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Investing in Venture Capital: A Step-by-Step Guide

By Dan Caplinger - Sep 13, 2017 at 8:31AM

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Find out how you can get involved with the same deals that big-name investors do.

If you want to get in on the ground floor of some of the most exciting business ideas available, investing in venture capital can be your gateway to a whole new world of investment opportunities. Becoming a venture capital investor takes more effort than just opening a brokerage account, so you'll need to look at your options to gain access to these investments. The following guide will help you work through the process and find the best way to invest in venture capital to meet your needs.

Step 1: Find out if you qualify as an accredited investor

The Securities and Exchange Commission seeks to protect investors by limiting their access to high-risk investments like venture capital opportunities. However, the SEC recognizes that certain experienced investors don't need the same protections as the general public, and the laws and regulations that the SEC follows have provisions defining what's known as an accredited investor. If you meet the requirements of an accredited investor, then you can invest in venture capital investments without either you the company you invest in running afoul of any legal requirements.

To qualify as an accredited investor, you have to meet at least one of several financial conditions. Income of $200,000 or joint marital income of $300,000 in each of the past two years is enough to become an accredited investor. Net worth of $1 million excluding any equity in your principal residence is also a sufficient condition. You can also qualify for special treatment if you are an executive officer, direct, or general partner of the business in which you want to make a venture capital investment.

Wall Street street sign in front of the New York Stock Exchange.

Image source: Getty Images.

Step 2: See if the investment you want to make qualifies as a crowdfunding opportunity

More recently, lawmakers made it easier even for those who don't meet the requirements to be accredited investors to make venture capital investments. Crowdfunding regulations made it possible for people to invest up to $2,000 per year into business start-ups, with higher amounts equal to 5% of the lesser of your annual income or your net worth available for those for whom such figures would exceed $2,000.

Finding crowdfunding opportunities can be tricky, but information sources have sought to aggregate these investments in order to make it easier for investors to locate them. With some companies accepting investments of as little as $100, crowdfunding makes it easier for those of limited means to participate in the exciting world of venture capital.

Step 3: Think about investing in the professionals who specialize in venture capital

Often, it's smarter to invest in companies that facilitate lucrative activities rather than in the companies that actually do the activities themselves. With venture capital, several professional companies that specialize in these and similar investments are publicly traded, making their shares available to anyone with a brokerage account. The companies below are just a few examples:


Market Capitalization

Assets Under Management

Blackstone Group (BX)

$39 billion

$371 billion

Carlyle Group (CG)

$7.2 billion

$170 billion

KKR (KKR -0.21%)

$15 billion

$149 billion

Data source: Companies, Yahoo! Finance.

Investing in these companies has the benefit of diversification, but it also means that you miss out on the huge rewards of picking correctly on a single company. This approach offers a more conservative tack on venture capital, but that isn't necessarily the best avenue for every investor in the space to pursue.

Venture capital investing can be risky, but it's also a great way to maximize returns if you're correct in identifying a promising business. By following this simple guide, you can see whether venture capital is right for you and get yourself on the road toward making such investments to supplement your other investing activities.

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Stocks Mentioned

The Blackstone Group L.P. Stock Quote
The Blackstone Group L.P.
Carlyle Group L.P. Stock Quote
Carlyle Group L.P.
KKR & Co. Stock Quote
KKR & Co.
$48.47 (-0.21%) $0.10

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