#startupfunding

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!

Gawker - The Best Lean Startups in America

gawker-lean-startup

Gawker founder Nick Denton is another example of someone who founded and sold another company before turning to bootstrapping for his next endeavor. Denton launched Gawker, a media and blogging company, in 2002. For many years, he did most of the work himself, bringing on other bloggers as needed in contract or work–at–home positions to keep costs down. Denton slowly expanded Gawker operations outside of his home by renting an inexpensive storefront to house his growing team of bloggers. Six years after he launched, he invested in a more traditional office for the company. Within about ten years, Denton's bootstrapped media company weighed in with valuation estimates around $150 million.


Get a copy of our official guide to venture capital and angel investing by becoming a member of Angel Kings - the Venture Capital and Startup Experts. And learn from the angel investing and venture capital expert, Ross Blankenship.

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Ross Blankenship is the "expert on venture capital and angel investing" for startups and investments for venture deals. He is also a proven entrepreneur, and the Founder and CEO of AngelKings.com. Ross Blankenship has successfully founded several companies and now manages a Venture Capital fund focused on early stage, high growth startups in sectors such as mobile, cybersecurity, cloud computing and biotechnology. Learn more about Ross Blankenship, and how to become a successful, early investor at http://AngelKings.com.


Votizen Review - Lean Startup

The Lean Startup method is just one of many ways to launch your startup. 

Startup Burn Rate vs. Startup Profit and Loss

Don't Burn All Your Money

The gross burn rate is the amount that is being spent every month. The net burn rate is the amount of loss. Both are of equal importance. One of the reasons that net burn is such a valuable number to investors is that it provides some idea of how long the business can continue to operate, assuming it doesn't increase its net burn. As such, the net burn can be a way to determine how many more months a startup can stay in business, based on the cash it has in the bank. A company with one million dollars in the bank might sound promising, but if its net burn is $250,000, it can only stay afloat for four more months unless drastic changes are made. So that scenario does not sound like a good investment at all.

The net burn rate can help current investors measure and determine their level of risk, and can also give them an idea of how quickly they will need their teams to focus on fundraising. New investors will also be interested in the net burn of a startup, because they will want to know how quickly they need to raise cash, and how much cash they will be asked to invest.

While it's important that startups keep their net burn as low (or at least as realistic for their company and industry) as possible, having a very low net burn actually can work against them if they're looking to raise a significant amount of money. To illustrate this point, a startup with a net burn of $150,000 wouldn't appear to need to raise millions of dollars right away, and asking for that kind of money might put investors off. Prospective investors could wonder why the company would need that level of capital. So simply seeing if investors will fork over large sums of money isn't a good practice for startups, and can lead to their being overcapitalized.

Here are some tips and questions for you to consider when reviewing a company’s net and gross burn rates:

1.  Is the company responsible with money? 

Make sure that company founders who are seeking your capital investment articulate why their company needs it.  If the company’s net burn rate is low, why are they seeking a high–dollar investment? Are there other expenses that are not being disclosed?  Be wary of companies who respond with the idea that “more money is always better”.  These companies tend to develop a bad habit of unnecessary spending. 

The burn rate of any startup should be similar to the burn rates of the competition, but the size of the company and its operating expenses will dictate the overall burn rate.  It’s always best to invest in companies that have 10% month–to–month growth and at least 18 months of burn rate, as these companies have proven to be more viable in the long run. 

2.  who makes up for most of the company’s revenue?

Make sure that the company’s revenue is not reliant on a few customer accounts, and there is a varied distribution on where the company makes money.  This provides a safety net for investors since market fluctuations cannot be easily foreseen and can happen quickly. Having a wide array of customers allows a company to survive any revenue losses due to unpredictable market fluctuations.  SaaS companies are ideal for investors because their biggest customer may account for <5% of their revenue, and their revenue is ongoing and recurring. 

3.  Is the company spending on growth and development?

Pay attention to where the company does spend its money.  A company may have a high gross burn rate due to growth and development expenses.  It is a calculated risk that provides investors with longer–term rewards if the company raises the value of its product and broadens its customer base.  Stay away from companies that have low burn rates in a stagnating market since these companies will provide little return of investment. 

How To Invest In Startups

THE ANGEL KINGS STARTUP FORMULA

Like the S&P, Moody’s rating systems, or Morningstar formula for ranking public companies, we built our own proprietary, private market investing formula and ranking of the next billion dollar startups.  Until now, we have never released our proprietary formula; we’re sharing this for the first time because you deserve to know how venture capitalists think, and moreover, how you too can make money investing in the right startups.  We score every startup we meet on a scale from 0 to 100 using the following investment formula.  

** Over and above this scale, startups will be grouped by stage of development: 

·      Pre–revenue

·      Break–even

·      Profitable

I.   People 

a.     Integrity

b.    Organic net worth vs. age

c.     Wealthy family

d.    Education 

e.     Experience

f.      Credit & background checks 

II. Product 

a.     Is the product innovative and how established?

i.     Is the product an improvement on an existing solution?

ii.     Does the product provide a solution for a problem that people haven’t yet realized?

iii.     Is it a minimum viable product, where it still needs several iterations before it can be sold to the market?

iv.     Is it an established product in the market with a customer following?

b.    Bonus: Does the product reinvent the wheel and present something revolutionary?

c.     Adoption Rate & Traction: calculate the startup’s success against its future goals by using vanity metrics, units sold, or units sold at profit.

d.    Company vs. Total Addressable Market (TAM)

i.     What is the size of the total market for the product?

ii.     How much more can the total market grow?

 iii.     How much of the total market can the product take from competitors?

e.     Customer Base

i.     Concentration: what percentage of customers are businesses vs. consumers?

ii.     Do customers come back to purchase more products (LTV)?

f.      Economics of single sale

i.     What is the amount per unit sold? What are your acquisition costs?  What are your margins? 

g.    Perception/Hype Factor

 i.     Is the current hype around startup (e.g., press) proportionate, or is consensus missing something, for better or for worse? 

III. Execution/Timing

a.     Advertising ROI – How much are your customer acquisition costs through advertising?  How many of those consumers converted to paying customers?

b.    Efficiency of product distribution mechanism

 i.     How well have you managed your sales staff?

c.     Scalability of model

i.     How exhausted are possible sales channels?

ii.     Evidence of or potential for partnership opportunities.

d.    Three– to five–Year Plan/Roadmap

 i.     What does the growth trajectory look like?  How much funding is necessary to achieve that growth?

 ii.     How comfortable is management with a given exit plan (sale or IPO)?

e.     Stumbling blocks to date – Have there been any botched product launches or failed financing? 

IV. Financials

a.     Cash Flow

b.    Return on Invested Capital

 i.     Current monthly burn–rate versus sales

c.     Valuation

 i.     Pre–investment vs. post–money valuation 

d.    Capital structure composition and restrictions around future money, as relates to dilution

e.     Funding Sources to Dates and Needs

 i.     Founders and Friends/Family funding to date

ii.     How necessary is next raise

f.      Incremental Intellectual Property (IP) Value

Weight: Each item below will either enhance or detract from our weighting from the scale above, driving our overall adjusted score.

I.        Industry “Factor”: growth of overall industry

II.      Risk “Factor”

a.     Litigation around product

b.    Likelihood of patent infringement and years of ensuing litigation

c.     Competition

d.    Other  

* * *

There’s also another part of the decision making process above that’s not mentioned: it’s called your gut feeling or better known as “intuition.”  Whether you’re a card player, investor, doctor, lawyer, or any other profession, you often rely on your intuition in cases where things don’t add up quite right or you don’t have enough information to make an informed decision.   In fact, when you’re investing in startups, you won’t have the same publicly released information as you would investing in a company listed on the NASDAQ or NYSE; thus, you have to be more logical and patient in your investment strategy.   You need to use your intuition less often in startup investing before writing a check.  After all, for every startup success story you’ve heard where someone invested in a “billion dollar” idea because of a purported gut feeling, there are thousands more who lost their money because their gut was dead wrong. 

This is why the Angel Kings’ investment formula is important for startup investors and venture capitalists; it makes important decisions more reliant on facts than intuition.  Use as much of the formula as you can, ask the questions in the following chapters, but if there’s a missing piece that doesn’t add up to our 90 score… you’ve got to be willing to say “no.”  In the startup world, it’s about saying “no” more than saying “yes” that will lead you to higher returns on investment.     

As in law, your burden of proof for investing in startups is beyond a reasonable doubt.  And thus, our formula too is geared towards investing in companies that score a 90+ or more before we would ever say yes to invest.

FACTS:

·      Each of these four categories combine to make a 0 to 100 score. 

·      We invest when a startup reaches a total of 90+ points or more. 

·      Most startups (98.5%) that have pitched Angel Kings have scored 90 points or less.

Here’s a fact: the typical venture capital firm (VC firm) assumes it can beat you investing in startups and amass greater returns than you.   VC firms often return up to 25% per year annualized, often beating the average S&P investor by 10% to 20% or more per year.

Now, here’s a myth: the old boy networks of VC firms and private equity (“PE”) funds are running the show and preventing you from getting in on startups.    With platforms like AngelKings.com and crowdfunding sites growing under the JOBS Act, you now have the ability to make smart, calculated investments in the next billion dollar startups.

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.  


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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.