Understanding the Risks of Early-Stage Investing

By its very nature, early-stage investing is a high-risk, high-reward endeavor.

When you invest at the beginning of a company’s journey, the rewards can be outstanding. However, there are real risks – and understanding them is important. The fact is that many startup companies fail.

That’s why you shouldn’t invest too much of your portfolio into equity crowdfunding deals. I recommend no more than 5% for most investors.

Fortunately, minimum investments range as low as $100 (sometimes even lower). This makes it easy to build a large, diverse portfolio of quality companies over time.

Investors should also understand that these aren’t “liquid” investments. You can’t sell them for at least 12 months, and it usually takes several years to cash out on one. So you should never invest money you can’t lose or might need quick access to.

Other Risks

Many startup companies are dependent on outside financing for their first few years. If they don’t make enough progress or if the funding environment changes, they may not be able to access more capital to keep the business afloat.

And it’s important to keep in mind that some companies using equity crowdfunding may have been turned down by other investors, including professional ones. Be aware of this “reject factor” when looking into deals. It’s not automatically a bad sign. Startups can be turned down just because they don’t have the growth potential that Twitter or Uber did in the beginning. In which case, that’s the kind of detail that matters more to venture capitalists than to you.

However, those investors could have walked away because the business in question suffers from major flaws. You’d need to do a little digging to clear this issue up.

Startups raising money via equity crowdfunding may have significant debt and other liabilities. They’re required to post financials as part of the Electronic Case Filing process, and we’ll be examining those in our recommendations.

Set Realistic Expectations

Equity crowdfunding in the U.S. is an unproven market, but I believe it holds massive potential. Still, I recommend starting out slowly with your investments and pacing them over time.

We’ll work to only recommend deals with the highest potential. But going in, you should expect some to eventually fail. This is the nature of the business. The road ahead is often long and seldom smooth for early-stage startups, and some simply prove unable to overcome all the obstacles they encounter.

But what we’re looking for is a few big winners. If it goes as planned, those success stories will more than make up for the losers.

I’m not trying to dampen enthusiasm here. I just want to make sure to set realistic expectations. Early-stage investing is the most fun, rewarding and profitable adventure I know of. And our goal here at First Stage Investor is to help you enjoy the same experience.

Just remember this is a risky way of investing. Treat it as such… and you’re more likely to find success and profits.

Good investing,

Adam Sharp

Adam Sharp

Adam Sharp

Adam Sharp the founder of EarlyInvesting.com, a new e-letter focused on equity crowdfunding. He is an active investor in more than 50 startups. A former financial advisor, he also has extensive experience with internet marketing and financial writing. He has built 3 profitable web businesses.