There is an obstacle for successful investing: it is difficult to find, access, vet, and invest in a successful small business. First, let’s review why it is important to find these investments. According to a study by Edward Wolff, an economist at NYU, the wealthiest 1% in the country has the majority of their net worth in small business equity. This does not refer to owning stocks or mutual funds, but a direct ownership stake in a business.
While the wealthiest Americans have a direct ownership in a business that pays them, the poorest have the highest percentage of personal debt and that costs them money. Which group do you want to move toward?
A direct investment is not as simple as buying shares in a company listed on a stock exchange. Publicly traded companies are audited and scrutinized by many different government agencies. When investing in a small privately-held company, you must perform these all of these functions yourself before you invest a penny. This process is called performing “due diligence” and you can find many checklists and ways to approach this online. But finding your own deal flow of businesses as potential investment candidates takes effort and personal interaction. And it is more difficult to find owners willing to accept modest investments under $25,000. Thankfully, recent regulation changes allow the less wealthy (non-Accredited investors whose net worth under $1 million) to invest in private companies.
There are now many investment platforms that screen investment candidates for new investors that are looking to invest $2,000 to $25,000 into a new venture. There are dozens of platforms for these investments – I just did a quick search and found a couple for businesses (EquityNet.com and Crowdability.com), or if you are more conservative, only professionally managed real estate investments (iFunding.com and AlphaFlow.com). Just like all investing, you also need to do homework on your potential investment website (they are called platforms) because not all investing platforms are equal; some have sterling reputations while some are mostly scams.
Any investment can be risky and all startups are extremely risky. However, if you are willing to learn about these types of investments before you invest, they could become the largest portion of your net worth over time, just like the top 1%.