How and why to invest in start-ups when you are an individual

Investing in start-ups… has been a dream of many people for a few years now. Since dozens of success stories have flooded the media theater: Facebook, Apple, Google, Amazon, Revolut, Alan, Sorare, BlaBlaCar, PayPal and even Airbnb.

All these start-ups (or ex-start-ups) have created hundreds, even thousands of millionaires and dozens of billionaires in a relatively short time. No wonder they make you dream…

Success stories are so beautiful that they make us forget about the thousands of failed startups. Yes, because it is the case for many! Some statistics speak of a 90% failure rate!

It is no wonder that venture capital investment funds, nicknamed VC (pronounced “vissi”), invest in many startups. A very small minority of them will be Facebooks or Alans and the vast majority will be Frosty Crunch, SnowBluff or even Frosty Fog, which no one has ever heard of.

Investing in start-ups is one of the riskiest investments you can make, but if you can diversify those investments, that risk will decrease.

Why invest in startups?

It’s not for everyone! As I said, it is an extremely risky investment. If you can’t lose 100% of the money invested, don’t go.

That said, let’s start from the beginning. Why invest in boxes that have a 9 in 10 chance of failing? The reason is simple and can be summed up in one word: asymmetry. When investing in a start-up, of course you can lose everything, but you can also gain a lot. We usually talk about × 10, × 100, even × 1,000.

For an investor like you and me (whose job is not to invest in start-ups), investing in start-ups is a good way to diversify your portfolio and, above all, try to boost it strongly.

You can tell yourself that you invest 90% in low-risk assets (ETFs, real estate, etc.) and 10% in high-risk assets (cryptocurrencies, start-ups, etc.). If high-risk assets go up in smoke, your losses will be limited.

How to invest in startups?

We will cover methods accessible to the vast majority of individual investors like you and me.

Join an investment club

There are investment clubs with the primary objective of providing the network you don’t own or extending the one you do, but also combining the strengths of dozens, even hundreds, of investors to invest together larger sums that will be more easily accepted by start-ups. that capture resources.

We are talking about unionization. It is about bringing together investors who can/want to invest only “small” tickets worth €1,000 to €5,000 per deal, but group together with others and can thus enter a deal with a €200,000 ticket. , for example. .

How does this actually work? The group creator will present an investment opportunity; so it’s up to you whether or not to invest in this start-up. If you invest, you will often do so through what is called a SPV (Special Purpose Vehicle).

We could very roughly compare it to an SCI. Often, when you want to buy an apartment with several people, you create a civil real estate company (SCI) that will own the property. Here it is the same thing, you will have as a shareholder a percentage of the SPV, which in turn will have 100% of the shares purchased in the start-up.

The two best-known clubs in France are Leonis Investissement and Angelsquare. At Leonis, you can invest primarily in Silicon Valley startups (many coming out of the famous Y Combinator accelerator). You can invest small amounts up to several thousand.

Angelsquare, it’s a bit the same, but this time it’s only possible to enter by invitation. More select. The other difference with Leonis is that here there are sub-clubs and the possibility to invest directly in a start-up without going through a club.

The Start-up Exchange: the secondary market

We talk about the primary market when a company sells its shares directly to investors. The secondary market is when investors sell shares to each other.

In the world of start-ups, the secondary market has always existed, but it has always been difficult to access. You had to know this and that, then go through heavy administrative procedures, etc. A hell ! Fortunately, several young shoots are trying to dust it all off! In France, there are Caption and FairShares.

FairShares also works with an SPV system. For now, the company is only open to so-called “qualified” investors, that is, you must meet relatively complex criteria to achieve (+500,000 euros of assets in your portfolio, transactions in the markets above 600 euros per quarter, etc.) . FairShares’ goal is certainly to make all of this even smoother in the coming months.

Caption is also a new marketplace that allows the purchase/resale of start-up shares. If you own stocks you can resell them to investors and if you are an investor you can buy beginner stocks very easily. The minimum ticket is 2,000 euros.

· Crowdfunding platforms

There are also crowdfunding platforms that allow startups to easily sell shares to hundreds or even thousands of investors. Today I will only talk about CrowdCube, but there are many more.

CrowdCube, which is headquartered in the UK, allows startups to raise funds through its platform, just as you could fundraise for your project on Kickstarter or Ulule. You don’t have to be a business angel with millions in your bank account to get started, the entrance ticket is just 10 euros!

Like Caption, you can access analysis and other material from the relevant launch page. You can also directly ask the founders of these companies questions before making your choice.

If you want to discover other platforms, you can go to French Anaxago, WiSEED, Sowefund, or even CrowdCube’s English competitor, Seedrs.

Now that you know where to buy startup shares, the big question is which ones to invest in? !

How to choose the startups to invest in?

As a retail investor, you can approach the problem in several ways:

✔ Invest in an area you know well. If you work in the e-commerce world, it will be easier to judge an e-commerce startup;

✔ Invest in business models you know well. If you are an expert in SaaS (Software as a Service) software, it might be easier for you to invest in companies with this business model.

When you want to invest in a start-up, you can take these different steps:

Step 1 : understand the business and its maturity. Is the company very young in an expanding market (eg Sorare at the moment)? The market is mature, etc. ?

2nd step : look at your valuation and company opportunities. What is the company’s current valuation? What are your opportunities? Do you intend to launch abroad? Launching new products, etc.

step 3 : comparing the company with its competitors to shed light on the trajectory it can take.

step 4 : See companies that have had similar businesses in the past.

Step 5 : Watch for changes in company ratings. Has your valuation only increased? Dropped after a fundraiser?

Step 6 : certainly the most important of all: look at the founders of the company. Who are they ? Why do they make a good team? Do they seem capable of taking the company very far? Why ? Have they already started business?

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