Investing in Startups - How it's Done

Startups are young companies that are not traded on the stock market yet. In the past, investing in startups through venture capital funds was only possible for the wealthy. Through equity crowdfunding, however, investors can invest in up-and-coming enterprises already with smaller amounts. We’ll explain how that works in this article.

Register and open an account

Companisto is an investment platform on which you can invest in startups and growth companies online. In order to invest, you will need an account first. Registering and creating an account is easy, quick, and free of charge. There are neither account fees nor transaction costs for later investments.

While registering as a startup investor can be accompanied by a lot of paperwork in other countries, it’s pretty simple in Germany. You only need a valid email address and your name. If you want to make an account for an investment company, we’ll also need a copy of your identification document as well as an excerpt from the commercial register. As soon as you’ve registered, you can conveniently access all investment opportunities.

Select investment opportunities

You can find all current financing rounds on the investment opportunities page. There, the startups present themselves with a video in which they introduce the team, explain their business idea, and present their product. Furthermore, the startups provide the investors with comprehensive information, including financial figures, business plan, market data, product details, and background information on key employees.

In addition, investors can engage in direct communication with the founders. During the financing round, they can ask questions and provide suggestions to the team in the discussion area. Throughout the course of the campaign, the management board publishes news in the updates area. These report recent progress, new partnerships or announce the addition of strategic investors.

Finally, crowd investors can find important data for every investment in the profile of the startup. Among these are company valuation, the participation quota, the participation offered and the probability of default. The company valuation states the current valuation of the startup. The participation offered shows the portion of the company that the founders are offering to the crowd investors for sale. The level of participation determines how high the share of profit and sales proceeds will be in the future. The probability of default is calculated by the external service provider Creditreform and provides information on the company's creditworthiness to date.

Profit participation or fixed interest rate

As an investor, you have the opportunity to choose between two equity crowdfunding models: profit participation and fixed interest rates. Both participation models are subordinated loans. These are entrepreneurial participations with equity-like characteristics. While investments with exit and profit participation are set up for high returns in the case of a sale of the startup, investors with a fixed interest rate profit from a constant interest return.

The majority of investment opportunities are investments in startups, which are always tied to exit and profit participation. Crowd investors thus benefit from the increase in value and future profits of the company. If the company is sold to another company or goes public in the future – these are referred to as exits – the crowd investors receive a share of the sales proceeds corresponding to the amount of their participation. When the company generates profits in the future, you, the investor, will also participate pro rata. 

On the other side of the spectrum are fixed interest loans for growth companies or social entrepreneurs. The so-called venture loan is a loan for a company that has been on the market for a few years already and is already generating revenue. They need capital for further growth, for example in order to expand their production or to tap into new markets. In return, investors receive an annual fixed interest of 8% that is distributed semi-annually.

The impact loan is also a fixed interest loan, except that it is granted exclusively to social entrepreneurs. These are organizations that combine profitability with social or ecological added value. This is also a final loan with a maturity of 6 years. At the end of this term, the loan amount is repaid. The interest rate is 8% per annum, and the interest is distributed semi-annually.

Use positive crowd effects

Investments in startups via crowdfunding are characterized by great transparency. This includes not only the information that the startups provide the crowd investors with but also the opportunity to engage in dialogue with the founders or other investors.

Investors have expertise and professional experience in a wide range of industries. They contribute this know-how to the discussion and can publicly ask the founders questions about the technology or the market. Founders or knowledgeable employees of the company answer these questions publicly.

Other investors can subsequently evaluate how useful the question and the given answer were to them. Thereby, you benefit from the collective knowledge of the crowd as an investor. You can thus gain a sense for the team, and also have open discourse for example about risks, opportunities, or the business model. This helps investment beginners, especially when making decisions.

Carry out a risk assessment

Investments in startups are venture capital. They are investments that come with great risks, but also with great potential for return. As a general rule, the higher the planned return on investment, the higher the risk. In the worst case scenario, the risk is the loss of the entire investment, but there is no obligation to make additional contributions. Therefore, it is essential to carry out a risk assessment before every investment. For the investor, this means thoroughly examining the individual aspects of the startup’s profile.

Startups generally do not make revenue yet, or they generate only very little. Only very few of them have annual financial statements in which an investor could see the financial development. This is why assessing the risk/return ratio is more difficult than when investing in established companies that are traded on the stock exchange. We explain what to pay attention to when carrying out a risk assessment in our academy article “Risk Assessment for Investments in Startups.”

In any case, investors should not place the entirety of their available capital in one single startup but rather spread it among various companies from differing industries. Investments in startups are not suitable for retirement provision. They should only make up a small part of an investor's entire portfolio. As a guideline, this should be no more than 10% of the total investment.

Moreover, your investment strategy should include secure investments such as government bonds, fixed-term or call money accounts in addition to risky investments like those in startups. By following both methods, you can spread risk more broadly and thereby reduce the chance of losing your entire capital. This strategy of spreading risks is called diversification. You can find more suggestions about reducing risks in your portfolio in our article “Strategies to Spread Risks.”

Conclude the investment process

When you the investor are convinced of a project, you can invest in the company of your choice directly on the platform. The entire investment process occurs online and takes only a few minutes. The topic of regulation and investor protection plays an important role in equity crowdfunding. Investments in startups are regulated by the Kleinanlegerschutzgerecht (Retail Investors Protection Act). Therefore you will want to make sure that you have read the Vermögensanlagen-Informationsblatt (VIB; Asset Investment Information Sheet) before every investment.

The minimum investment sum is €100. In the case that you want to invest more than €1,000 in a company, Companisto will need an additional self-disclosure statement stating that this investment does not exceed your income or assets. Should you want to invest more than €10,000 in a company, you will only be able to do so via an investment firm.

When you make your investment, you can choose between three payment methods: Bank transfer, immediate transfer, or direct debit procedure. The transaction is complete when the money arrives at Companisto. You will then receive an email with all the necessary documents in digital form, including the participation contract. With your investment, you become a shareholder of the company and receive regular reports on the current development of the startup.

Have we piqued your interest? Then register on Companisto today!