By Xavier Brenner Investing in the coolest technology startups and other promising young companies is no longer just the playground of the super-rich. These days ordinary investors can invest in venture capital, private equity and angel funds that seed startups. These so-called alternative investments can help average retail investors diversify their portfolio's risk exposure away from traditional equity and fixed income asset classes.
Alternative investments are often uncorrelated to broad moves in the stock and bond markets. So if the stock market takes a dive, the alternative asset part of your portfolio may possibly be less impacted. That said, investing in alternative investments isn't for everyone. First off, startup investing is by nature volatile and sometimes requires higher minimum investments and fee structures than mutual funds and ETFs. Proceed with caution: While they are subject to less regulation, business development investors, be they private equity or angel funds, don't always publish verifiable performance data. That said, here are some ways to play the startup game.
Simply put, angel investors extend startups money for a piece of the action, usually equity. The angels tend to be high net worth individuals and meet the Securities & Exchange Commission's income requirements ($1 million net worth and $200,000 or more base salary) for accredited investors. Another option are angel syndicates. These investing groups pull money together and invest in a handful of startups. With a syndicate, the investing risk is spread over a larger group and the investment is smaller than if you were funding a startup by yourself. Though the returns can be substantial, angel investing requires time, expertise and due diligence to do right.
Another way to gain exposure to the startup world is through private equity firms.