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Startup Investing: 3 Things Every Investor Must Know

Thinking about how you can invest in startups? 

As our funds and team are now filled with top angel investors and venture capitalists, we are happy to tell you learning how to invest in startups is the single most important and valuable thing you will ever do once you have the capital to deploy into top startups.

Here are three things about venture capital and startup investing you need to remember: 

1) Invest in people.  Every founder should be vetted and you must know their backstory, before you invest. But at the end of the day, a company is nothing more than the founders and CEOs who run them, which is why you must always consider who's in charge before investing.

2) The product must fill a need or change consumer psychology/behavior.  If the product is merely a mirror of an existing idea or concept, and lacks originality of ingenuity, it's not the right fit. 

3) Invest, and be patient.  Startup investing at Angel Kings is profitable, big league!  However, we do want to be clear that our goal is to invest in the first seed rounds in companies that will go public vis-a-vis an IPO.  Thus, this process can take 3 to 7 years on average (sometimes longer), but the potential for a 100x return does exist... and sometimes greater.

Be sure to subscribe to our Newsletter on How to Invest In Startups by visiting our homepage (AngelKings.com).  We have tons more to share with you soon.

The Angel Kings Team

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The photo herein is a picture of investing expert Ross Blankenship meeting with InDinero CEO Jessica Mah.  Blankenship is a successful investor in top startups like InDinero and believes firmly that Mah represents rule #1 about why you should always look to people first, before you invest!

The X Factor: Invest in People Surrounded By Equals Or Those Greater

the-x-factor

Let's discuss the #4 of the Angel Kings' four must have personality factors, otherwise known as our "PASS" formula.  Here's a reminder of what those four personality factors are:

  1. Passionate, but with a purpose.
  2. All-in to their endeavor.
  3. Shows no fear of failure.
  4. Surrounded by equals or those greater.

Surrounded By Equals Or Those Greater

Not one startup founder has created a successful company without being surrounded by amazing talent. 

When we invest in startups through Angel Kings, we don’t just get to know the startup founder, but we also get to know the team.   We also don’t care whether someone went to an Ivy League or state school, or if the team is stacked with previous successes.  Ultimately, we want a founder who has managed to recruit people of equal talent and skill to support her vision and share the same success–driven purpose.

The default question we ask before investing:  Is there more than one person on the team who could step up and take over the CEO role if the CEO died, was replaced, gave up or just didn’t have it in her anymore?  There must be at least one, and preferably two or more, people within a company who could step up to the plate and replace a founder.

Even though an iconic personality ideally should build the startup, someone should be able to take over at a moment’s notice.  Don’t invest in a one–person business, which is often the problem that investors encounter with lifestyle and one–person service companies.


Within the Angel Kings’ Investment Formula, we use the following as metrics before deciding to invest in PEOPLE:

·      Integrity

·      Organic net wealth vs. Age

·      Family background

·      Education

·      Experience

·      Credit and Background check

 Investors need to interview founders in order to trust but verify the credentials and people with whom they plan on investing.  Your intuition is often the best marker for future success. 

For example, someone who claimed to have generated more than $10,000,000 in revenue at a previous cybersecurity startup once pitched to us at Angel Kings.  With such profound success in business development, we knew we might have a hit on our hands.  However, after speaking with the previous CTO and CEO, we learned that the startup had dissolved after three years and that the company had hit no more than $750,000 in total revenue during that time frame.  Be careful with integrity... Trust, but verify.

 Investors need to determine how old a founder is and whether or not she has previously earned a living or made money independent of her family’s wealth.  If a founder has made money by her mid–30s – read: had a liquidity event, IPO’d or sold a previous company – this should catch your eye.  However, if a founder is saddled with debt or still struggling financially in her late 20s while using her parents’ money to pay her bills, stay away.

Most 20, 30 and 40–year–olds should have learned how to manage their money. But another indicator of success in startup founders is their exposure to affluent people, which may be because many founders come from wealthy families themselves.  We believe that it is best to invest in founders who are comfortable having a conversation that deals with large amounts of money, but also do not support themselves using their families’ wealth.  These startup founders tend to have wealthy parents who taught their kids how to invest but also how to live frugally.  As an investor, having a founder who has been taught financial responsibility at a young age yields greater returns.  This doesn’t mean Angel Kings doesn’t invest in some kid who’s only 19 years old and is building the next big thing... rather, we tend to ask enough about a founder’s background and nurturing to get a sense of how he or she handles money.  After all, when we write a $1,000,000 check, this money should be neither overwhelming nor too little for a founder to understand how to manage it.

In fact, look no further than Zuckerberg and Gates.  One’s father was a wealthy dentist and the other’s father ran a bank.  Both kids went to private schools and then matriculated at Harvard University.

 Why does exposure to money matter?  Why are angel investments more successful when the founders come from a family with some means? 

The basic reason is two–fold:  On the one hand, you get someone who won’t spend freely without frugality (a big problem currently in startup investing), and on the other hand, the investors will get someone who’s not going to sell out on their first buy–out offer from a larger company. 

Larry Page and Sergey Brin of Google exemplify the type of founder we’re talking about. They were offered $1,000,000 to sell Google to Yahoo.  To most people, $1,000,000 is a lot of money.  However, both Page and Brin had been among wealthy students at Stanford, and they both come from families who understand worth, value and how to spend money frugally but with calculated risk.  As founders, their backgrounds gave them a far–sighted perspective on what Google would be worth down the road.


If you'd like to learn about startup investing or want to see if you're an accredited investor apply here. Angel Kings are the angel investing and venture capital experts.

Ross Blankenship is an expert on startup funding,  angel investing and venture capital.

Ross Blankenship is also the Founder and CEO of AngelKings.com.  Angel Kings is an investing platform that provides accredited angel investors the opportunity to invest in top startups and companies in sectors like cyber security, biotech, mobile, data and financial services.  Angel Kings provides both venture capital funds for startup investing as well as private equity funding for early and middle-stage investments.  

The X Factor: Invest in People Who Show No Fear of Failure

the-x-factor

Here's a reminder of the Angel Kings' four must have personality factors, otherwise known as our "PASS" formula.

  1. Passionate, but with a purpose.
  2. All-in to their endeavor.
  3. Shows no fear of failure.
  4. Surrounded by equals or those greater.

Let's discuss #3 in our PASS formula.

Shows No Fear of Failure

The most common trait that we see in startup founders is no fear of failure.  Entrepreneurs in every startup must be able to hear the word “No” over and over again.  The harsh reality is that it’s hard to hear “no” for most founders, particularly when these often Ivy–educated, top–of–their–class individuals have soared beyond their peers all of their lives. 

But a “No” is ubiquitous in the startup world, and founders must maintain composure and be able to move on to the next customer, VC firm or investor, or else they’ll wither away like a flower in the desert.  They inevitably discover that hearing the word “no” and facing multiple rejections and objections to their companies are all part of the startup process.  The best founders are the ones who learn how to embrace these rejections and turn them into stepping–stones to success. 

Can you imagine what it must have been like for Elon Musk at SpaceX to think he had a shot of competing against NASA by launching satellites and rockets into space?

Musk has encountered resistance repeatedly when launching new products – whether it be from large defense companies that fear his companies will take their government subsidies, or from utility companies that are wary to embrace green energy with Musk’s SolarCity.

Another unquestionable example of a founder without fear is Mark Zuckerberg.  Facebook has been arguably the most impactful company on society in the past 10 years.  If it weren’t for Zuckerberg’s antics at Phillips Exeter Academy and then Harvard University, where he was warned repeatedly about his programming and online activities, Facebook would have never happened. 

Rejection and failure go hand and hand with running a startup. The difference between founders like Musk and Zuckerberg and founders who aren’t as successful is the ability to recognize that rejection isn’t an obstacle or roadblock.  Rejection is fuel to keep going, to keep building great things, and to launch what they know will transform industries and make people call them “icons.”

But let's better define failure...

Having no fear of failure doesn’t mean a startup founder should continue to build a product that people don’t want.  

If a founder is blindly stubborn, and she continues to sell her vision to a market that finds no need for it, then as an investor, you should be concerned.  There’s nothing worse than a founder spending money to build something no one is either going to use repeatedly for free (Facebook) or going to buy out of necessity (Tesla). 

Having no fear of failure doesn’t mean a startup founder should continue to pitch investors when they continually refuse to write a check. Having no fear of failure can simply mean a founder who takes charge of her own path.

Musk and Zuckerberg were intent on having their ventures change the conversation within industries that have existing dominant players.  They didn’t care that those players would be upset.  Based on their example, having no fear means a founder believes that a fundamental paradigm shift is needed in an industry to make the world a better place, and she’s going to take charge to make it happen.


Would you like to invest in startups and become a venture capitalist? The VC expert is ready to help you start invest in top startups. See how you can by becoming a qualified member here.

Ross Blankenship is an expert on startup funding,  angel investing and venture capital.

Ross Blankenship is also the Founder and CEO of AngelKings.com.  Angel Kings is an investing platform that provides accredited angel investors the opportunity to invest in top startups and companies in sectors like cyber security, biotech, mobile, data and financial services.  Angel Kings provides both venture capital funds for startup investing as well as private equity funding for early and middle-stage investments.  

The X Factor: Invest In People With An All-In Mentality

Remember the Angel Kings' four must have personality factors, or otherwise called our "PASS" formula:

1.  Passionate, but with a purpose.

2.  All-in to their endeavor.

3.  Shows no fear of failure.

4.  Surrounded by equals or those greater.

In this article, we will be discussing #2 of our formula.  

 

The All-in mentality

 

All passionate and purposeful founders or inventors must be asked whether or not it’s their full–time venture or just an idea they’re pondering perfunctorily.  Why?  If it’s not their full–time, all–in moment, don’t bother writing a check.  Not one of the top 10 billionaires in the world ever took on an idea, product or service part–time. 

For Musk, his all–in mentality has driven him to a level of obsessive compulsiveness that one could blame for a divorce and much strife within his own life.   Musk was all–in to PayPal – and to every venture he pursued.   Musk worked day and night, and in fact, slept in the office and shared a tiny apartment to save on expenses.  Musk would do everything he could to make sure that his company succeeded.

Normatively, is this good or bad?  Who knows… your job as an angel investor is to find the best founders who can bring you a massive return on your angel investment.  No, we don’t want, wish or hope for any of our founders to suffer personal strife or deal with major pains, but look to none other than Steve Jobs to know it can happen to the best.

 When we say all–in, just like in poker we want you to treat any investment – $25,000 up to $10,000,000, which we’ve seen at Angel Kings – as possibly your only startup investment.  A founder expecting you to write a check should be just as committed, if not more so, to building her product as you are in giving precious dollars to help her fulfill her vision.  She has to understand that receiving your check does not mean the work gets easier.  If anything, she has to become so hyper–focused in making her vision succeed that her level of commitment to both your investment and her vision becomes a bit daunting.

The all–in mentality is a two–sided coin for both investors like yourself and founders. 

On the one hand, you need to be willing to go all–in and have enough of a meaningful investment for it to hurt if the startup doesn’t succeed.  As Mark Cuban says, you need to have enough “skin in the game” to care about whether the startup succeeds or fails. 

On the other hand, the founder should be willing to play her cards right, not be distracted by different commitments, and remain fully committed to making your investment profitable.  If a founder is hedging her bets by thinking that “if this doesn’t work out, we can always do something else,” then it’s not going to work.  There’s a limited amount of time during which your startup investment should take off, and the founder can’t squander that time bouncing around ideas and splitting her time between different companies.  The all–in mentality requires focus, decisiveness and cooperation between the founder and the investor. 

As an investor, you have to be discerning about the founders of your startup investments.  Although a founder may have a great idea and is brimming with passion, she must be able to shoulder the level of risk that your investment carries.  Just as in poker, the founder must play every hand as if it were her last hand to play. For every hand dealt – whether pocket Aces or deuce–seven – a founder must be all–in as though her life is on the line.  Even when tired, exhausted and ready to give up because she feels like nothing is going right, the best founder always gets up quickly before the self–pity worms its way in.  There is a level of tenacity, shrewdness and optimism that a founder must possess in order to make sure her vision succeeds.

 

For the investors…

As an investor, your big moment could come at any time.  Again and again, you’ll be pitched on ideas, products and services that will be the next “big thing.”  You have to know when and how much you should bet to get a fruitful return, one in which you’re not just in the money but you’re the grand winner …  Yes, it’s possible.

 

For the founders…

View every hand you’re dealt as if it’s your last.  Look at an investment as your ticket.  You will never be dealt pocket Aces every hand.  You’re likely to be dealt just as many terrible cards as the next guy.  In fact, you should be happy to even be sitting at the table instead of working a boring job!

 

If you’re distracted or not fully committed to each hand, you will fail.


Want to get information on angel investing and venture capital? Get information from the venture capital expert on startups. And find out if you qualify as an accredited investor here.

ross-blankenship

Ross Blankenship is an expert on startup funding,  angel investing and venture capital.

Ross Blankenship is also the Founder and CEO of AngelKings.com.  Angel Kings is an investing platform that provides accredited angel investors the opportunity to invest in top startups and companies in sectors like cyber security, biotech, mobile, data and financial services.  Angel Kings provides both venture capital funds for startup investing as well as private equity funding for early and middle-stage investments.  

Total Addressable Market: Startup Market Size and Why It Matters

How much is the magic market share number? It depends on how much the investment ask is: you don't need a $20 billion market share to make a profit; niche companies often succeed with much small shares–they just succeed on a smaller scale.

In this section, we'll cover some basic ways you, as the angel investor, can estimate the addressable market share. We'll also talk about how to drill down in a startup's pitch deck, what to look for when the startup talks market share, and how to protect yourself against poor investments with regard to market.

 

Back-of-the-Napkin Considerations

 

You can do some back-of-the-napkin math to estimate a startup's future share of the market. The more you know about the industry or product type in question, the more accurate your math is likely to be, which is one reason many angel investors choose to operate in fields with which they have experience.

For a solid estimate of total addressable market (TAM), you'll need five pieces of information.

1.  The Total Population of Potential Users

This may be a geographical consideration: There are 100,000 people in the city where a restaurant wants to launch. More likely, this is a more abstract number, since the majority of angel investors are opting for opportunities in Internet, software, e–commerce and other virtual spaces. A total possible population for a mobile app launching in the United States, for example, might be up to 182 million people in 2015, according to Statista's numbers on smartphone users in the nation. The site also forecasts smartphone user population to grow to 220 million in 2018.

2.  Definition of the Market Segment and Estimated Percent of Target Customers

Your product limits the percent of your market segment. Angel investors should ask: Who is this product for? Who is likely to want, need, and purchase this product? Are people already buying similar products, and if so, who are those people?

Consider an app that acts as a virtual storybook for babies. The obvious market for such an app would be new parents with smartphones. There are a total of 318 million people in the US; if 182 million have smartphones, then approximately 57 percent of the population has a smartphone. There are around 4 million babies born each year—applying some dirty math, we can assume that 57 percent, or around 2.28 million, of those babies have at least one parent with a smartphone. That's the target audience for our app.

This back-of-the-napkin math is rough: the population numbers used to arrive at the above percentages counted young children and older individuals, which are less likely to own smartphones. Child–bearing parents are more likely to own the devices, which means the target audience could be as high as 3 million. For ease of estimation, let's assume 2.5 million. Out of 182 million smartphone users, that's approximately 1.4 percent.

3.  How Many of the Products Will Be Purchased At A Time?

If a company is selling software through licenses, businesses can purchase multiple instances of the product. Someone with a hot new cupcake recipe is going to sell in multiples as well; our baby app, however, is most likely to sell once to each user. 

4.  How Often Will The Product Be Purchased?

Does the product lend itself to repeat purchase? Is it a commodity or necessity that will be used up, so consumers must refill or restock? At first glance, a software product is going to be purchased once for each user, but what about new versions and upgrades? Are those free, or monetized?

5.  What is the Intended Selling Price of the Product?

We'll look at two possibilities with our baby app example. First, the startup may charge for its app.  Given app store prices, and depending on how much functionality the startup is going to provide in its app, price might range from 99 cents to $7.99. For the example, assume the startup charges $2.99.

The other possibility is that that startup offers the app free to users, but plans to monetize it through ads, in–app purchases, or professional relationships. In this case, the angel investor needs to see the startup's projections on how much per user the app might generate. For our example, let's assume the startup estimates $5 in revenue per user, per year. 


Possible Market Share Formula

The basic market share formula multiplies all of the data points above. So, for our baby app, basing market share solely on the purchase price of $2.99, maximum market share would be:

182 million smartphone users * 1.4 percent target audience * 1 purchase at a time * 1 purchase (no repeats) * $2.99

The maximum potential market share would be approximately $7,618,520 per year.

 

Drilling down: the Startup's deck

 

That $7.6 million market share number for our imaginary baby app is unrealistic–but some startups are optimistic enough to publish such numbers in their pitch deck. No matter how great the product and timing is, you aren't going to get 100 percent to buy–in from your potential market–and remember, the math we did to get to $7.6 million was all estimates and quick Internet statistics searches. You have to assume the numbers are off a bit.

Startups tend to make sweeping statements about market targets in their pitch deck. They might state, "We're targeting 1 percent of a $20 billion market by 2022." As the angel investor, you have to do your own math, as shown above, to vet the total market claim, and then you have to evaluate whether you think the startup is on point with their target. How likely is the 1 percent goal? At Angel Kings, we like to see startups that provide more specific market definitions, even if that reduces opportunities to $500 million instead of $20 billion. 

 

Is The Startup's Plan Backed By Data?

Startups with specific market definitions have some data to back up claims; as the angel investor, you should vet that data against your own research or knowledge of the market. The statistics we used to create our assumptions for the baby app market share are an example of data that anyone can vet. Startups should source such information, but a quick online search turns up information too.  You should also download the app yourself, try it out, and see if people would care enough to pay for it.

It's harder to tack down the percent of potential market a startup hopes to obtain. Ask how the startup came up with that percent. Did they conduct market surveys? Are they basing the data on comparable products? The startup launching our imaginary baby app might have polled 500 new mothers and mothers–to–be to find out if they would be interested in purchasing an app, and then applied that data to the overall market to determine that 20 percent of possible consumers would make a purchase.

Despite how much data the startup presents, you as the angel investor have to make a judgment call. Do you buy in to the market assumptions the startup makes? Do you think they are probably too optimistic? Even if the startup's assumptions are too optimistic, does the market share potential you see make the investment worthy?

 

tomorrow's market, not today's

 

As an investor, you are worried more about tomorrow's market than today's market. Understanding today's market lets you make evaluations of future market potential. In some industries, you can also use benchmarks, expert guidance on industry trends, and forecasts to estimate future market behavior. With our baby app example, an investor might use the estimated smartphone user growth from several statistical sites to gauge how much the potential market will grow. 

 

primary demand versus secondary demand

 

Numbers and data are important, but investors must also understand the difference between primary and secondary demands. Primary demand references the market size for a specific product or product category–baby apps, cupcakes, virtual hard drives, and point–of–sale software, for example.

Secondary demand refers to the size of the market for a brand.

When dealing with early–stage startups in most industries, angel investors are concerned with primary demand because fledgling startups often tout a single product idea. While concentrating on primary demand, keep secondary demand in mind as it plays a role in growth potential. What are the brand goals and plans for the startup? Will the startup pull its audience through branding more so than product, and does the startup plan to branch out with products that could capture greater shares of the market in the future?

In a few niche industries, secondary demand is the primary evaluation point. This might be true when evaluating biotech or social startups, for example, where audience buy–in to an idea is much more important than the product itself. 


Setting Limitations As An Angel Investor

 

You know the saying about going to the grocery store hungry or without a list? Chances are, you walk out spending more than you wanted and with items you don’t need. As an angel investor, enter evaluation phases with limitations in mind to avoid getting caught up with the people and idea and failing to see the potential market pitfalls.

Some angel investors won't consider a startup that doesn't have a potential minimum market share of $500 million or more. Others won't invest in a company where growth projections can't be reasonably estimated at 10 percent a year or more.  You shouldn’t set targets and ranges like this.

Even more important than arbitrary limitations is your own awareness of earning potential. No investment is 100 percent safe, but by calculating market share, the angel investor has a better understanding of the type of returns that can be expected if the startup is successful.


Want to get information on angel investing and venture capital? Get information from the venture capital expert on startups. And find out if you qualify as an accredited investor, http://AngelKings.com/angel-investing-101

           

Venture Capital Firms: All about VC investing

Investors aren’t born overnight.  They don’t come out of the womb with the ability to identify successful startups.  They might want you to think they do, but they don’t.  Some may have the good fortune to have an ample cash flow to invest.  But the knowledge that would allow them to pick the right companies in which to invest isn’t something learned by intuition. Intuition is expensive.  What you need is both strategy and focus to win so you can become one of the incredibly successful angel investors mentioned in this book.

Most people—you may be one of them—are intimidated by the idea that investing is exclusive to “those people” like Peter Thiel or other Silicon Valley tycoons.  “Those people” work in tall buildings made of glass.  “Those people” wear three colors when it comes to clothing: blue, black and gray.  “Those people” look sharp with their shiny, polished shoes, and they walk around with a portfolio in one hand and a cup of coffee in the other.  “Those people” talk only to people who look similar to them.  They use words like “return of investment,” “financials” and “valuation” as easily as you might use the words “ice cream,” “coffee” and “sleep.”   They always know when to invest and when to walk away.  They also seem to know about the up–and–coming startup companies that are going to explode in the market.  But they never share that knowledge. 

At Angel Kings, we know when to invest in a company, not because we have prophetic powers, but because we do our due diligence to find out everything about that company–from the founder to the financials. We look for companies that provide better solutions for everyday problems, not iterations of other companies’ successes.  It’s easier to follow the pack of VC’s who invest at the next biggest startup, but it’s wiser to take a closer look at startups that are providing simpler and better solutions for problems of everyday people.  Our main goal is to reduce your risk—for which there’s plenty in the current startup–investing environment—and help you make calculated, wiser decisions about where to place your money.  


ross-blankenship.jpg

Ross Blankenship is an expert on startup funding, angel investing and venture capital.

Ross Blankenship is also the Founder and CEO of AngelKings.com.  Angel Kings is an investing platform that provides accredited angel investors the opportunity to invest in top startups and companies in sectors like cybersecurity, biotech, mobile, data and financial services.  Angel Kings provides both venture capital funds for startup investing as well as private equity funding for early and middle-stage investments.