If you are considering investing in startups, read this first. There are many questions that our angel investing group gets every day and we'd like to address them so that people have the right answers to make the best investing decisions before making an investment in startup companies:
- What is a startup investment?
A "startup investment" is an illiquid, long-term bet in an early-stage company for which the goal is to help a company launch and thus create a greater return than a traditional public market investment. Startup investments are considered "private investments" where returns, according to Venture Capital news, can often take between 3 to 10 years before there is a meaningful exit, i.e. return on investment/ROI.
In our book, "The Investing King" we discuss how you should have the following information about a startup before you invest.
This is based on a startup valuation method called "The Blankenship Method":
People + Product + Process + Traction + Financials = a potential billion-dollar startup.
Make sure you identify the who, what, where, when, why and how, all factors driving a startup to success or failure, way before you invest in a startup!
- How will you make money for your investors?
The goal for startup founders should be to build something great, a company with a real mission, and to establish a long-term brand name and value for your industry... but it should also be about creating a solid return for investors in your startup. What's a good return? Aim for something in the neighborhood of 25 to 50% IRR, every year, for the lifetime of your startup. Compounded as interest and as a matter of mathematics, this could equate to 10x or even beyond at 100x the angel investor's original capital outlay in your company. Again, nothing is guaranteed, but always shoot for the moon!
And for angel investor groups and venture capital ("VC" firms), you need to be sure that your goal isn't to just make the general partners of a venture capital fund, rich... but rather you do your best to generate meaningful returns for anyone who believed in your investment decisions.
- How do investors get their money back?
The way investors "get their money back" is general through what's called an "exit" event. An exit event could be one of the following scenarios for a startup...
(1) IPO aka "Initial Public Offering."
(2) Sale to a larger entity.
(3) Merger into a larger or equally-sized company.
(4) An "acquihire" with a bigger company.
(5) Liquidation or closing shop.
I ordered these possible "money-back" scenarios, i.e. a return for investors, based on their typical largest to smallest return on investment ("ROI"). Typically, even though it's definitely the most rare event... and IPO will create the largest return on investment for angel and VC investors.
Just look at Facebook, where the original angel investors such as Peter Thiel, gained close to 5,000x his original investment of $500,000 into Facebook.
Sales to larger entities are next in terms of ROI as they are typically based on an EBITDA multiple (1 to 25x), which if you've taken my course on investing in startups, you know exactly what this is!
Of course, startups can fail... and many do without the right formula (mentioned above), but think positively and only invest what you're willing and able to lose in search of big-time angel investing returns such as Peter Thiel's and many other investors who found the hottest startups before they were "hot."
- How do you become an angel investor?
If you want to become an angel investor, I would recommend you be an "accredited investor." If you don't know what this means, the U.S. Securities and Exchange Commission has a great definition of an "accredited investor" and the standards required.
Ok, so you are not satisfied or you don't like my suggestion that you should have enough money saved away that losing a $25,000 to $100,000 (average angel investment) before angel investing?
Fine... go ahead and check out Reg A+ mini IPOs where public, non-accredited investors can invest. But I will never compromise my original suggestion and advice that startups are risky and you need enough money saved - in whatever form, crypto, bonds, stocks, ETFs, mutual funds - to transfer into startups where there won't be liquidity for years.
The good news though: if you do have enough capital to spare, the typical angel investments and VC investments net a higher IRR / ROI than public companies over a 10-year period. This is according to the Brookings Institute, and I was pleasantly surprised to research and discover this fact!
- What are the best startup companies to invest in 2018?
We're so glad you asked! We just posted our rankings of the best, hottest and fastest growing startups in America... from industries such as Biotech, Cybersecurity to E-Commerce, Fintech and mobile platforms.
If you ever have any questions about the angel investing and venture capital industry, don't hesitate to contact us or send us a note on our social media (Angel Kings Twitter) or LinkedIn for Angel Investors.
To the future, moon and beyond...