How to invest into startups

Investing into startups can be risky business. But investing in the right startup has proven time and time again to deliver outsized returns.

Startups are critical drivers of innovation. From fintech to healthcare, startups have shaped and transformed industries. And early investors in successful startups have reaped substantial financial returns.

How did they do it?

In this article, we’ll dive into how startup investments work and some strategies for sourcing and closing high-potential startup investment opportunities.

‍Key takeaways

• Investing into startups is the process of providing capital to early-stage companies in exchange for equity.
• There are several avenues for startup investing, including venture capital, angel investing, and private equity.
• By tapping into your network, you can surface hidden startup investment opportunities and uncover paths of warm introduction that close deals 25% faster.
• Deal sourcing platforms like Affinity use relationship intelligence, automated activity capture, and data enrichment to help startup investors and VC firms source more deals faster.

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What is a startup?

A startup is an early-stage business built around bringing an innovative new product or service to market. 

Startups are a type of small business. But traditional small businesses, like your local restaurant or shop, tend to operate on a tried-and-true model with a goal of making money from day one. Startups tend to focus on developing groundbreaking technology or pioneering new business models and industries that may not generate revenue straight out of the gate.

Thanks to this unique model, startups often require significant capital to reach their goals. They tend to rely on investors and other sources of funding to sustain the early days of their operations to reach long-term profitability.

What is startup investing?

Startup investing refers to when investors provide capital to early-stage companies—often in exchange for equity or ownership. While many startup investors are searching for high-potential investment opportunities, many also hope to support and get in on the ground floor of innovative and exciting ideas.

Common terms you’ll see as you dive into the world of startup investing include:

• Acquisition: When a startup is purchased—or acquired—by another owner, often a larger company or entity. 
• Equity: The ownership an individual holds in a startup. This is often denoted by the number of shares you own. 
• Initial Public Offering (IPO): When the shares of a startup are offered to the public for the first time.
• Liquidity: A liquidity event—or an exit—is when investors are able to convert their ownership or equity into cash. This is typically through an acquisition or an IPO. 
• Stage: The startup lifecycle is made up of several stages and investment opportunities, commonly referred to as the pre-seed stage, seed stage, Series A, Series B, and so forth.

Unlike typical investing, startups are usually private companies, which means not everyone is necessarily able to invest in a startup. Investment decisions are often closely guarded by the founders or founding team, which makes the path to investing in a startup somewhat unique.

How to invest in startups

There are many different ways you can invest in startups—all of which offer different benefits and avenues based on your investment goals and needs. 

Venture capital

Venture capital (VC) is a type of funding that is distributed by venture capitalists and VC firms. VCs are a type of institutional investor, focusing primarily on high-growth, early-stage startups. VC firms provide significant capital injections into the startup ecosystem—raising over $71 billion throughout 2024 in the US alone.

With VC, individual investors don’t directly invest in startups. Rather, VC firms raise a venture capital fund through their own investment process. This capital is provided by a pool of investors, known as Limited Partners (LPs).

The VC firm then invests that capital into a range of portfolio companies (portcos) or larger VC funds based on the fund’s investment thesis. VCs take on the role of sourcing deals and managing investments. Individual investors benefit from portfolio diversification as the larger pool of funds makes it possible to invest in multiple startups, maximizing returns for both the fund and its LPs.

Startups tend to favor VC funding because they don’t simply provide capital. The success of a VC firm is closely tied to that of their portcos, so they also act as a source of knowledge, expertise, and a network to help companies fast-track their success.

Angel investing

Angel investors are typically high-net-worth individuals who invest in startups using their own funds. They work directly with startup founders to provide capital and resources.

Every angel investor has their own investment goals and priorities, which means they may be hands-on or hands-off with the companies in their portfolio. But angel investors are often experienced entrepreneurs who’ve successfully scaled their own startups or have business expertise. Their experience and partnership tend to make them a valuable addition to a startup's cap table.

IPOs

Also known as ‘going public, ’ IPOs are when shares of a company become available to the public to purchase through a stock exchange. Startups that IPO are typically more established and have raised multiple rounds of funding.

When a startup becomes a public company, shares become available to anyone to purchase on the stock market. It makes investing in startups more accessible to anyone, from institutional investment funds to individuals. 

Private equity 

Similar to VC, private equity (PE) funds are created from a group of investors. PE firms then invest those funds collectively across different private companies, including startups. 

Unlike VC firms, PE firms don’t just invest in early-stage companies. Their investment strategy often covers various industries and development stages, offering a diversified investment opportunity for LPs. PE firms will also often use a combination of debt and equity in their investment strategy rather than just equity. 

Crowdfunding

Unlike most other forms of startup investment, crowdfunding relies on small investments from a large group of investors. 

Typically, these opportunities become available on crowdfunding platforms like Kickstarter, where almost anyone can invest in a startup in exchange for discounts, early access to products, or rewards. Crowdfunding is particularly popular in product-based startups, with well-known brands like Peloton and Oculus taking on crowdfunding in their early stages.

Equity crowdfunding has also become a more popular option, where startups can use platforms like Crowdcube to provide small amounts of equity to a large number of investors. 

Startup accelerators and incubators

Startup accelerators and incubators, like Techstars or Y-Combinator, are programs designed specifically to develop and nurture early-stage or pre-ideation startups. 

Founding teams are often accepted into these programs and provided capital in exchange for equity. They’re also given resources, mentorship, and networking opportunities to help them scale their company at a faster rate.

Accelerators and incubators are funded by a range of entities, including educational institutions, private companies, and even VC firms.

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How to find startup investment opportunities

As many as 50 million startups are launched every single year—with abundant opportunities for investment. But finding the right startup investment opportunities—also known as deal sourcing—is something even the most experienced investors and VC are constantly trying to perfect.

Here are some best practices for finding lucrative startup investment opportunities. 

1. Identify your investment goals

VC firms have an investment thesis that guides their investment decisions. Similarly, every investor—whether an individual or an entity—should identify their investment goals before even sourcing potential deals.

Some questions you can ask to help identify your investment goals include:

• What is your liquidity, and how much capital can you invest?
• What is your risk tolerance?
• What is your ideal timeline for returns?
• What’s your preferred exit strategy?
• Are you looking to be a hands-off or hands-on investor?
• Is supporting a specific social issue or cause a priority?
• Are you limited by U.S. Securities and Exchange Commission (SEC) investment regulations (particularly for non-accredited investors)? 

Once you have a firm grasp of your investment goals, you can decide if early-stage investing is the right fit for your investment strategy—and if so, what type of startup investments you’d be interested in pursuing. 

2. Tap into your network

Most startup investment opportunities aren’t available to the general public, which means sourcing deals often comes down to who you know. Startup investing is a relationship-driven industry, with as many as 70% of deals in the VC world stemming from existing contacts. 

Dealmaking tools like Affinity, unlock the relationship insights in your network so you can identify paths of introductions to founders, investors, and other key decision-makers. Even if you don’t know a founder personally, there’s likely someone in your firm’s collective network who can introduce you and help you close deals up to 25% faster.

With startup investments, you never know when a potential deal will come up. Nurturing and engaging your network is key to staying on top of your network and getting access to high-quality investment opportunities. Affinity helps keep your network warm by giving every contact a relationship score and triggering notifications when the score drops so you can keep your relationships warm. 

3. Research startup founders and teams

Your existing network only makes up one side of the investment table. Getting a seat on the cap table at the most sought-after startups is often incredibly competitive, and founders get the last say when it comes to investment opportunities.

‍Growing your network of founders can keep you in the loop, so you’re the first to know when new opportunities come up. 

This goes beyond simply making their acquaintance. Take the time to learn more about their vision and passions, and deliver value outside of chasing investments. For example, offer founders resources in your network and engage with them in person and virtually through social media. 

Proactively building a personal relationship with key stakeholders and understanding their motivations can help you position yourself as a valuable partner. It creates a relationship that feels less transactional, so founders are more likely to reach out when they have an opportunity. 

Startup success is also often heavily dependent on the founding team. By researching and getting to know potential founders, you can also get insight into their track record, founder style, and potential exit strategy so you can keep your investments aligned with your own goals. 

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4. Keep your finger on the pulse

Being able to identify the underlying signals and trends can help you stay ahead of high-potential opportunities. 

‍Industry trends and outlooks can be valuable for understanding potential shifts in the market. And internal company insights, such as past fundraising and hiring patterns, can point to future investment opportunities and valuations.

Rather than manually tracking necessary industry and firmographic data, deal sourcing tools like Affinity can help surface important deal insights. Affinity turns employee growth data into actionable insights by pulling company insights into a single view. By tracking employee counts and job functions over time, you can stay on top of a prospective startup's growth story. Every contact and company in Affinity is also enriched with comprehensive data, from biographic to funding insights, so you can make smarter deal decisions.

5. Use data-driven tools and market intelligence

In the fast-paced world of startups, access to clean and up-to-date data and intelligence is critical for sourcing deals and making informed investment decisions. By accurately tracking the right metrics in the early stages of the deal lifecycle, you can discover and prioritize startups relevant to your investment thesis sooner—and spend more time building the relationships that make an impact.

Data-driven dealmaking tools make it easier to collect, analyze, and act on relevant insights. Similarly, AI and automation tools help unlock and centralize real-time insights so you avoid missing opportunities. 

For example, Affinity’s Deal Assist streamlines data location. Rather than manually sifting through data, ask Deal Assist the questions you need to conduct deal analysis so you can quickly surface relevant files and data. And Affinity’s Industry Insights provides dealmakers with an AI-generated list of relevant competitors so you can make informed deal decisions faster. 

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Don’t forget to do your due diligence

The key to successful startup investment is proper due diligence. 

There’s never a guarantee when it comes to early-stage startup investments. But the best investors and VCs are able to source opportunities with high-risk adjusted reward by having a deep understanding of the companies they’re investing in

Even at the early stages, while you’re narrowing down potential opportunities, it’s important to screen startups in your investment pipeline. Only once you’re confident the investment aligns with your investment strategy should you invest the resources into more rigorous due diligence.

While the specific areas you need to analyze will vary depending on the deal and the startup, your due diligence checklist should include reviewing financials, assessing legal implications, and reviewing the competitive landscape. This helps you understand the potential upside of an investment and anything that might get in the way of you reaching your investment goals. As a general rule, the bigger the investment, the more comprehensive your due diligence process should be.

Source lucrative startup investment opportunities with Affinity

Affinity’s relationship-driven deal sourcing platform helps startup investors and VC firms uncover more deals faster with:

‍Relationship intelligence to uncover warm paths of introduction that help you source and close deals 25% faster.

• Deal flow management to source, track, and manage deals in your inbox and browser.
• Automatic data enrichment so you can make deal decisions with confidence.
• Intelligent investor relations to help dealmakers efficiently fundraise and strengthen existing relationships.

Ready to discover the key to successful startup investing? Explore Affinity and Affinity for Salesforce today.

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Investing in startups FAQs

Is it a good idea to invest in startups?

Investing in startups is a good idea if you’re looking for a high-risk, high-reward investment opportunity. Startup investing tends to present higher risks than more traditional investment methods, which is why many investors invest in startups as a part of their investment portfolio diversification strategy.  

How does investing in startups work?

Investing in startups involves investors providing an early-stage company with capital in exchange for equity or ownership. Investors are betting on a company’s success with the hope that those funds will propel the company toward future growth and deliver a positive return on investment (ROI).

Is startup investment profitable?

Startup investment can be profitable, but it’s also risky—which is why venture capital firms, angel investors, and other startup investors have robust due diligence processes so they can conduct research to make the best investment decisions possible.

Do investors get their money back from startups?

Startup equity is an illiquid asset class, but investors can get their money back from startups if there is an exit event (such as an acquisition or IPO). In a less common approach, they can also sell their shares privately or through a secondary market before a liquidity event. The ROI on startups can vary drastically. Depending on a startup's success, an investor's repayment can get diluted or can be lost altogether. It’s estimated that only one in three startups yields positive returns to investors

What is the success rate of startup investing?

Compared to many businesses, startups tend to have a low success rate. While many startup companies have yielded high returns for their investors, it’s not always the case. Fewer than 1% of startups reach the coveted unicorn status and stats have shown that up to 90% of startups fail, making it critical for investors to make informed, data-driven deal decisions.