Mr. Wonderful Endorses StartEngine. Here Are 3 Reasons to Avoid It Like the Plague

Mr. Wonderful thinks you should invest in start-ups. But should you?

StartEngine was founded in 2014 and, according to its website, it is the largest equity crowdfunding platform in the U.S. Equity crowdfunding is a relatively new option to raise money. It allows anyone to invest in private businesses, not just private equity or venture capital firms.

Shark Tank investor Kevin O'Leary, aka Mr. Wonderful, recently became a shareholder of StartEngine, as well as a strategic advisor. A renowned businessman who founded SoftKey, a software company that led to a $4 billion acquisition, O'Leary is advising StartEngine on how to best offer services to small businesses. He is also providing StartEngine with exposure to his large community of followers and encouraging the companies he invested in while on Shark Tank to use StartEngine for their funding needs. While StartEngine is a great way to invest in start-ups, there are three reasons you should be careful. Let's take a look at the company before we dive in.

What are the benefits of StartEngine?

StartEngine helps companies raise capital. It has funded more than 500 offerings with 760,000 prospective investors. Companies can raise their first funding round on StartEngine and later give their shareholders the opportunity to trade shares, all on the same site.

If you are looking to raise money, then StartEngine will provide a team to help you launch your offering and run advertising campaigns. StartEngine's community of investors contributes an average of 65% of your earnings. Companies can raise up to $5 million for a seed round and up to $75 million for a Series A round.

If you are looking to start investing, StartEngine allows you to support start-ups and early-growth companies that you think have potential to grow. Unlike Kickstarter, you aren't buying a product, but are buying a piece of a company and helping it grow before it potentially goes public. There are certain regulations that dictate how much you can invest, but the minimum can be as low as $100. StartEngine can offer investors a way to diversify outside the stock market.

What are the disadvantages of StartEngine?

StartEngine may be right for you if you are a start-up looking to raise capital or are an accredited or non-accredited investor who wants to invest in them. An accredited investor is someone who has a net worth of at least $1 million (excluding their primary residence) or earns at least $200,000 in income each year -- $300,000 if combined with a spouse.

A non-accredited investor is everyone else! Historically, only accredited investors were allowed to invest in these types of companies. However, here are three reasons why StartEngine may not be for you.

1. High failure rate

Investing in a start-up is risky. According to the Small Business Administration, as of 2021, only two out of three start-ups survive their first two years. By the fifth year, about 50% of start-ups fail, and by the 10th year, about 70% fail. Only one out of 10 survive in the long run. To make matters worse, less than 1% go public.

In other words, the chances that the company you invest in will become the next Amazon, Google, or Facebook are less than 1%. The chances you will lose your money are high, though, so it is important to be very cautious if you're looking to invest in start-ups.

2. Low liquidity

If you are looking for short-term gains or money you can easily access, then StartEngine isn't for you. Start-ups take years to become profitable. Even then you may not be able to find a buyer to purchase your shares.

StartEngine does offer trading on the secondary market, but it is only available to companies that have previously raised money on StartEngine and not every company that raises funding will trade in the secondary market. This means that you may not be able to trade shares that you purchased. The pool of investors is not as large as the S&P 500 index or other publicly traded companies and funds.

3. High fees

Many offerings on StartEngine are free for investors, since StartEngine charges fees to the company raising money. However, companies can charge a 3.5% processing fee to help offset these costs. This fee is charged to investors in addition to the price of the shares. StartEngine has investing competitors with lower fees.

Opening an account and buying shares on StartEngine's secondary market is free. However, if you are selling shares, you will have to pay a 5% transaction fee. Another con is that the valuation of the company you're investing in is set by the company itself. There are no negotiations, so it is possible that you may overpay for a stake in a company.

StartEngine was made possible by the 2012 Jumpstart Our Business Startups (JOBS) Act. This law gave companies more freedom in how they could raise funds, and it gave more companies access to raise capital and investors more opportunity to invest. However, due to the nature of start-ups, there are considerable risks when investing. It is important to consider your risk profile and find the right investment mix.