Investing in a venture capital is a longer process than opening a brokerage account for investing through bonds and stocks.
Your Guide to Investing Through Venture Capital in Your IRA
Step 1: Know the Risks and Limitations of Investing Through Venture Capitals
Venture capital or investing through private equity of startup businesses are often rewarding but also very risky in nature. These investors are often called angel investors. Since businesses seeking such funding do not have the ability to secure traditional loans, they rely on unsecured loans provided by angel investors to set up their companies. Before deciding which venture capital to pursue, do your research and make sure to read reviews and forums about angel investing.
Step 2: Identify the Business in Which You Want to Invest
When looking for the company to invest in, two of the most important things to consider are the management team and the market trends. The team of managers plays an important role in every business. By knowing the people who run the business and taking note of their past experiences, you will get a good picture of how they will handle the current business. A manager who has a proven record of success will more likely know how to make the business successful.
As a venture capitalist, you need to be familiar with the different market trends or be able to determine those companies with potential for success. The products or services pretty much sum up the competitive advantage of a business. Take time to review the projections and assumptions of the business. This will give you a better understanding of whether a business is worth investing in or not.
Step 3: Determine Your Qualifications
There is more you can do with your IRA account than investing in stocks and bonds, or even investing in real estate. You can also use your IRA to invest in private equities as an angel investor. While there are really no proper qualifications for becoming an angel investor, you need to at least have the right amount of money in order to invest. Some angel investing platforms such as Blackstone Group, Carlyle Group, and KKR set their own income criteria which you need to meet before you can invest.
However, in the case of self-directed IRAs, there are self-dealing rules you need to follow. This rule states that you are not allowed to be a key investor in a business. This basically means you are not allowed to invest more than 50% worth of a startup business’s total investment. Additionally, you are not allowed to invest in businesses which belong to your spouse, parents, or children. You can, however, invest in companies belonging to other relatives, friends, or a business associate.
Step 4: Look for a Custodian to Execute Your Investment
In order to invest through venture capital using your IRA account, you need the expertise of a custodian. This custodian will provide appropriate record keeping services for these businesses, and may also help you find possible alternative venture capital investments. Additionally, it is part of a custodian’s role to execute investment directions from the IRA account holder. It is their role to administer and make sure that the tax deferment of an IRA account is being preserved.
Investing your IRA through bonds, stocks, real estates, or digital currencies allows you to diversify your retirement. Investing in venture capital offers even more opportunity to diversify, plus the opportunity for significant returns. Just keep in mind that an investment, no matter how appealing, also comes with risks and downsides. Make sure to do your research first and, when possible, consult a financial advisor before coming up with a decision.
Do you have any experience investing in a venture capital? Share your thoughts with us in the comments section below.