How To Invest In Startups Online

As we discussed last week in The Juice (for the link, see today’s Freshly Squeezed section), relatively small retail investors have unprecedented access to private investment opportunities. AKA venture capital.

Jeff Bezos (as well as the CEOs of Uber and Salesforce, among others) is investing in a company called Arrived, that allows “anyone to invest as little as $100 in single-family homes and vacation rentals. Investors earn rental income + appreciation right away, and Arrived takes care of all the work typically involved with owning property.”

So, if you follow Bezos on this, you’re not only investing in a startup that — just a few years ago only people like Bezos could invest in — you’re making an alternative real estate play. 

It used to be that you only heard about rich people making money in these fancy new startups. 

For example, consider the artist formerly known as Google — Alphabet (GOOG).

• In 1999, Sequoia Capital, a huge Silicon Valley venture capital firm, was just one member of the big money (along with names such as Tiger Woods) to invest in Google. 
• Before the investment Google was valued at $75 million. Today, it has a market cap of more than $2.1 trillion. 
• That 1999 investment in Google of $12.5 million turned into $4.3 billion when Google went public in 2004. 
• In 1977, Sequoia invested a mere $150,000 in Apple (AAPL), then turned around and sold it right before Apple’s 1979 IPO for about $6 million. 
• Sequoia put $60 million in WhatsApp in 2008 and came away with a net profit of around $3 billion when Facebook (Meta Platforms (META)) bought the app in 2014.

And the list goes on.

Big deals that made the partners (the individual venture capitalists) in numerous VC firms, their investors and other investors (big banks, big money and big celebrities) filthy rich. 

The only way you could have participated — for example — would have been to purchase Google or Apple stock when they went public. Not a bad deal. But a totally different ball of wax from private access to the next big thing before it goes public. 

While it’s tough to quantify what a, say, $1,000 investment in Google in 1999 would be worth today. A $1,000 investment when it went public would be worth roughly $68,000 today. Not too shabby. 

More recently—

There’s a pretty popular neobank out of Europe called Revolut. Along with Wise, they’re a breed of FinTech that specializes in currency conversion and transfer along with other banking services. 

In 2016, Revolut did a Series A funding round. Its shares were valued at $2.17 per share. In August, Revolut did a secondary with its shares soaring to $865.42 each. 

Enough said. 

But, what about you? 

How can you make money via private investments? 

We’re not going to blow smoke up your ass. While alternative investing platforms such as the ones that let you take a stake in private companies have helped level the playing field, they have far from evened it. 

Consider Arrived. The company we told you about the other day and mentioned at the outset today. 

On WeFunder, Arrived recently closed what they called a community round:

The minimum investment amount in this round is $100 USD, which is consistent with our investment properties. Given the limited nature of this community round and the high interest we are seeing, we are adding a $500 maximum investment per non-accredited investor and a $5,000 maximum investment per accredited investor. In addition to ensuring that more people get to participate, the lower maximum investment amount for unaccredited investors allows us to stay within the Reg CF limitations.

So, there were restrictions in this case that limit how much Arrived could accept, how much you could invest and how much money you could make. 

The key on these platforms is creating an account, following your favorite investors (if there is a social feature like WeFunder has) and opportunities, doing your research and getting in when an investment round opens. There’s a good chance Arrived will do another round at some point in the future. 

Keep it and others on your watchlist and make some investments in open rounds. Diversify, just like you do in the traditional stock market. 

Beyond Arrived, there are considerable opportunities to join the big money on the ground floor. 

For example, big VC firm Y Combinator is an early investor in Cinapse, a startup that provides production logistics platforms to Hollywood. Y Combinator has put $500,000 into Cinapse. Right now, the firm has an open round where individual, non-accredited investors can contribute up to $2,500. 

When asked on WeFunder, how much each share is worth, the company’s co-founder and CEO said they’re “raising via a Simple Agreement for Future Equity (SAFE) on a $12M post-money valuation.” 

What does this mean?

A SAFE is an agreement between a startup and its investors that, according to Forbes, “exchanges the investor’s investment for the right to preferred shares in the startup company when the company raises a future round of funding. The SAFE sets out conditions and parameters for when and how the capital will convert into equity.”

Y Combinator actually created this mechanism and uses it with all of the companies it funds. A big risk of this type of agreement — again, from Forbes — is that “no obligation on the founders to repay the investment if the SAFE never converts into security. While this can be seen as a negative as the investors could be left with nothing, most professional seed stage investors understand the risks of investing in early-stage startups.”

Sometimes you know a price-per-share up front when you invest on a platform such as WeFunder. At other times — as with Cinapse — you don’t. You have to hope the company grows and moves forward to another funding round. At this point, you might have more specificity around the value of your investment. Then, you can decide to remain an investor or see if you can sell your shares in a secondary round. 

None of this shouldn’t be news to anybody. Whether you invested in the Magnificent 7 via the traditional stock market, followed Bezos into Arrived or end up investing in Cinapse, you’re taking a risk. The big difference with private equity investing is that you don’t always have a clear idea of how much you can make or even what your initial investment is actually worth. 

The Bottom Line: Here again, there’s risk inherent in all types of investing. And there’s additional risk when you’re dealing with startups (remember Google and Apple were startups when Sequoia took a chance on them) instead of trillion dollar companies. 

If you’re okay with this flavor of uncertainty, a $2,500 investment in a company such as Cinapse (which is being deployed at all the major studios and is backed by a super successful VC firm, not to mention industry players such as Neil Patrick Harris) can make sense in the aggressive speculation section of your portfolio.

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