Startup Investing: The New Trend in Alternative Assets

By Tim Hoghten

By definition Angel Investors are individual investors. But the data shows a rapidly growing trend in accredited investors investing together. This is something that we have experience at 1000 Angels, the private investor network that connects startups with investors. So how are sophisticated investors putting their money to work today?

Trending Investment Strategies

Global investor surveys have shown that since the crises of the early 2000s more affluent and sophisticated investors are choosing to invest in partnership with each other. This is in contrast to going it alone in direct investments or publicly traded REITs and stocks.

Wikipedia notes that “in 1996 there were about 10 angel groups in the United States. There were over 200 as of 2006.” In a report on startup investing and “How the Rich Invest” Forbes notes that the Angel Capital Association counted more than 330 active angel groups in North America as of 2013. While the Wall Street Journal claims “very few start-ups” received angel investment in 2007, Stanford Graduate School of Business, Center for Entrepreneurial Studies proclaims “90% of all see and start-up capital” comes from angel investors. Just 2% of startup financing actually comes from venture capital firms. But angel financing has been evolving thanks to ‘Super Angels’ and crowdfunding.

How To Find Deals

Angels have organized themselves in a number of formats, including:

  • Pooling funds as hybrid super angel-venture capital funds

  • Geographically; by gravitating to startup hubs and fertile environments for new ventures such as Silicon Valley, New York, Austin, Miami, and even SW Florida.

  • By attending investor pitch events at coworking spaces, conferences, and even on TV

  • Local social gatherings providing angel financing to local entrepreneurs, like Miami Soup

  • Online via platforms like 1000 Angels

Five Reasons to consider Investing through Online platforms

  1. Safety

  2. Due Diligence

  3. Enhanced Investment Performance

  4. Deal Flow

  5. Fun

Participating in startup investing as part of an online platform adds in all of the factors which may be missing for investors. Groups investing in multiple deals mean better diversification. That means safety in investing. They also attract more deal flow than solo investors.

When investing with a group of likeminded and qualified accredited investors, due diligence burdens can be shared. This is especially true with today’s crowdfunding platforms which pre-screen and vet proposals. A savvy angel network invested on the ground floor significantly elevates the potential of a startup too. It means a base of invested individuals that may both provide additional cash injections without causing dilution, along with more introductions and ambassadors, all pushing to make the venture a success.

Let’s not forget fun. It can be lonely as an angel investor. Even if you are at the ‘top of the world’ by all other standards. You may not always want to travel or find you fit in with the other angels in your neighborhood. However, the buzz and camaraderie of investing alongside other angels online can prove to be both more profitable, and fun.

In Summary…

Online platforms are trending. They can add a substantial opportunity for investors, boost the odds of success, and lift ROI. There are plenty of options for participating, even if you live remotely or are a full time global traveler. Plus; investing with others just makes it more meaningful and enjoyable.

Try it out…

 

Startup Investment 101: Investment Rounds Explained

By Michael Whitehouse

Investment rounds are an essential part of the startup investment journey. Something that we state to our members at 1000 Angels, the private investor network that connects startups with investors, is that If you are a new investor in the startup marketplace, then you will need to quickly familiarize yourself with each round. You will encounter them progressively as you negotiate a deal either with a startup founder, or as an investor looking to attract further capital to an existing organization. Either way, an understanding of each round and why it exists is critical.

 Photo credit: http://businessenglishpod.com/

Photo credit: http://businessenglishpod.com/

The terminology used to describe these investment rounds can seem daunting, but it needn't be. At 1000 Angels we want to help new and seasoned investors as much as we can to find startup opportunities.  A big part of this is understanding the various rounds of investment out there so that they may be negotiated with ease and confidence.

With this in mind, let's take a look at some of the most common investment rounds seen in the startup sector, summarizing their function and why they're important.
 

1. Seed Investment

This is the first type of investment round on offer through a startup. It is a preliminary investment stage which is geared towards helping a startup founder establish the direction and goals of their business. The seed stage of any organization is clearly embryonic and is therefore more speculative than other rounds of investment. It is there to establish the startup as a going concern, in many cases going as far as to bring a product to market.

A seed investment should aim to achieve one of the following:

  1. Product Identification: A startup founder may have an idea about the type of product or service he/she hopes to develop, but seed investment is usually a big part of cementing design elements and settling on a defined product for launch.

  2. Marketplace Orientation: At a seed stage a startup may be looking to carry out research into available marketplaces, understanding the competition and how best to sell a product or service within that niche.

  3. Demographic Targeting: It may still be necessary to identify the specific demographic or target audience for a product or service. This might include market research and other exploratory measures to define this more clearly.

  4. Team Creation: There is the possibility that a seed investment could be used to establish a working team beyond the founder(s) of the startup. This could be needed in order to bring the right expertise needed to create or launch a product.

Seed investment is not always necessary as many startup founders will have much of the infrastructure in place before seeking capital. In some instances, however, this type of investment can be critical to bring a startup idea out of its infancy.
 

2. Series A Investment

This type of investment is often the first encountered when the seed stage does not require outside funding. At this juncture most startups have a strong defined idea of what the central goal is behind any product or service and may even have launched them commercially.

Series A investments should achieve one of the following:

  1. Distribution: Optimizing the way that advertising is disseminated and products/services are distributed is a key part of series A investment. This can lower overall costs or increase sales; hopefully both.

  2. New Markets: Launching a successful product in a new region can be costly. This is why series A investment is often sought by startup founders. New markets can be opened up using this injection of capital, engaging with different demographics and furthering brand visibility in the process.

  3. Stage 2: The primary function of a series A investment is usually to take a company to the next level. Capital raised during this round is often used to implement a new business plan geared towards meeting defined business goals. This could include launching a new product or reaching a new sales target.

  4. Shortfall: Series A investment can also be used to make up for a shortfall in capital. A startup may still be a promising investment opportunity, but unforeseen expenses can use up available funds, and so another round of investment might be required to offset this.

 

3. Series B Investment

By the time Series B investment is being actively pursued a startup is usually well on its way to being a truly established business. Production is well managed, advertising in in full flow, and customers or users are actively purchasing an associated product or service as planned. While scalability is a factor in Series A investment, here it is the main focus. This includes:

  1. Team Expansion: As the company grows it is likely that more employees will be required in order to ensure smooth running of the business. This may involve an initial outlay beyond using sales to pay for salaries. It is likely that employees will need new equipment, office space etc., in order to perform effectively.

  2. Globalization: A startup might be selling in one or two regions, but this is often the stage where capital is needed to establish a company on the global stage. Trading in every region can require a significant outlay depending on the nature of the business, and this is exactly why Series B investment rounds exist.

  3. Acquisitions: If a startup has grown sustainably, it may be in a good position to bolster its operations through acquiring another business. This could be in the form of a competitor, or perhaps a related technology or patent which could be incorporated into the company. Rather than using its own reserves it can be beneficial to pursue new investment to fund such an acquisition or merger.

 

4. Series C Investment and Beyond

There is no technical limit to the number of investment rounds a startup can pursue. This depends heavily on any anti-dilution agreements previous investors have acquired, ensuring that their stake is never watered down. As each investment round progresses more and more equity from the company is released, so they are normally not entered into lightly from both investor and founder perspectives.

Understanding the various machinations of each investment round will help a potential investor decide on the most appropriate course of action. With the information contained in this article hopefully such rounds will no longer appear confusing, and so can be entered into confidently and with purpose.

The foregoing article is for educational purposes only and should not be construed as legal advice.  The information described in the above article is just an example of fundraising rounds and may not apply in every deal.  There may be overlap between specific rounds.  The round terms themselves, “Seed,” “Series A, B, C,” etc., may also be interpreted differently by founders, investors, and institutions. Prospective investors should carefully review the documents of any offering which they are considering for purchase and should consult with their legal counsel and professional advisors.

8 Ways to Identify the Perfect Startup Investment

By Michael Whitehouse

If you are considering investing in a startup company offline or online with platforms like 1000 Angels, a private investor network that connects startups with investors, the sheer number of what’s available can be both daunting and comforting. On one hand there are so many startup founders out there that it is very difficult to identify which ones have the best chance of success and producing a profit for investors. On the other hand, the large quantity can be looked at as a sea of opportunities just waiting to be explored.

 Photo credit: http://www.valley.bc.ca/

Photo credit: http://www.valley.bc.ca/

But how can you identify the right investment opportunity for you when facing such an onslaught of possible avenues? For even the most experienced of investors this can prove difficult. There are many startups out there; but the key is separating those that meet your investment criteria, from those that do not.

With this in mind, let's take a look at 8 key aspects of the “ideal” startup. Most startups will not meet all 8 criteria, but these are considerations when making your investment decision.  There is no guarantee that an investment will meet any of these objectives, rather objectives that you as an investor want to think about when considering an investment.
 

1. Consumer Need: An important aspect of any startup is whether a resulting product or service will sell or solve a particular problem.  A slick business plan and charismatic founders will help, but the bottom line is that if the product does not sell and generate revenue, it is useless to you as an investor. Of course no product or service is a sure thing, but what is certain is that only those which fulfill a demand have any chance of making it. Does the startup offer something people genuinely want? Will it solve some need which is not already being met? If the answer is yes, then there is a chance that such a startup could prove successful when finally launched.

2. Exit Strategy: Does a startup have a clear exit strategy in place? In other words, does the business have a definitive timetable or pathway towards returning an investor's money alongside an agreed portion of generated revenue? It's important that you as an investor know how you are going to make your money back with a suggested timetable in place. Without this there is little point providing financing because there is no direction or plan to help you generate returns.

3. Clear Ownership: As an investor you must have a comprehensive understanding of who owns the startup and all of its intellectual properties. If there is any question regarding patents, copyright, or ownership of assets then investment should be withheld until those issues are legally settled. If they are not then your investment could prove worthless.

4. Management: Depending on how “hands-on” you wish to be as an investor, having a reliable and astute management team in place to oversee a startup is essential. Without this, such a project cannot thrive, operate efficiently, or meet its goals on time. In some cases a new management team can be brought in as part of an investment deal, but founders often prefer to keep their existing talented team in place. Some startup founders have great ideas and big dreams, but if they lack the administrative talents to make them happen, you as an investor could pay a hefty price.

5. Sustainability: Some startups by their very nature may be “flash-in-the-pan.”  In some circumstances this might still prove to be a solid investment should there be a swift exit strategy in place, but ideally a startup should be able to demonstrate that it can be sustainable; a brand which will generate profits for many years. If the startup cannot demonstrate sustainability, then there won't be many investors willing to purchase that equity from you, at least not in a way which will maximize profits.

6. Standout: Unless uniquely innovative, the chances are a startup will have competitors. These could already be operating or trying to launch into a new niche at the same time. A startup must therefore demonstrate why it stands out from the crowd; showing why it will be a strong competitor to other similar companies within that niche. If the startup cannot separate themselves, then it may not be wise to invest in such a project.

7. Relationship: Startup founders must be willing to work with investors and be communicative at all times. A project might have a great idea at its heart, but any working or financial relationship which may become fiery, destructive, or stressful, may not be worth investing in. There has to be a mutual respect between founders and investors, each knowing their role in the startup and willing to build constructive relationships throughout.

8. Expertise: If a startup is the product of an accelerator program, incubator group, or can access the advice of market experts, it is may start with a solid foundation, This knowledge can be used as a safety net, providing peace of mind for investors knowing that advisers with the relevant expertise and skill-set are available to help steer the startup in the right direction, but does not guarantee execution by the company.


As stated above, most startups won't possess all of these facets, but a strong combination of a few of them may produce a successful investment opportunity.

Is Startup Investing Right For You?

By Tim Houghten

Startup investing may be right for the many individuals in the U.S., if it is done well.

Why invest in startups offline or online via platforms like 1000 Angels? What role should startup investing play in your financial plan? What’s the smartest way to embrace this type of investment?

 Photo credit: forbes.com

Photo credit: forbes.com

Three Reasons to Add Startups to Your Portfolio Today:

  1. Growth

  2. Diversification

  3. Impact investing

Replicating Success

Matt Theriault, host of the Cash Flow Savvy podcast on iTunes, poses that if you emulate what the wealthiest are doing, you should get the same results, and vice versa.

So what are the wealthy doing that is working? A quick review of the 2015 Forbes list of the richest billionaires shows that virtually all members are invested in businesses in some aspect. A huge percentage have invested in startups or have launched their own. The 2015 Midas List highlights this even further.

Then just look at what the most notable individuals, investors, companies, and fund managers are investing in today. Whether you are a fan of Jim Goetz, Mark Cuban, Barbara Corcoran, Warren Buffett, Peter Thiel, Google, or Facebook; there is a common thread of investing in or acquiring startups and growing business ventures.

The New York Times reports that while many individuals may not be aware of it, some of the  performance of their 401ks and mutual funds might already be credited to startup investing. Big name funds like Fidelity Investments, BlackRock, and T. Rowe Price have already been incorporating shares of startups like Uber, Pinterest, and Airbnb into their pools.

Direct investments to private companies give individual investors more control versus pooled vehicles, may reduce investor expenses, and when purchased through self-directed IRAs, may be a tax efficient way to allocate.

A Quick Caveat

While the new SEC Regulation A+ has cast aside the velvet rope to allow more individuals to participate in the benefits of startup investing, and more ventures might get to IPO faster, every new venture has its risks. Early Stage investing across a number of startups may assist in reducing risk, and may be less risky than trying to build your own business from the ground up. But there are no guarantees of multi-billion dollar valuations and IPO exits.

Startup Investing Done Right

Here are five tips to leap the laggards to successfully invest in startups for maximum results and safety:

  1. Explore the benefits of angel groups and networks in your area.

  2. Hone in on curated and pre-vetted startups for investment opportunities .

  3. Dedicate an appropriate percentage of your portfolio based upon your personal risk tolerance

  4. Find a startup investing platform that provides convenience, efficiency and effectiveness.

Read this advice for being a successful early stage Investor.


This site is operated by Onevest Corporation. Onevest does not give investment, legal or tax advice. All securities listed herein are offered through North Capital Private Securities Corporation ("NCPS"), a registered broker-dealer, member FINRA/SIPC. Onevest has taken no steps to verify the adequacy, accuracy, or completeness of any information presented herein. By accessing this site and any pages thereof, you agree to be bound by the Terms of Use and Privacy Policy. Only Accredited Investors can invest in securities offerings posted on this website. All accredited investors using the Onevest platform must be verified as to their accredited status and must acknowledge and accept the high risks associated with investing in privately held companies and early-stage ventures. These risks include holding an investment for periods of many months or years with limited ability to resell, and the risk of losing your entire investment. You must have the ability to bear those risks. To the fullest extent permissible by law, neither Onevest nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising out of any error or incompleteness of fact or opinion in the presentation or publication of the materials and communication herein. Hyperlinks to sites outside of our domain do not constitute an approval or endorsement of content on the visited site.

5 Tips to Manage Relationships With Portfolio Companies as a Startup Investor

By Michael Whitehouse

You've found that perfect startup opportunity on 1000 Angels, the private investor network that connects startups with investors, or somewhere else, decided to invest an amount in the project, and now it's time to help that investment flourish. But just how do you move forward as an investor and maximize your impact on a startup? How can you ensure that you are having a positive effect rather than a detrimental one?

 Photo credit: http://blog.topazlabs.com/

Photo credit: http://blog.topazlabs.com/

The key is to foster a positive relationship with the founders of the startup directly. This doesn't mean a personal one, but rather a relationship built on a clear understanding of what everyone brings to the table. Depending on how hands-on you intend to be as an investor, you'll need to recognize that your startup will only operate effectively if you make best use of everyone's talents. It may be that you can only contribute in a small manner, or, if you're lucky, the company runs effortlessly and doesn't require your input at all. Regardless, your relationship with the founders of the company and any management team in place, is going to be pivotal in ensuring your investment has the best possible chance of success.

With this in mind, let's take a look at some key areas where you as an investor are likely to play a role.

Regular Communication

As an investor you'll want to know that your finances are being used effectively. This requires communication with those managing the startup. Some investors will be happy to interact with management a few times a year, while others will want to keep a handle on things and stay in the loop every week. Whichever approach you take, open, frank, and respectful communication will go a long way to avoiding any disappointments or misunderstandings regarding the direction of the project.

Communication creates trust and ensures that everyone is on the same page, pulling in the same direction. As an investor there may be times that you disagree with a management decision, and in many cases you might be unable to do much about it if you do not have a controlling stake, but even in this situation at least you can be aware of where your money is being spent and how things are proceeding. All you can do is give your input, and the only way that input can be truly effective is if it is based on an informed opinion, one completely aware of what is going on within the business itself.

Business First

Unless you own the majority of a startup – and most investors are not in this position – it is important to recognize that, while you have invested money in the project, that you are not running it. The founders who first created the company or had that amazing product or service idea which attracted your interest, generally have a good idea of how to run the business and how to steer the ship. This is where you will have to put your ego aside and put business first. You might want to be involved in every decision, but you have to be honest – if the management in place are more knowledgeable about an associated industry or the daily workings of the business, the chances are they will be better at managing it than you will. 

The above, however, is not always the case. In some circumstances a management team may be inadequate or not up to the task. If that happens, then as an investor you can raise your concerns, but even in this circumstance it will result usually in bringing in a new manager to oversee the project. Ego is one of the root causes for a business to flounder, so don't get caught in the trap. Know when to step in and get involved, and know when to get out of the way and let others do their jobs. Always put the business in its entirety before any pride or ego stops your investment from being a success. 

Set Goals

We've talked about this previously in our article about how startup founders can better manage their time, but setting goals can be something which will set your mind at ease as an investor as well. By having a schedule and a clear plan of milestones for the business to meet, you can better measure where performance is high or low. It's important to remember, however, that these goals should be decided on collectively, especially if you have little knowledge of an industry or the workings of the business. It may be that something which you believe should take a short time, actually requires more substantial allocation of resources. What's important is to come to an agreed, fair, and reasonable timetable for goals. If, one the other hand, you have the experience and knowledge required to make a judgment on timescales, then absolutely make your voice heard.

A goal could be something which could take a year, a quarter, or a day to reach. Managing this progression brings on nicely to progress updates.

Progress Updates

Tying together our previous points about communication and goal-setting, progress updates are a great way to set everyone's minds at ease. They create a sense of urgency and feeling that the business is moving forward, even when accomplishments are perhaps incremental rather than earth-shattering. If you have a business goal which will take 3 months to achieve, receiving regular updates from the business about the progress each week or month will allow you as an investor to know whether a milestone is actively being worked towards.

A set schedule for progress updates can really make a difference and facilitate great organizational communication. It can help identify where there is a problem months before it would otherwise rear its ugly head. As an investor, the real balance to strike here is between receiving so many progress updates that they become redundant or even annoying to founders and management, and not receiving enough to get an accurate idea of where the business is heading. Sensibly regular progress updates which genuinely inform are what should be aimed for.

Positive Relationships are Productive Ones

The above mentioned aspects of investor-management relationships are ones which should be looked on as critical. You, as an investor, should try to foster a positive relationship with those running any startup you are connected to, in a way which uses your talents, and theirs; allowing the business to succeed off the back of good communication, planning, and use of available skill-sets.


This site is operated by Onevest Corporation. Onevest does not give investment, legal or tax advice. All securities listed herein are offered throughNorth Capital Private Securities Corporation ("NCPS"), a registered broker-dealer, member FINRA/SIPC. Onevest has taken no steps to verify the adequacy, accuracy, or completeness of any information presented herein. By accessing this site and any pages thereof, you agree to be bound by the Terms of Use and Privacy Policy. Only Accredited Investors can invest in securities offerings posted on this website. All accredited investors using the Onevest platform must be verified as to their accredited status and must acknowledge and accept the high risks associated with investing in privately held companies and early-stage ventures. These risks include holding an investment for periods of many months or years with limited ability to resell, and the risk of losing your entire investment. You must have the ability to bear those risks. To the fullest extent permissible by law, neither Onevest nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising out of any error or incompleteness of fact or opinion in the presentation or publication of the materials and communication herein

Top 5 Tips for Being a Successful Angel Investor

By Tim Houghten

What does it take to be a successful angel investor today?

This is the question that we get asked all the time at 1000 Angels, the private investor network that connects startups with investors. Becoming an angel investor has the potential for being insanely profitable, personally rewarding, and even bringing about essential world change. However, as billionaire Shark Tank investor Mark Cuban recently noted in a viral interview, in order to realize these results and sustain them, you have to know what you are doing and have some good luck along the way.

There are some finer mechanics to funding startups and including covering yourself legally, but the bulk of the matter can be boiled down to these five crucial elements…
 

1. Deal Flow

There are certainly some advantages to investing more money and energy in fewer startups.  However, It is important not to spread yourself too thin. Whether needing broader diversification, more opportunities to put your pent up capital to work in, or simply more choices of startups to select from, deal flow is important. Having options is a good thing.
 

2. Curated Investment Opportunities

More deal flow is great, but the type of deal flow you are receiving as an independent angel investor can be even more important. You may be only interested in healthcare and medical related startups, or early stage opportunities versus those on the brink of IPOs. There is a lot to choose from with an estimated 400 million plus entrepreneurs, often with multiple startups. For example, Tanya Prive (@TanyaPrive1), CEO and co-founder of 1000 Angels, says “only 3% of the startups that apply ever make it in front of our investor community.” This type of deal flow means preserving your time, focus,  energy, and ensuring you are targeting the best opportunities. You should expect entrepreneurs you fund to maximize their time, so why not lead by example and be efficient with yours when looking for opportunities?
 

3. Selecting the Right Matches

Even after narrowing the field down to quality startups with good chances of success, it is still important to select new ventures to invest in that are a good match for what you care about. For some angels it may be just about the money. However, you can take a more active role that will help the venture beyond simply providing dollars, such as by making introductions and being involved as an advisor. Cause driven opportunities and impact investing are also ways to be passionate while maximizing your investment.  So what do you care about? What drives you?
 

4. Invest in What You Know

The very nature of startups is to disrupt and change things. This can make it challenging to find a new venture that angels understand. However as Warren Buffett consistently reminds us, it is critical to “invest within your circle of competence.”

Try looking for startups with an element you do get. Perhaps it is a tech startup solving access to a healthcare challenge you are familiar with. Maybe it is a technology solution you are passionate about that is being applied to an industry you have experience in.

 

5. Invest in Extraordinary Entrepreneurs

There are thousands of new ideas and and concepts springing up daily. The difference maker often however is not the idea, but the strength and energy of the founding team. Follow the biographies of the most notable entrepreneurs and you’ll find one common thread. It is not IQ or where they went to school. It is how dedicated and relentless they were once they latched onto a mission. It is those that are committed enough to keep on going through the challenges and tougher days that will stick it out long enough to experience the fruits of their labor. Talent and experience plays a part, but without toughness and grit to get you through difficult times, those founders may not survive. Even a heavyweight investors like Mark Cuban can have run into these issues, as he did with Motionloft. It is key to  find the right business partners along with the business idea.
 

Summary

Select both great founders and great ventures to back.  Look beyond making money, stay alert to the boundaries of your circle of competence, and establish curated sources of deal flow.


This site is operated by Onevest Corporation. Onevest does not give investment, legal or tax advice. All securities listed herein are offered through North Capital Private Securities Corporation ("NCPS"), a registered broker-dealer, member FINRA/SIPC. Onevest has taken no steps to verify the adequacy, accuracy, or completeness of any information presented herein. By accessing this site and any pages thereof, you agree to be bound by the Terms of Use and Privacy Policy. Only Accredited Investors can invest in securities offerings posted on this website. All accredited investors using the Onevest platform must be verified as to their accredited status and must acknowledge and accept the high risks associated with investing in privately held companies and early-stage ventures. These risks include holding an investment for periods of many months or years with limited ability to resell, and the risk of losing your entire investment. You must have the ability to bear those risks. To the fullest extent permissible by law, neither Onevest nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising out of any error or incompleteness of fact or opinion in the presentation or publication of the materials and communication herein. Hyperlinks to sites outside of our domain do not constitute an approval or endorsement of content on the visited site.

Identifying the Right Investor for Your Startup

By Michael Whitehouse

 Photo credit:  http://blog.acrowire.com/

As we tell our members at 1000 Angels, the private investor network that connects startups with investors, a startup lives and dies from its funding strategy. If the correct approach is taken and the right form of investment is secured, then a startup can thrive and establish sustainability. On the other hand, if the wrong type of funding strategy is implemented, a startup may face a precarious future, resulting in stagnancy and, in some cases, even liquidation.

What's right for one company may not work for another. If your startup project requires a continual stream of financing for 1 to 3 years before becoming self-sufficient, for example, then a one-off investment might not cover what you need. Other types of investments may require connections, business and advertising know-how, etc. Investors offering finance exclusively may not be adequate for your company's needs.

It's clear that implementing a funding strategy specific to your project is essential. In order to do this, you'll need to understand the types of startup investments out there and identify which type will best serve your company.

 

Startup Funding: Know Your Options

There are a growing number of funding options out there, even hybrids of popular choices, but for simplicity’s sake we can solidify these into seven investment strategies for your startup. Once you're familiar with each, you will be better placed to choose which is best for you and your business.

Let's take a look at them below:

  1. Family & Friends: It may seem obvious, but to approach friends and family can be a great way to fund your startup; you will not have a serious creditor or investor hanging over your head and can quickly gain access to funds. There is more freedom with this option than most others. You won't need to explain all of your managerial choices in most cases, and often friends and family will be happy to support your project in any way they can as long as the investment amount is reasonable.

    One of the difficulties of approaching friends and family is the rarity and difficulty of raising over $100,000. Not to mention the personal issues which can arise from mixing business with friendship. All investments, even from family, should be documented in writing. There must be an understanding that no investment is a sure thing and that there is a chance the investment might not be returned if the project fails. Of course, if it succeeds, then your friends and family will share in the profits which might offset this concern.
     

  2. Angel Investment: An angel investor provides capital for a startup in return for either equity or convertible debt. Often, such individuals are contacted during a second round of investment after family and friends have been approached. They can provide more lucrative investments, sustaining a business before moving on to more substantial sources such as venture capital. Angel investors use their own funds and are most commonly involved either at the seed stage of a startup to help the business find its feet, or during difficult times when cash flow is an issue.
     

While this form of investment is perfectly valid, you should consider some of the implications of going down this route. Angel investors often seek an active role in the startup they are investing in. They also are unlikely to invest more than once unless they see returns in the pipeline, so if you need more than a one-time cash injection, another funding strategy might be preferential.

3. Business Plan Competitions: Often overlooked by startup entrepreneurs, applying to a business plan competition involves submitting your business plan to be judged by a panel against others, with the winning entry receiving some form of funding. Such a panel normally represents a group of investors who are willing to supply capital to those with the most attractive business plan. There are many such events like this worldwide, but the terms of submission must be explicitly followed. A business plan competition might ask for hands on involvement in the startup in return for investment; if this is not something you wish to entertain, then ensure that you are applying for those competitions without such stipulations.
 

There is usually nothing stopping you from applying for as many business plan competitions as you can. If you yourself are not best equipped to create a dazzling plan, then it might be worth hiring someone to do it for you on a one-off basis. This plan can then be submitted to any competition you wish.

4. Accelerator and Incubator Programs: These programs are designed to foster startups during the seed stage for a defined period. Good example of this could be TechStars. This usually occurs over a few months and includes office space, funding, access to B2B or B2C networks, and mentoring. Experienced businesspeople will therefore help shepherd your startup at the beginning and get it off the ground. This is typically done in return for equity in the business.

Working with the right businesspeople can be a valuable opportunity for your project, but it requires careful consideration. While you gain access to the experience and capital of someone who knows how to make a startup a success, this is given in exchange for a permanent stake in the business which many mentors may sell to other parties outside of your control, as soon as a profit presents itself. The emphasis here is often on the quickest turnaround time possible. If you are looking for a co-founder and investment of time then check CoFoundersLab.

5. Bank Loan: Most banks offer loans to small businesses. All that is needed to acquire a loan is a good credit history, a business plan clearly defining costs and how profits will be made, and a well researched overview of the marketplace for your specific product and/or service. If the business already has capital of its own this can hugely help in persuading a bank to approve funds.

As with any loan, there are dangers which should not be overlooked. If a loan is not paid on time then it can put a startup into a precarious position. Any creditor will expect to be repaid the amount owed; if they are not they will consider legal proceedings which could destroy your business. High interest rates can also be an issue, so it’s critical that you try to secure the best deal available before agreeing to take a loan. A credit union may be a better option, as they will provide capital to members for a much lower annual interest.

6. Crowdfunding: There is no doubt that crowdfunding has changed the way fundraising works. By showcasing the concept behind your startup and offering perks in return for money, rewards-based crowdfunding can provide substantial amounts of capital. The greatest advantage here is that it isn't really investment; at least not in the traditional sense. You receive money from those wanting to support your project, but contributors do not hold a stake in the business. They expect to see the project come to fruition, but there is no legal obligation for this to occur. Crowdfunding can attract hundreds of thousands, and in some cases millions, of dollars worth of capital without giving away one single share in the business. Equity-based crowdfunding platforms like 1000 Angels provide a chance to reach a slightly wider pool of investors, but still raise a good chunk of capital in exchange for equity.

There are downsides to crowdfunding, most pertinently in terms of reputation. If you do not bring the startup to a position where it can produce its goods or service, or you do not honor perks/commitments which were traded in return for investment, then your brand and you personally will acquire a toxic reputation. This can negatively affect future ventures and can all but destroy any faith the consumer might have had in your startup. For this reason, crowdfunding should not be entered into lightly.

7. Venture Capital: One of the most desirable forms of investment for a startup is to attract the interest of a venture capital firm. Most VCs represent a pool of investors who are willing to commit substantial amounts of capital to the right project. With a huge amount of available funds and access to expert consultants who will help your business, venture capital groups provide an enticing option to startup entrepreneurs looking for a large round of funding.

Unfortunately, venture capital firms tend to require a big return on their investment. This can be a large portion of profit as well as a substantial stake in the business. Caution must be taken here; if too much equity is given away, you might find yourself out of the decision making process for the startup that you created. Furthermore, venture capital firms stick to rigid guidelines when it comes to due diligence. It can take them months to decide whether or not a startup is worth investing in, so they are not the ideal choice if you are seeking a quick injection of finances.

Which is the Right Investor for Your Startup?

Unless you have access to a high level of personal wealth, securing investment for your startup is a must just like we outlined on our piece discussing thoughts on hustling stating the differences of why some founders win and other loose. Even after a certain period of bootstrapping, there's no other way to get to the next level. Deciding on which type of investor to approach is entirely up to you. They must be the best possible option for your business and your financial situation. Get that decision right and your startup could grow exponentially, from a small project to an internationally renowned brand.


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JOBS Act Title III: 3 Changes Startups Should Be Ready For

Title III of the JOBS Act will dramatically transform the way startups raise capital and interact with investors. The proposed regulations, as written today, permit non-accredited investors to invest in startups under strict limitations: for individuals earning income below $100,000, one can invest a maximum of $2,000 or 5% of annual income, and for income over $100,000 but less than $200,000, one can invest a maximum of 10% of their annual income in any given twelve month period. Startups will have the ability to appeal to mass investor audiences in ways they could never imagine before. For example, companies with a popular app may choose to solicit their own users – “Like our app? How about you purchase some equity in it?” The implications are yet to be actualized, yet many speculate the new regulations will completely revolutionize the startup and venture capital industries.

With this major shift coming in the startup investing landscape, here are 3 things startups should be prepared for:

Wine and dine investors on a larger scale

A great Kickstarter project usually offers an outstanding product for its funders. This is largely because Kickstarter campaigns are donation-based, not equity-based, and the funder’s return on investment (ROI) is primarily the physical product or service itself offered by the company in a timeframe of 3 - 8 months on average. On the other hand, the ROI on equity-based investments is often much further down the road (often 5-8 years or more), so founders need to make sure their investors feel secure today. This often translates to startups spending a considerable amount of time with their investors engaging them in many one-on-one conversations.

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For equity crowdfunding post Title III though, offering to chat over a coffee isn't going to adequately scale. Startups need to insure that individual investors feel comfortable and trust the team and product to deliver their ROI. Therefore, startups may have to turn to measures with a mass appeal like investor conference calls, free prototypes, and company related promotions for their investors. This might play out well for consumer product companies or media and entertainment businesses that interact and cater to the masses as a part of their business, however, B2Bs may need to be a bit more creative.

Your investors are your best advocates and advisors - now you may have a lot more of them

Venture capitalists are often more confident in their own backyard.  Investors prefer to be a master in their respective industry to know all the players, tricks, and ins-and-outs of a specific industry whether it be mobile, cloud, healthcare, or hardware devices. The actual investment only marks the beginning of a long-term intimate relationship between the parties with mentorship, feedback and oversight. With equity crowdfunding post Title III, startups will likely have a larger number of investors, and the founders can leverage the benefits of this network. Say for example, a healthcare startup runs a crowdfunding campaign and attracts physicians to invest in the company; the startup then gains access to free – assuming the doctor stands to benefit from the startup’s success – and much needed consultations from both industry experts and end users.

On another front, investors are sure to advocate in any capacity to help out their startup and sage investment. From downloading the company’s app to speaking about them at tech conferences, the startup instantly gains a very strong and influential fanbase who openly praises their efforts. A larger network of investors means more people talking about your company, telling their friends and colleagues, and sharing your company on social media.

The lean startup can put on a few pounds early on

Most businesses and ideas are initially funded from the founders themselves, a bank loan, and/or a network of friends and family. Title III will both help formalize the process of raising a seed round from this network, as well as allow an even broader pool of both accredited and non-accredited investors to participate. According to a 2012 report  from the Angel Capital Association, there are roughly 8.7 million individuals that are currently eligible to be accredited angel investors in the United States. With the introduction of non-accredited investors - the remaining 97% of the population -  the angel investment market has the potential to quickly dwarf the existing VC market, simply by the sheer mass of investors that will be able to participate.

Founders will have the ability to raise more capital at an earlier stage before the big VC firms are willing to look their way allowing some startups to scale faster earlier without the pressure of running out of money.  Obviously, these startups would still need to be “lean” in the sense that their investors wouldn’t want them to go on a shopping spree, but at the same time more startups will be able to weigh the cost of selling equity early on in order to grow rapidly in the fast-paced and ever evolving industries of today.