

When evaluating whether a startup is a worthy investment opportunity, there are critical elements to examine. Here are some tips for investing in startup companies:

  1. A strong vision: A clear and compelling vision guides a startup's direction and sets the stage for its potential growth.

  2. Passion and drive: The determination and enthusiasm of the startup's founders and team members play a crucial role in its success.

  3. Strong and experienced team: The backbone of a successful startup lies in its capable and experienced team members, making this a foundational factor.

  4. Complementary skills: Assess whether the team possesses a diverse skill set that covers various aspects of the business.

  5. Market potential: Evaluate the startup's target market size, demand, and potential for growth.

  6. Viable business model: Scrutinize the startup's business model to ensure its practicality and sustainability.

  7. Competitive advantage: Analyze the startup's unique selling proposition that gives it an edge over competitors.

  8. Scalability: Consider whether the startup has the potential to scale its operations and expand its market presence.

  9. Traction: Look for evidence of progress, such as customer adoption, partnerships, or product development.

  10. Transparency and communication: Open and effective communication between the startup's leadership and investors contributes to a healthy investment environment.

  11. Financials: Review the startup's financial statements and projections to understand its fiscal health and stability.

  12. The exit: Consider potential exit strategies, such as acquisitions or initial public offerings, that could provide returns on your investment.

By thoughtfully assessing these interconnected factors with the guidance of a knowledgeable financial advisor, you can gain valuable insights to make informed decisions about whether a startup holds the potential to evolve into a prosperous and rewarding investment opportunity.

How long before startups become profitable?

Startups typically require a span of around 2 to 3 years to achieve profitability and establish a firm foundation for success. The point of significant accomplishment is often reached within 7 to 10 years of their inception.

It's important to recognize that the journey to success for most startups involves several years of dedicated effort, even though certain companies, such as Facebook, may appear to have achieved rapid success.

Make money investing in startups

Investing in startup companies offers an exciting avenue for potential financial growth. By carefully navigating the world of startups, you can tap into promising opportunities that align with your goals and risk tolerance.

Whatever your financial goals and risk tolerance are, experienced investors at Bay Street Capital Holdings can guide you into a successful investment venture. Reach out today!

Bay Street Capital Holdings

Bay Street Capital Holdings

Bay Street Capital in Palo Alto excels in wealth management, focusing on risk management alongside returns. Led by William Huston, among Investopedia's Top 100 Financial Advisors, it's a notable Black-owned firm.

Their partnership with Resthaven Properties earned them a finalist spot in 2023 Awards. In 2021, Bay Street was a CSR finalist among 900 firms, showcasing their commitment to diversity and impact.



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