Startup/Angel investing for the regular Joe?

[Mr.GrowingMustache]

Hi All,
So I just read an article on David Choe (mural artist) who painted The Facebook's offices back in 2005 and was paid a few thousand $ in Facebook stocks which are worth $200 mil today.

http://www.nytimes.com/2012/02/02/technology/for-founders-to-decorators-facebook-riches.html

I also talked to one of my friends, who had a startup and I am sure he made good money once it was sold about two years ago. My friend also told me of a friend of his (call him Doe) who quit a $300k a year corporate job to create his own startup. Although Doe told my friend that he shouldn't invest $ in his startup (for friendship reasons), my friend did it anyways.

Investing in startups has been simmering in my head for a while, and I have about $10k I might be willing to invest. So I did a quick search on startup investing and basically ended up at 1000angels.com  http://www.1000angels.com/ and eventually saw the words "Accredited Investor"

https://www.investor.gov/news-alerts/investor-bulletins/investor-bulletin-accredited-investors

So I have to be an "Accredited Investor", and that means:

An accredited investor, in the context of a natural person, includes anyone who:

-earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
-has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).



Soooo.... I definitely do not fall in that category with $125k in Investments (Retirement, etc) and $170k home loan.

I can understand the "Accredited Investors" rules that prevent someone loosing a large portion of their funds, but I also see it a barrier to the 99%. I feel this is a really stacked rule to exclude a large portion of potential investors, or some archaic Great Depression legislature.

Does anyone have any experience?
Is $10k too little for a startup, or they look for larger investments?
Are their any "angel"/startup investment vehicles for regular income people like me?

[Financial.Velociraptor]

The closest you are likely to come is the Business Development Corporation (BDC) space.  They are (usually) run by former executives who arrange investing in small to medium sized companies that need financing for growth.  It is often times a debt plus convertibles and/or equity incentives.  They tend to specialize in firms that are too large for the local bank to support but too small to attract interest from a big investment bank to float a bond for them.  Thus, variable rate debt from a private corporation with strings attached.  In exchange for the strings, the BDC usually offers management help from their internal expertise.

I think you are looking for "home runs?"  I tend to lean towards safety and yield.  So I like (and own) PSEC.  It is currently yielding about 13.5%.   From yahoo! finance

Prospect Capital Corporation is a business development company. It specializes in middle market, mature, mezzanine finance, later stage, emerging growth, buyouts, recapitalizations, turnaround, growth capital, development, subordinated debt tranches of collateralized loan obligations, cash flow term loans, and bridge transactions. It also makes real estate investments particularly in multi-family residential real estate asset class. The fund makes secured debt, senior debt, unitranche debt, first-lien and second lien, private debt, mezzanine debt, and equity investments in private and microcap public businesses. It typically invests across all industry sectors, with a particular expertise in the energy and industrial sectors. The fund invests in aerospace and defense, chemicals, conglomerate services, consumer services, ecological, electronics, financial services, machinery, manufacturing, media, pharmaceuticals, retail, software, specialty minerals, textiles and leather, transportation, oil and gas production, coal production, materials, industrials, consumer discretionary, information technology, utilities, pipeline, storage, power generation and distribution, renewable and clean energy, oilfield services, healthcare, food and beverage, education, business services, and other select sectors. It prefers to invest in the United States and Canada. The fund seeks to invest between $10 million to $250 million per transaction in companies with EBITDA between $5 million and $150 million, sales value between $25 million and $500 million, and enterprise value between $5 million and $1000 million. It fund also co-invests for larger deals. The fund seeks control acquisitions by providing multiple levels of the capital structure. The fund focuses on sole, agented, club, or syndicated deals.

[mr_orange]

Does anyone have any experience?
Is $10k too little for a startup, or they look for larger investments?
Are their any "angel"/startup investment vehicles for regular income people like me?

Yes, I have a lot of experience in this and run a crowdfunding platform that will soon be licensing our technology to another company for doing angel investing.  Our company focuses on real estate investments. 

$10k is not too little for startups.  At the seed stage (prior to Series A) many people invest $10k - $25k and this is not really uncommon.  On a $500k raise or smaller $10k still moves the needle a bit.  Startups are very risky and I would encourage anyone looking to invest to make small investments in a number of companies to diversify risk.  I would also encourage you to look at sidecar funds many angels groups have instead of investing in any single company. 

In May of 2016 Title III of The JOBs Act will be the law of the land.  Non-accredited investors will be allowed to invest in private offerings that early stage companies use.  There will be FINRA licensed legal portals available for this purpose.  Our securities attorney is working on this registration for us right now. 

Hope this helps....and yeah, it is pretty silly the government "protects you" from investing your money as you see fit. 

[Interest Compound]

Hi All,
So I just read an article on David Choe (mural artist) who painted The Facebook's offices back in 2005 and was paid a few thousand $ in Facebook stocks which are worth $200 mil today.

http://www.nytimes.com/2012/02/02/technology/for-founders-to-decorators-facebook-riches.html

I also talked to one of my friends, who had a startup and I am sure he made good money once it was sold about two years ago. My friend also told me of a friend of his (call him Doe) who quit a $300k a year corporate job to create his own startup. Although Doe told my friend that he shouldn't invest $ in his startup (for friendship reasons), my friend did it anyways.

Investing in startups has been simmering in my head for a while, and I have about $10k I might be willing to invest. So I did a quick search on startup investing and basically ended up at 1000angels.com  http://www.1000angels.com/ and eventually saw the words "Accredited Investor"

https://www.investor.gov/news-alerts/investor-bulletins/investor-bulletin-accredited-investors

So I have to be an "Accredited Investor", and that means:

An accredited investor, in the context of a natural person, includes anyone who:

-earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
-has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).



Soooo.... I definitely do not fall in that category with $125k in Investments (Retirement, etc) and $170k home loan.

I can understand the "Accredited Investors" rules that prevent someone loosing a large portion of their funds, but I also see it a barrier to the 99%. I feel this is a really stacked rule to exclude a large portion of potential investors, or some archaic Great Depression legislature.

Does anyone have any experience?
Is $10k too little for a startup, or they look for larger investments?
Are their any "angel"/startup investment vehicles for regular income people like me?

Two questions for you, and you alone please:

1. What do you think are the odds of picking a winner with your $10,000?
2. What, in your opinion, are the top 5 things a startup needs to be successful (have a liquidation event which will compensate their investors for their risk), and what is your source for this information?

[Mr.GrowingMustache]

Thanks for the replies! That is some really good information that I will use to do more research on. Appreciate it!

1. What do you think are the odds of picking a winner with your $10,000?
2. What, in your opinion, are the top 5 things a startup needs to be successful (have a liquidation event which will compensate their investors for their risk), and what is your source for this information?

1. Not great odds, it depends on doing the diligence, but my first thought is that there must be some sorft of a collective "ETF" or "Betterment" type of investment option that helps me diversify, and invest without being all in on one company.

2. There is really a ton of check marks there. There are some good articles that outlined a lot of things to look for in a startp as an angel investor, such as marketing strategy, growth potential, return on investment timeframe, social marketing strategy, potential buyers of the technology etc. I would also weigh in on the resume of the company workers, and if I really think they have a winning technology. I am an engineer by trade myself and have a very diverse technical and management experience, which can help me look beyond the sales pitch.

This type of investment is defiantly something to approach with extreme caution.

[Bikeguy]

Everyone likes to talk about their wins.

No one likes to talk about their losses.

I made a few "investments".  I use the term loosely, because I now feel I didn't research thoroughly.  More like a very slow moving roulette wheel.  These were individual turbulent stocks.

Made $1500 on the first one.  Made $6000 on the second one.  This proved 1) I was smart enough to make real money, and 2) I should play at a higher level.

Third one I lost $33K.  And that was back in 2000.  I don't even want to think what $33K invested in an index fund would be worth now.

Like the poster above asked, what makes you know you will pick the winner with your $10K?

So, now you have one guy that told about a loss.  Most others won't.

Most of my investments are index funds now.

[Interest Compound]

Thanks for the replies! That is some really good information that I will use to do more research on. Appreciate it!

1. What do you think are the odds of picking a winner with your $10,000?
2. What, in your opinion, are the top 5 things a startup needs to be successful (have a liquidation event which will compensate their investors for their risk), and what is your source for this information?

1. Not great odds, it depends on doing the diligence, but my first thought is that there must be some sorft of a collective "ETF" or "Betterment" type of investment option that helps me diversify, and invest without being all in on one company.

2. There is really a ton of check marks there. There are some good articles that outlined a lot of things to look for in a startp as an angel investor, such as marketing strategy, growth potential, return on investment timeframe, social marketing strategy, potential buyers of the technology etc. I would also weigh in on the resume of the company workers, and if I really think they have a winning technology. I am an engineer by trade myself and have a very diverse technical and management experience, which can help me look beyond the sales pitch.

This type of investment is defiantly something to approach with extreme caution.

What's your asset allocation look like (stocks/bonds)?

[NorCal]

Honestly, I would stay far far away from angel investing unless you have significant capital to burn on high-risk projects.  If you really want to be in this space, I would look at one of the new mutual funds that invests in later stage startups. 

I've worked around venture capital and startups for around 7 years now, and am closely linked to the community.  One thing to remember is that a share of early-stage angel money should not be thought of in the same way as a share of a public company.  Common stock in a startup will be one of many classes of stock in the startup.  If successful, the startup will have a series A,B,D etc. rounds of funding piled on top of your angel investment.  This professional investment will come with professionally negotiated documents that are specifically designed to minimize the value owned by management and seed stage investors.  In addition, the board will be made up of holders of the preferred stock, who frequently have interests directly opposed to yours.  Also don't expect any disclosures from the company on how they are performing, or what they are doing with their shares.

Keep in mind, this is the BEST case scenario.  Most startups flame out before they get to raise this much money to begin with.

From what I've seen, 90%+ (I would guess around 97%) of Angel investments end up being worth nothing.

[Mr.GrowingMustache]

What's your asset allocation look like (stocks/bonds)?

Pretty much all in the stock market, except for my Safety Net, and House Donwpayment fund. Overall, I would say about 80/20% stocks/bonds/savings/cocking acct.

I have about $17k in a taxable account, individual stocks. I have made profits on the stocks (apple, google, etc.). I am considering using some of those funds for another investment, ie why I am looking at another alternative. I am also considering real estate.

Honestly, I would stay far far away from angel investing unless you have significant capital to burn on high-risk projects.  If you really want to be in this space, I would look at one of the new mutual funds that invests in later stage startups. 

I've worked around venture capital and startups for around 7 years now, and am closely linked to the community.  One thing to remember is that a share of early-stage angel money should not be thought of in the same way as a share of a public company.  Common stock in a startup will be one of many classes of stock in the startup.  If successful, the startup will have a series A,B,D etc. rounds of funding piled on top of your angel investment.  This professional investment will come with professionally negotiated documents that are specifically designed to minimize the value owned by management and seed stage investors.  In addition, the board will be made up of holders of the preferred stock, who frequently have interests directly opposed to yours.  Also don't expect any disclosures from the company on how they are performing, or what they are doing with their shares.

Keep in mind, this is the BEST case scenario.  Most startups flame out before they get to raise this much money to begin with.

From what I've seen, 90%+ (I would guess around 97%) of Angel investments end up being worth nothing.

Thanks for the insight! A 90% failure figure is pretty dismal. It is definitely something to approach with caution.

is there a name for those "mutual funds that invests in later stage startups." That is something that might make more sense for me, and what I might be looking for all along.

Everyone likes to talk about their wins.

Like the poster above asked, what makes you know you will pick the winner with your $10K?

So, now you have one guy that told about a loss.  Most others won't.

Most of my investments are index funds now.

I agree with that statement. Putting all of the $10k in a single investment would be extremely risky, especially in a startup. However this is a Exteremly High Risk, High reward type of investment. If I ever consider investing in one company, it would have to be someone I am familiar with personally, and something I believe 100% in, and I accept the losses. It is unlikely that I would ever do such a single sum investment, but I find it unacceptable that the government limits me in doing this if I want to.

That is why, I am doing research, and my first thought is to find if there is an "angel index fund" type of investment that would automatically diversify my investment, instead of startup picking.

[mr_orange]

Robert Wiltbank has some of the best studies around on angel investing.  Here is one:

http://sites.kauffman.org/pdf/angel_groups_111207.pdf

A 90% failure rate isn't accurate.  You should invest in a fund though IMO. 

[NorCal]

What's your asset allocation look like (stocks/bonds)?

Pretty much all in the stock market, except for my Safety Net, and House Donwpayment fund. Overall, I would say about 80/20% stocks/bonds/savings/cocking acct.

I have about $17k in a taxable account, individual stocks. I have made profits on the stocks (apple, google, etc.). I am considering using some of those funds for another investment, ie why I am looking at another alternative. I am also considering real estate.

Honestly, I would stay far far away from angel investing unless you have significant capital to burn on high-risk projects.  If you really want to be in this space, I would look at one of the new mutual funds that invests in later stage startups. 

I've worked around venture capital and startups for around 7 years now, and am closely linked to the community.  One thing to remember is that a share of early-stage angel money should not be thought of in the same way as a share of a public company.  Common stock in a startup will be one of many classes of stock in the startup.  If successful, the startup will have a series A,B,D etc. rounds of funding piled on top of your angel investment.  This professional investment will come with professionally negotiated documents that are specifically designed to minimize the value owned by management and seed stage investors.  In addition, the board will be made up of holders of the preferred stock, who frequently have interests directly opposed to yours.  Also don't expect any disclosures from the company on how they are performing, or what they are doing with their shares.

Keep in mind, this is the BEST case scenario.  Most startups flame out before they get to raise this much money to begin with.

From what I've seen, 90%+ (I would guess around 97%) of Angel investments end up being worth nothing.

Thanks for the insight! A 90% failure figure is pretty dismal. It is definitely something to approach with caution.

is there a name for those "mutual funds that invests in later stage startups." That is something that might make more sense for me, and what I might be looking for all along.

Everyone likes to talk about their wins.

Like the poster above asked, what makes you know you will pick the winner with your $10K?

So, now you have one guy that told about a loss.  Most others won't.

Most of my investments are index funds now.

I agree with that statement. Putting all of the $10k in a single investment would be extremely risky, especially in a startup. However this is a Exteremly High Risk, High reward type of investment. If I ever consider investing in one company, it would have to be someone I am familiar with personally, and something I believe 100% in, and I accept the losses. It is unlikely that I would ever do such a single sum investment, but I find it unacceptable that the government limits me in doing this if I want to.

That is why, I am doing research, and my first thought is to find if there is an "angel index fund" type of investment that would automatically diversify my investment, instead of startup picking.

I honestly haven't researched the funds well enough to give recommendations.  I do know that Fidelity and T.Rowe have funds with money invested in later-stage startups.  I don't know if they're pre-IPO specific, or invested as part of various "technology" funds.  It shouldn't make much of a difference though, as there's very little difference between a small public company and a late-stage pre-IPO company.

[NorCal]

Robert Wiltbank has some of the best studies around on angel investing.  Here is one:

http://sites.kauffman.org/pdf/angel_groups_111207.pdf

A 90% failure rate isn't accurate.  You should invest in a fund though IMO.

Thanks for posting.  That was good info.  I think the most relevant paragraph for this discussion is:

Investors reported their years of experience in the industry of each
venture in which they invested. The study indicates that half of the
investments made were unrelated to investors’ industry experience.
When ventures were related to an angel’s expertise, the angel typically
had fourteen years of relevant experience. Analysis indicates that
expertise had a material impact on angel investors’ earned returns.
Investment multiples were twice as high for investments in ventures
connected to investors’ industry expertise.

While that study has the best quality methodology I've seen in a while, I think the results would absolutely be impacted by a survivorship bias.  Those who tried angel investing and failed would not respond to the survey (or would no longer be in the contacted groupds), while those who succeeded would respond.

[mr_orange]

While that study has the best quality methodology I've seen in a while, I think the results would absolutely be impacted by a survivorship bias.  Those who tried angel investing and failed would not respond to the survey (or would no longer be in the contacted groupds), while those who succeeded would respond.

Perhaps.  The academic types generally do their best to control for stuff like this though.

Anecdotally I can tell you that many investments "go sideways" for a long time and then return some of the investor's initial investment.  Some in the industry refer to these investments as "lifestyle investments" and try to avoid situations where this is the ultimate outcome. 

Angel investing is not for newbies.  It is extremely risky and should be treated as such.  I also agree that one should seek to invest in industries they know very well.  I only look at real estate related industries and some SaaS software businesses.  I know the former much better so I am trying to concentrate my effort there. 

Another problem with the angel and seed stage investment industry is that most investments are structured where a later-stage round can come in and eliminate any upside with liquidity preferences or other terms.  If you invest early you really need to know what you're doing or need to be confident that additional financing will not be needed.  Both of these circumstances are hard to find or negotiate with small amounts of money at stake.