How and why to invest in startups when you are an individual

Investing in startups has been a dream of many people for several years. Since dozens of success stories have flooded the media: Facebook, Apple, Google, Amazon, Revolut, Alan, Sorare, BlaBlaCar, PayPal and even Airbnb.

All these startups (or former startups) have created hundreds, even thousands of millionaires and tens of billionaires in a relatively short time. No wonder they make you dream …

Success stories are so wonderful that they make us forget about thousands of failed startups. Yes, because so many! Some statistics say 90% of failures!

No wonder venture capital funds, called VC (pronounced “vissi”), invest in many startups. A very small part of them will be Facebook or Alans, and the vast majority – Frosty Crunch, SnowBluff or even Frosty Fog, which no one has ever heard of.

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

Why invest in startups?

This is not for everyone! As I said, this is an extremely risky investment. If you can’t afford to lose 100% of your money, don’t go.

Having said that, let’s start from the beginning. Why invest in boxes that have a 9 out of 10 chance of failure? The reason is simple and can be summed up in one word: asymmetry. By investing in a startup, you can, of course, lose everything, but also gain a lot. We often talk about × 10, × 100, even × 1000.

For an investor like you and me (whose job is not to invest in startups), investing in startups is a good way to diversify your portfolio and, above all, try to expand it greatly.

You can tell yourself that you are investing 90% in low-risk assets (ETFs, real estate, etc.) and 10% in high-risk assets (cryptocurrencies, startups, etc.). If you run a high-risk asset, your losses are limited.

How to invest in startups?

We will look at methods available to the vast majority of individual investors such as you and me.

Join an investment club

There are investment clubs whose main goal is to provide you with a network that you do not have, or to expand one that you do have, and to bring together dozens, even hundreds of investors to invest more together, which will be easier. are accepted by startups that raise funds.

We are talking about syndication. This is to bring together investors who can / want to invest only “small” tickets worth between 1,000 and 5,000 euros per deal, but team up with others and thus can enter into a deal with a ticket worth 200,000 euros. , example .

How does it really work? The creator of the group will provide an opportunity to invest; then decide for you whether or not to invest in this startup. If you invest, you often do so because of what is called SPV (Special Purpose Vehicle).

We could very roughly compare this to SCI. Often, when you want to buy an apartment with several people, you create a civil real estate company (SCI), which will own the property. Here’s the same thing, you as a shareholder will hold a percentage of SPV, which will own 100% of the shares purchased in the startup.

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

Angelsquare, it’s a bit the same, but this time you can only log in by invitation. Choose more. Another difference from Leonis is that there are subclubs and the opportunity to invest directly in the startup without going through the club.

Startup Exchange: Secondary Market

We are talking 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 startups, the secondary market has always existed, but has always been inaccessible. It was necessary to know so and so, then go through difficult administrative procedures and so on. Hell! Fortunately, a few young shoots are trying to grind it all down! In France, there are Caption and FairShares.

FairShares also works with the SPV system. Currently, the company is only open to so-called “qualified” investors, ie you must meet relatively difficult criteria to achieve (+500,000 euros in assets in your portfolio, market operations over 600 euros per quarter, etc.). The goal of FairShares, of course, is to make it all smoother in the coming months.

Caption is also a new market that allows you to buy / resell startup shares. If you own shares, you can resell them to investors, and if you are an investor, you can very easily buy shares to run. The minimum ticket price is 2000 euros.

· Crowdfunding platforms

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

CrowdCube, headquartered in the United Kingdom, allows startups to raise money through its platform, just as you can raise money for your project on Kickstarter or Ulule. You don’t need to be a business angel with millions in your bank account to get started, the ticket costs only 10 euros!

Like Caption, you can access analytics and other materials on the appropriate homepage. You can also ask questions directly to the founders of these companies before making your choice.

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

Now that you know where to buy start-up stocks, the big question is which ones to invest in? !!

How to choose startups to invest in?

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

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

✔ Invest in business models that you know well. If you are a SaaS (Software as a Service) software specialist, you may find it easier to invest in a company with this business model.

If you want to invest in a startup, you can follow these different steps:

Step 1 : understand business and its maturity. Is the company very young in an emerging market (such as Sorare at the moment)? Or a mature market and so on. ?

Step 2 : look at his assessment and the company’s capabilities. What is the current assessment of the company? What are its capabilities? Does he intend to launch it abroad? Launch of new products, etc.

Step 3 : Compare the company with its competitors to shed light on the trajectory it could take.

Step 4 : Look at companies that have had similar businesses in the past.

Step 5 : look at the changes in the company’s estimates. Has his assessment only increased? Did it fall after fundraising?

Step 6 : Of course, the most important thing: watch the founders of the company. Who are they ? Why do they create a good team? Do they seem to be able to take the company very far? Why? Have they already started a business?

Note

This forum was written by a contributor outside the editorial office. Les Echos START does not pay him, and he did not pay for the publication of this text. Therefore, the choice to publish it was made solely on editorial criteria.