It can be challenging to offer a precise definition of a startup: It can be a business creating a new product or service under conditions of extreme uncertainty, or a company aiming to solve a problem where the solution is not obvious and success is not guaranteed.

However you define a startup, it used to be that you needed both wealth and good connections to invest in them. This is no longer the case, however, and average investors can easily grab a piece of an exciting startup opportunity using crowdfunding sites.

Startup investing is potentially lucrative, but it’s important to understand that it comes with big risks. The vast majority of startups fail—even if you do your research, you could end up with a pocket full of nothing. Here’s what you need to know to begin investing in startups.

Platforms for Startup Investing

Ordinary people can invest in startups via crowdfunding sites. Startup investing platforms offer a curated selection of companies, and require varying minimum buy-ins. Major players in the crowdfunding startup space include:

“Thousands of companies apply to raise on our platform each year, and we approve only about 3% of them,” says Kendrick Nguyen, CEO of crowdfunding platform Republic.

Most of the sites listed above let you get started investing in startups with as little as $100, while SeedInvest requires at least $500.

AngelList is another leading startup investing platform, but it only admits accredited investors with incomes of at least $200,000 ($300,000 if married) or net worth of at least $1 million, excluding their primary residence. Minimum buy-ins on AngelList are at least $1,000.

How Much Can You Invest in Startups?

Non-accredited investors should be aware there may be a maximum amount you can invest in crowdfunding ventures during any 12-month period, according to SEC guidelines:

Just because you can invest a certain amount in startups doesn’t mean you should go all-in. “The right amount to allocate should be no more than the investor can comfortably lose if the startup goes bankrupt or takes an especially long time to pan out,” says Randy Bruns, a certified financial planner (CFP) in Naperville, Ill.

Experts generally also recommend making several small investments in a few different startups versus one big investment in one startup. In fact, AngelList even writes in its investing guidelines that you should “only invest if you have enough capital to make 15-20 startup investments.”

This provides diversification: If you invest in five startups, and four of them fail, you still have one winner, which may help protect some of your money. That said, “you should expect your total losses to exceed your gains,” notes AngelList.

How to Make Money Investing in Startups

When you invest in a startup via a crowdfunding site, you enter into an investment contract with the company. Broadly speaking, there are four different kinds of investment contracts, each of which offers different ways to make money from your investment:

Why Invest in Startups?

Investing in startups gives you a ringside seat to solutions for challenging problems or the development of new technologies.

Why You Might Not Want to Invest in Startups

Startup investing is not for everyone, least of all investors who want low risk and reliable income.

How to Decide If a Startup Is a Good Investment

How you approach startup investing will be unique to you and your financial situation. Experts recommend doing plenty of research before putting your money on the line. You should be able to answer these questions before making a startup investment:

Should You Invest in Startups?

The question of whether or not to invest in startups depends greatly on your circumstances. Are your finances in good shape? Are you struggling to pay down debt or hit your savings targets?

“When you think about an average person in the United States, who has probably not saved enough for retirement … I would not recommend that they invest in a startup as an alternative to putting money in a 401(k) or an IRA,” says Schryver. The potential for loss is simply too high.

That’s why in the past, startup investing was only available to accredited investors who already had substantial income and high net worths.

Now that crowdfunding platforms have made it possible for anyone to invest in a startup, experts recommend keeping the following principles in mind:

“My biggest concern with startups is that they are often most attractive to those who have fallen behind in saving for goals,” says Joel Cundick, a CFP in McLean, Va. “They may feel like a startup can be a home run that can help them catch up. These individuals may not be able to afford to take that risk and should first focus on building a diversified portfolioto do the majority of the heavy lifting.”

Odds are, the companies included in your diversified portfolio’s ETFs and mutual funds are investing in startups, which may give you some of the exciting startup growth you’re after anyway.

Source Forbes: