You don’t have to be a Silicon Valley venture capitalist to invest in the hot new technology startups.
Individuals interested in startups can invest through angel groups or online platforms for early-stage investors like AngelList and Propel(x). Or they can invest in later-stage, but still young, companies through publicly traded funds that hold stakes in companies already backed by venture capitalists.
Investing in fledgling companies can bring returns that are hard to find when buying stock in publicly traded companies. And it can be a thrill. “You can’t discount how psychologically interesting and intoxicating it is” for many people to get involved in startups, says
who invested through AngelList before going on to become a venture capitalist at two firms, Haystack Fund and Lightspeed Venture Partners. “It’s an exciting thing to be around people doing new things.”
But those opportunities come with a huge caveat: Investing in technology startups is high-risk, particularly for people who aren’t familiar with the volatile tech scene. Angel investors, experts warn, shouldn’t invest money they can’t afford to lose. This isn’t the place to put savings an investor is depending on for retirement.
For individuals who want a piece of the action, angel groups are an option that’s growing in popularity. They offer the inexperienced investor a way to learn from more-seasoned hands about the language of investing as well as how to pick prospects. Some angel groups pool investor contributions in a fund and the group decides which startups to back with that money. Other groups give members the option to back individual companies.
The Angel Capital Association offers a list of its member groups on its website. Angel groups often invite prospective members to visit meetings to get to know and evaluate the groups.
Many investors instead have flocked to online platforms, because of the wide access to startups they offer.
AngelList has provided a platform for $800 million invested in more than 2,000 startups, which went on to raise $7.4 billion in venture capital. An average of 100 companies a month raise money on the platform, according to San Francisco-based AngelList. Fast-growing startups that have raised capital through AngelList include the dog-walking app Wag, which later raised $319 million from venture investors, and real-estate service Opendoor, which went on to raise $310 million from big investors.
One catch: AngelList is only available to accredited investors, generally defined as having an annual income of $200,000 for two years or having a net worth of more than $1 million.
On its site, AngelList offers funds managed by the company’s executives that provide exposure to a range of startups. Investors don’t have any say in which companies are financed through these so-called Access Funds. But another option on the site gives them choices. New investors can essentially follow an experienced individual investor in two ways: by choosing to invest in all the same deals as the experienced investor, through a small fund, or by choosing to back only some of the companies the experienced investor is funding.
The minimum to invest in the next AngelList Access Fund is expected to be $100,000. The minimum to invest in individual deals is as low as $1,000, though many lead investors won’t accept checks smaller than $5,000.
For a minimum $3,000 investment, San Francisco-based Propel(x) matches investors with startups focused on so-called “deep tech” advances that hinge on scientific discoveries or some type of engineering breakthrough. For each potential deal, Propel(x) provides an independent panel of experts who can answer investors’ questions to help them vet the startup.
“There’s an information-asymmetry gap in private markets,” says
co-founder and chief executive at Propel(x). “There’s no research, unlike in the public markets.” The expert panels, she says, are “a way to help investors make better investment decisions.”
For investors who have lower risk tolerance, there are publicly traded funds that invest in later-stage private companies backed by venture capital. The risk is lower because these are companies that have survived the early stages of corporate development and have big money behind them, but that also means the potential payoff is smaller than what an investor could hope for if an angel bet pays off.
A closed-end fund called the SharesPost 100 Fund has invested in companies such as Uber, Pinterest and SoFi. The fund’s minimum to invest is $2,500.
Corp., with no minimum investment, is an investment fund that trades on the Nasdaq and invests in private companies such as Palantir, Lyft and Coursera. It held Spotify and Dropbox, two startups that recently had initial public offerings of shares. GSV seeks out companies that are about two to three years away from being sold or going public, says fund founder
Whatever route an investor takes, it’s important to remember not only that investing in high-technology startups is inherently risky, but also that such investments mostly are illiquid. People investing in individual companies, rather than funds, should diversify with at least 10 to 12 investments because of the high failure rate of startups, says
executive director at the Angel Capital Association.
“Know that half to 70% of your investments you will probably lose,” Ms. Hudson says.
Indeed, newcomers especially should invest only an amount they can afford to lose, says
chief executive officer at AngelList. “We see a lot of angel investors burn out their entire allocation in six months,” he says.
Mr. Geron is a Wall Street Journal reporter in San Francisco. He can be reached at email@example.com.