Time to Read: 9.5 mins
*Press play for a read-along*
*Scouring the internet, looking for ways for normal people to invest in startups*
Venture capitalist/Angel investor.
Have so much money that you can create or join a firm that shells out millions of dollars to all kinds of startups.
Join AngelList. Go in on a pot with other investors (syndicate) to help fund a startup or startups. Need to be an accredited investor (aka be pretty well-off so there’s not too much risk of you losing too much money (SEC rules and such)) and be able to invest a minimum of $1,000 along with some fees.
No – but getting there.
Republic. Crowdfunding meets startups meets investing. Invest in startups with as little as $10.
- How it Works
- Tips and Tricks
- Final Words
Startups are big movers.
Facebook. Twitter. AirBnB. Uber.
If you had the opportunity to jump in early on these ones — and you actually did — then you are probably a pretty wealthy person. Some of these turning every dollar you invested into $5,000. Uber for example has done this.
But for every one that goes big, you have 20-100 that crash and burn.
Startup investing is very risky. The SEC realizes this and makes sure to protect the average Janes and Joes from ignorantly destroying themselves financially by putting up all of their money in a startup that crashes. There is a much higher chance of total catastrophic failure than there is of exploding prosperity showers of wealth.
That’s why only big dogs are allowed to play in the startup game. They can put up the 100k, 500k and 1M and more required to invest and buy a part of a company, without wiping out their entire life savings and re-mortgaging their houses.
But with the new crowdsourcing/crowdfunding economy that we are starting to see in all sorts of places, Kickstarter, Indegogo, GoFundMe, Patreon, SoMoLend, etc… It was only a matter of time until community funding entered startupland.
Now, you can be an angel investor in these companies under the provisions of Title III of the Jumpstart Our Business Startups Act of 2012 (known as the “JOBS Act”) and Regulation Crowdfunding.
Until May 16, 2016, essentially only the wealthiest 3% could invest directly in private startups.
So blam! Now Janes and Joes can get in the game too, and have opportunities to see high returns on the little we do have to invest.
How it Works
In the Republic platform, each startup will present you with a:
The pitch is obvious. The company will do it’s best to sell you on their concept or product, getting you to contemplate whether you think they have enough of something to go anywhere with their concept — and make you money if you invest.
About. Next the company will provide you will some of the information about them, their full name, when they were founded, their corporation type, how many employees they have, their website, their social media stuff and their headquarters.
Then team: founders, advisors, employees — whoever they’ve got working on the business.
The FAQ. One of the most important things to pay attention to. This is one of the first ways to dig into the company and what it’s all about.
The risks. Even more important. Becoming more informed on the possible negatives will always give you a better perspective when it comes to investing.
And discussion. This one I like alot. Here is where people start asking questions and pointing things out and giving the founders an opportunity to respond. This is important to pay attention to because people get smart when it comes to investing their money, so you can usually stumble on a good question or a good point when looking through the discussions.
Along with these six sections of each startup’s Republic page you can find, along the side: the deal terms, the perks and the documents.
The terms specify how long they will be open for funding and what their goal is. If they don’t reach their goal in the specified amount of time, all money is returned to investors and the company is blasted to smithereens (not really, but they do have some thinking to do).
The perks are different things you can get by investing certain specified amounts. Like, if you invest $20 you will get a T-shirt with our logo or something like that.
And the documents are where you find financial statements, SEC filing forms, and corporation forms.
How do me get money?
Unlike donation-based crowdfunding, when you commit money to a company on Republic you receive a security.
It’s up to the company to decide what type of security to offer, but companies on Republic typically use a Crowd Safe. Some companies may choose to also offer perks based on the amount you invest.
You earn a return if the company you invested in is acquired or becomes a publicly traded company (a process called an IPO) at a higher price than you paid. Some offerings may include additional ways of getting a return, such as profit-sharing.
Until then, you can expect that you’ll need to hold on to your investment.
So when you invest in a company, you will get a Crowd Safe. This makes your investment not actually buy any stock in the company, like in traditional investing, but you will still get the financial value, in either cash or stock, when the company is acquired or has an IPO (initial public offering).
For more on Crowd Safes click here.
What Else to know?
Republic’s commission: Republic collects 5% of the total amount raised and 2% of securities offered in a successful financing.
Tips and Tricks
Okay, you’re a startup investor now. The more you know about startup investing, the better your chances are to duplicate your money, rather than lose it.
There are a couple of ways to give yourself an edge ahead of the guy or gal that gets swooned by the pitch and just gives them all of their money on the spot.
In real estate investing, this is when you go down your checklist and make sure that you are not missing anything. Checking the neighborhood, all the insurance rates, the condition of the property, the inspections, the rates to charge and the rates in the area, potential financing options, etc…
It’s the same thing in investing. When looking at a company, you should always have a checklist for your due diligence, to make sure that you are not missing anything.
Now doing due diligence is necessary to make the best decisions, but since this crowdfunding style of investing doesn’t requires hundreds of thousands of dollars, sometimes the due diligence isn’t worth the cost, in terms of time.
I mean, going through a startup investing due diligence checklist can take hours or even days and if I was going to only invest $100 in a startup, I would pay an additional $20 just so I didn’t have to read the financial reports.
So it’s at your discretion to value the due diligence required vs. the amount you are investing — but a rule of thumb might be: the more you invest, the more due diligence you do.
Here are two different due diligence checklists:
Short Checklist (by one of my favorite people, James Altucher)
Mirror Successful Investors
Follow those who know what they’re doing. Trust the people with the track records.
Republic has a feature that allows you to follow investors, to see what they are doing and investing in. You link with your LinkedIn and connect and follow with your LinkedIn peeps.
If you want to mirror successful startup investors, find the ones with the track records that know what is required for a startup to launch successfully and go public or become acquired — they know the ins and outs of what kind of business structure best fits their industry or maybe if customer service is a big deal in that industry — stuff like that.
Since these connections only come from LinkedIn (as of now), you will have to find people on LinkedIn that both, have a good track record and invest through Republic.
Then, connect with these people and then follow them through the Republic follow feature.
There is a lot to say about the risk, only 10% of companies live through the first year, and only 10% of those live after the 5 year mark — or whatever the saying is.
So if you do the math… you’re screwed.
The odds overwhelmingly show that backing just one startup will almost certainly lead to your investment’s wake.
So what’s the solution? Diversify.
You put $20 in 20 different startups.
All 20 fail and you lose $400.
No problem, you do it again, $20 in each of 20 more startups.
Now 19 fail and one gets acquired for a lot of money.
So you lose another $380 from the 19 that went bust but you get a 100x return on the one that got acquired.
$20 x 100 – 400 – 380 = $1220 net profit
So even after 4o companies, if only just one goes anywhere, you can still potentially make a profit.
Now the 100x figure is pulled from nowhere. But like I said before, startups can explode in growth, Uber being an example of one that 5000x the initial investment of it’s angel investors. You never know what success will mean for a startup, but it’s usually a big number.
But, take all of this with a grain of salt. As they say, investing is risky and past performance is not an indicator of future performance. You could pick 100 in a row and have each one bite the dust.
This is really super cool stuff and this has only just recently become possible for plebeians like you and me.
Getting in on the ground floor of a company really is where the big money is made. The risks are enormous and there are ways to mitigate that risk, like the few in the tips and tricks mentioned above, but make sure that the money that you put up in these investment deals is money that you can live without.
Like it’s said in the book, The Richest Man In Babylon, pay yourself first. They talk about how 10% of your income should always go to you first, and they frame paying you and yourself as investing.
So you can allocate that 10% investment money into the stock market like a normal person, get a 7% return, minus inflation, 3%, and then pay some fees to whoever…
Or you can be crazy and just shell it all into startups and cross your fingers.
Do your own risk analysis and choose your own path.
Either way though, a good way to think about investing is to say goodbye to your money every time you invest it. Once it packs its bags and is out the door – turn away and never think of it again. If you do ever see it again, be happily surprised. Run to it and hug it like you’ve missed it the whole time. And hey, if you’re lucky, maybe it will have brought some friends home with it too.
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