Intro To Angel Investing | Lectures 1-10
Learn how to start investing in startups & privately-held businesses.
Dear Community,
I'm excited to share that anyone interested in taking our highly requested "Introduction to Angel Investing" course can now view all 10 previously-recorded lectures directly on this Substack thread! Its more important than ever for us to empower a new generation of angels (both accredited and non-accredited) to accelerate the growth of promising businesses during these increasingly challenging times. History shows us that many of today's strongest companies were built during economic downturns, but not without the help of angels lending their social and financial capital. Through teaching this course, and making it more accessible than ever, the team behind Bison Venture Partners is continuing our mission to educate 10,000 new angels over the next decade.
We hope you enjoy!
- Garry Johnson III
Introduction
Welcome to the world of angel investing, a journey that extends beyond mere financial transactions to becoming a catalyst for innovation, change, and growth. This course, "Introduction to Angel Investing," is not just an exploration of investment strategies but a deep dive into the transformative power of angel investing. Here, you'll learn to see opportunities where others see challenges and to build wealth that extends its benefits beyond yourself, impacting communities and shaping futures.
Introduction to Angel Investing is ideal for anyone who wants to learn how to start their journey of angel investing in technology startups and small businesses. Join a community of wealth builders investing in early-stage companies with the potential to generate outsized returns!
*Note: This is a 10-part course, with each video lecture accessible below.
Meet Your Instructor
Garry Johnson III is an award winning startup founder and nationally recognized ecosystem builder working to build a more inclusive and equitable innovation economy. He’s been recognized as a Delaware Business Times 40 Under 40 honoree, HBCUvc & Hen Hatch Pitch Competition Winner, StartupAfrica Youth Entrepreneur of the Year, and Entrepreneurial Leadership Award Recipient, and achieved many other other accolades.
Garry serves as Founder & Managing Partner at Bison Venture Partners, a firm on a mission to empower a new generation of owners and angel investors. He also serves as the President of First Founders Inc., a 501(c)(3) organization on a mission to lower barriers to entry and increase the likelihood of success in the innovation ecosystem. The organization helps early-stage entrepreneurs launch successful startups through accelerator programs, community support, and access to resources. First Founders has supported 300+ entrepreneurs from around the world, who've raised $500k+ in non-dilutive funding, and more than $3 million in venture capital.
Table of Contents
Lecture 1: Understanding Your "Why"
Focus: The importance of understanding the personal motivations behind becoming an angel investor. Emphasis on shifting mindsets to invest in high-quality deals and building wealth for broader community impact.
Lecture 2: Know The Rules & Regulations
Focus: Understanding the legal and regulatory framework of angel investing. Discussion on accredited vs. non-accredited investors, risk factors, and the changes brought by the JOBS Act.
Lecture 3: Form C's & "Testing The Waters"
Focus: The legal process of startups raising funds through Form C filings and the concept of "Testing The Waters" for gauging investor interest.
Lecture 4: Set A Measurable Goal
Focus: The importance of setting clear, measurable investment goals. Strategies for building a diverse portfolio and setting targets for investment returns.
Lecture 5: Finding New Opportunities
Focus: How to discover new investment opportunities in private markets, focusing on platforms like WeFunder, Republic, and StartEngine.
Lecture 6: Analyze Interesting Deals & Doing Your Due Diligence
Focus: Methods for analyzing potential investment deals and the importance of conducting thorough due diligence on startups.
Lecture 7: Create Your Own Opportunities
Focus: Encouraging proactive involvement in sourcing and creating investment opportunities, emphasizing community-based investment approaches and equity crowdfunding.
Lecture 8: Manage Your Expectations
Focus: Realistic expectations in angel investing, understanding the likelihood of startup failures, the importance of a diversified portfolio, and the long-term perspective required for investing in startups.
Lecture 9: Build Your Portfolio & Support Your Investments
Focus: Strategies for building a diversified investment portfolio, considering different industries and stages of company development. Additionally, ways to actively support investments beyond financial contributions.
Lecture 10: Track Your Performance & Get Others To Join You
Focus: Importance of tracking investment performance over time using tools like KingsCrowd. Encouraging community involvement in angel investing, and the benefits of cooperative economics in investment.
Lecture #1 | Understanding Your "Why"
Understanding your “why” is probably the most important part about being an angel investor.
Since this course is about shifting mindsets and thinking that you can in fact invest in the same quality deals as a venture capitalist, it’s important to understand “why” you want to build wealth in such a way.
Now, I can't come up with that reason for you, but I can explain the thought process behind why I invest in startups and why venture capitalists do too.
This course isn’t about glorifying venture capitalists in any way. In many ways, I believe they’ve contributed to wealth disparities and inequalities discussed in this course. The mindset, however, is one I believe can create a transformational shift and be applied to our everyday lives. Venture Capital is not perfect, and it is certainly not the end goal, but we can take lessons from it to build the future we desire.
My “why” is to build wealth, not just for myself as an individual, but to build wealth that my family, future generations, and my entire community can benefit from.
Even though I originally embarked on this journey alone, my “why” is not a selfish pursuit. It's about being a problem solver and an innovator, an agent for change and a superhero in my community able to put my talents to good use in making a difference.
Every one of our communities has problems, but entrepreneurs see those problems as opportunities. If we can change those problems, through developing solutions that benefit us all, then we all succeed.
“For it is obvious that if a man enters the starting line of a race 300 years after another man, the first would have to perform some incredible feat in order to catch up to his fellow runner. - Martin Luther King, Jr.
Now, there are statistics that will tell you the racial wealth gap is widening — to say that the wealth attained and preserved in white communities is vastly greater than that of black and brown communities.
In my view, the only way that we can accelerate the rate of change that we wish to see and to create new wealth is to create new entrepreneurs, to create new businesses that deliver value at scale in our communities, and provide return on investment that can be reinvested in the development of our communities. The best way to do this is through investment.
It's important for me to teach this course because my “why” includes education.
Through my work, my goal is to educate 10,000 new angel investors — individuals who've never invested in a privately held business before, but they get their start after engaging with my content.
My “why” is about shifting the mindsets of those who’ve been taught to believe all they can ever be is a consumer.
My work is for those who previously believed they could never aspire to be an entrepreneur or a producer of valuable goods and services. It’s for those who never thought they could build a technology startup that goes on to serve millions of customers around the world. It's about tackling the narrative that just because you didn't go to an elite university, or have professional experience at a prestigious investment firm in the past, you can't aspire to be a venture capitalist, or simply angel invest in promising startup companies that you believe in.
My “why” is about educating a new generation of individuals of all ages, and of all backgrounds, to believe that they can do it too — to help them realize that many of the successful people you may look up to, the people that you study or whose art or music you love, they too are entrepreneurs and investors. Knowing that, there’s no reason why you have to fit into any one particular box. You don't have to fit in with any existing narrative or stereotype — you can create your own future and build the next best thing on your own terms.
Our country is becoming increasingly diverse, which I believe to be a very good thing, and unfortunately, some others believe this to be a very bad thing. The reality is that times are changing, the power structures that dominated the past are slowly being reformed, and diverse leaders from underrepresented backgrounds are shaping industries that impact us all.
My “why” is to create a guide that makes it a little bit easier for anyone interested in learning about startups and investing in private companies — to make it easy for them to understand how to get started, to inspire them to take that leap, and to galvanize them to take action in creating the change they want to see in the world.
It’s about shifting people's perspectives from thinking that they can't do it or they don't have the resources to do it — to realize that you can do this too, and you can get started today.
Even if you don't see yourself represented, this is a space that you belong in, and you can represent yourself in this space. When you represent yourself, you’ll be representing others who look to you for inspiration — and when they see you, they’ll know that they can do it too.
For me, this is how we multiply the number of wealth creation opportunities in our communities. It’s by educating and inspiring one person at a time, and then that person will go on to educate and inspire, and then that person will go on to do the same. If we continue to lean in and accelerate that cycle, we will have communities bursting with owners and entrepreneurs — creating the change, scaling to new heights, and lifting as they climb.
Lecture #2 | Know The Rules & Regulations
This course is a challenge to the status quo system in place that helps the rich get richer through laws that allow them to multiply their wealth, while those who are not wealthy have limited options to do the same with their own money. In this chapter, we’ll start breaking down the ways that you can invest like a venture capitalist, even if you don't have millions of dollars in assets under management.
It's incredibly important to understand the rules and regulations as we dive deeper into the various methods of investing in privately-held companies. A major key to remember is that all investments involve risk — meaning your investment could become worthless and you could potentially lose your money.
The U.S. Government gets very particular about how and where money flows within the economy, who gets to invest capital, what types of businesses individuals get to invest in, how much they can invest, and ultimately who gets to build wealth. More specifically, our government operates various agencies such as the Securities and Exchange Commission (SEC) to provide regulations that protect investors from fraud and other illegal investment activities.
Regulations exist to protect investors.
These regulations exist to protect investors from bad actors — individuals or companies creating fraud, manipulating financial markets, or simply failing to operate with the best interests of their investors. Unfortunately, some companies may defraud investors by taking their money and investing in things that are not a part of an agreed upon deal, or even investing in questionable or illegal assets. The SEC exists to ensure that companies and investors in various asset classes such as public stocks, private equity, and other securities are abiding by the rules.
Some of the most prominent laws governing the private markets today, such as The Securities Act of 1933, are nearly 100 years old. Although some may seem antiquated and overly restrictive, companies and investors alike that fail to abide by these regulations can potentially face legal ramifications including fines and jail time.
Our laws have created two classes;
Accredited Investors & Non-Accredited Investors.
Accredited Investors are not necessarily people who have passed a certain test, but they’re deemed to be “accredited” and financially sophisticated enough to invest their capital into privately-held companies such as startups since they’ve amassed some level of wealth to date.
There are specific ways that the SEC deems someone to be accredited:
“An individual will be considered an accredited investor if he or she:
earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year,
has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)), OR
holds certain professional certifications, designations or credentials in good standing, including a Series 7, 65 or 82 license.
A spousal equivalent means a cohabitant occupying a relationship equivalent to that of a spouse.
If you are a non-accredited investor, then the limitation on how much you can invest depends on your net worth and annual income.”
Basically, an Accredited Investor is someone who makes over $200,000/year alone, makes more than $300,000/year with a spouse, or has a net worth of $1 million dollars or more. Pretty high bar, right? Now, there are ways to become an Accredited Investor even if you’re not individually wealthy, such as taking the Series 7, 65 or 82 exams. This method is typically done by financial advisors and professionals working in various investment firms, as they likely provide financial advice or manage other people’s money.
In the past, only Accredited Investors could invest in private companies — now anyone can.
Thanks to the Obama Administration, which signed the Jumpstart Our Business Startups (JOBS) Act into law, 2012 marked an historic shift in access to the private markets.
“This bill is a potential game changer. Right now, you can only turn to a limited group of investors -- to get funding…
Because of this bill, start-ups and small businesses will now have access to a big, new pool of potential investors -- namely, the American people.
For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
- President Barack Obama
The rules have changed to allow a new class of investors to benefit from wealth creation opportunities in the startup landscape. Prior to the JOBS Act, individuals who were not accredited could not legally invest in early-stage startups through the platforms that exist today.
Before this legislation, which wasn’t put into action until 2016, wealth generation from investments in private companies was reserved for those who
were already individually wealthy.
With the JOBS Act, this opened up a new opportunity for startup companies, the same types of businesses that raise money from traditional angel investors and venture capitalists, who could now fundraise through SEC-regulated platforms. These are basically websites that allow for everyday people to invest into startups listed on an investment marketplace. These platforms are very similar to sites like GoFundMe where an individual can set up a campaign to raise money for a cause or some emergency need that they might have. In the same way, a startup or a small business can set up a campaign on an investment platform and raise money from everyday people. In some cases, you can make an investment for as little as $10, but in most cases, the minimum is at least $100. Needless to say, this was a game changer.
“While these asset classes make up a significant portion of a high net worth individual’s portfolio, access to these types of investments wasn’t available to the average individual due to regulations and the risks associated with private markets.”
On the startup side, there's a cap on how much a business can crowdfund within one year — with companies legally allowed to raise between $25,000 and $5 million on an investment platform. On the investor side, you can invest in these businesses, but the SEC has limits on the total amount of money that you’re allowed to invest in a given year. For most, that number is $2,500.
“If either your annual income or your net worth is less than $124,000, then during any 12-month period, you can invest up to the greater of either $2,500 or 5% of the greater of your annual income or net worth. If both your annual income and your net worth are equal to or more than $124,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $124,000.”
So, the SEC has determined that they’ll allow you to invest in privately-held businesses, but they won’t allow you to invest more than they want you to.
In their eyes, Non-Accredited Investors are not financially sophisticated enough to bear the brunt of the risks involved with private investing — potentially losing their entire investment. Their reasoning is that they want to protect you, the investor, from making financial decisions that could have an adverse effect on your net worth.
So, the SEC has decided to "protect" investors by limiting the amount they can invest.
You could still go out and buy all the lottery tickets you want — the SEC does not care how many lottery tickets you buy.
The likelihood of that lottery ticket paying off for you is very low — it's extremely low, but there are no rules limiting the amount of lottery tickets you can buy.
Investing in startups is similar to playing the lottery, because startups are very risky — "As of March 2021, only 80% of startups survived after one year."
These are businesses that have a limited operating history — they haven't been around for very long. Oftentimes, they're still trying to figure out their business model and what's called their "product market fit."
Other reasons for failure include:
Losing market share to competitors.
Lacking skill sets required to scale.
Running out of money.
Knowing this, it might sound like a bad place to invest if most startups are going to fail, but venture capitalists know that there will be successes.
Venture capitalists don't invest in one company and expect it to increase their wealth — they're going to make multiple bets by investing in a portfolio of startups. They spread their bets out on different startups, in different markets, with different entrepreneurs running them. In doing so, they're increasing the odds that one of the companies they invested in is not only going to create a return on their investment, but it's going to make up for all of the losses they will likely incur from investing in those other startups.
Now, the SEC knows that most people are not educated in startup investing, so they require investment platforms to also provide thorough educational materials. It's in the best interest of those platforms to offer those educational materials anyway because the platforms are only successful when startups successfully raise funding. In order to successfully raise funding, there needs to be a pool of investors educated on how to invest in those companies. With this in mind, investment platforms work hard to create educational materials for their user base to make informed decisions when investing in startups.
There are a wide variety of investment platforms you can use to find and invest in startups:
*Full disclosure; I’m an investor in this platform.
The rules, as they exist today, state that an individual can invest a maximum of $2,500 in one year — and that counts for all platforms they might use. The SEC puts the responsibility on the investor to ensure that they are not exceeding their investment limit, even if they're investing in 10 startups on one platform (ie. Wefunder) and 20 startups on another (ie. Republic). The reality is that when you go on these investment platforms, you are self-certifying that you are managing your own investment limit across all platforms that you might be using. That’s why it’s important to know the rules.
As an example, if you’re Non-Accredited and invest $2,000 in a startup raising on the Wefunder platform, then you go to Republic and invest $1,000 in another startup, you'd be $500 over your SEC limit. But remember, the platforms don't speak to one another, so you’d technically be able confirm both investments. Each site will, however, have you self-certify that you're maintaining your investment limit across platforms. Now, if you went on one platform and tried to invest $3,000 without proving you’re an Accredited Investor, the platform would not allow you to finalize your investment in that particular campaign.
It's not clear what the penalties are for investing more money than the SEC sets forth, but you likely want to avoid finding out.
Lecture #3 | Form C's & "Testing The Waters"
Startup companies that launch campaigns on various investment platforms are also regulated by the SEC, and must remain compliant if they hope to successfully raise money from Non-Accredited Investors. These businesses must file what's called a Form C with the SEC, which makes the fundraise a public offering of securities (via equity or debt)— it's like a mini IPO.
Each company has to put the legal paperwork together to offer a deal with specific investment terms, and the SEC has guidelines on what communications the startup can have as they publicly raise funds from private-market investors. This is important because the SEC wants to ensure there are no bad actors seeking to defraud investors, whether you’re “sophisticated” or not.
When a company files its Form C, it will include the specific deal terms of its investment offering. The deal terms are an agreement made between the company and its investors. It’s a legally binding contract where a business sets a price on its shares through a valuation, outlines an interest rate for a loan, and/or the potential investment multiple to be expected.
Investors have the power to decide
whether they enter an agreement or not.
Investment platforms (ie. Wefunder, Republic, & StartEngine) must clearly outline the deal terms of each investment offering and provide you with all of the materials necessary to evaluate an investment opportunity. At a minimum, investors should review each of the following documents before making a decision to invest in any particular company:
Pitch Deck or Business Plan
GAAP Financials
Form C
This is where you have the power as an investor to make an educated decision since you're able to review a company's background, its founders, the management team, revenue projections, outstanding debts & liabilities, assets, equity partners, or any lack thereof.
If a company does not provide this information, you're not able to make a fully informed decision.
It’s legally required for companies to provide you with this information, and if they don’t, it means they haven’t officially launched their investment campaign — they’re not actively soliciting investments from the public.
If you find a startup or a small business in this scenario, they’re most likely “Testing The Waters.”
“Testing The Waters” is legal, and it allows a startup or small business to essentially set up a draft version of their campaign on an investment platform and garner non-binding commitments from potential investors. This is a low-risk way for businesses to determine if their community, social media followers, or friends & family are even interested in investing in their business before the company goes through the hard work of filing their official paperwork and launching a fundraising campaign.
“Testing The Waters” is beneficial to founders as it helps them see how much money they might be able to raise if they were to officially launch a campaign.
It also frees them from having to disclose their financial information, and gives them time to develop their presentation materials, as well as anything else that would make for a more compelling case.
While in the “Testing The Waters” phase, a company can still adjust its investment terms and try to figure out which terms are preferable to investors. The company has until it files its Form C to continue adjusting those terms as it gauges interest from potential investors.
For example, a company could start by “Testing The Waters” through a debt round by providing a revenue-share loan where 6% of its annual revenues go toward repaying its investors. While the company is “Testing The Waters” and gauging interest with potential investors, it might start to get early interest. Some investors, however, may follow up with the fact that they'd love to invest in this company, but they’re only interested if the company is raising an equity round — they’d prefer for the entrepreneur to offer an ownership stake in the company in exchange for their investment capital. Since the company is still in the “Testing The Waters” phase, it can adjust and change its terms however and whenever it likes. Now, instead of offering a revenue-share loan, the company might decide to raise on a priced round — it can set a valuation on the company and sell shares or ownership units to investors.
As it continues to “Test The Waters,” the company may find even more people expressing interest in investing in this business because they see an opportunity to become owners in it as opposed to lenders to it. The company can then decide to file its official paperwork and make an investment offering that includes equity in the business as opposed to debt.
In order to get out of the testing the waters phase, the company must file its Form C and follow up with anyone who made an early commitment in order to finalize their investment. This means that investors can go back into the investment platform, analyze the updated terms and determine whether or not they’d like to invest in this particular offering. If that investor made a commitment prior to the filing of the Form C, then the investor did not make a binding investment — they did not subscribe to the investment terms. They have the right to rescind their commitment without facing any consequences, and the investment platform will refund any money that investors may have decided to hold in the platform’s escrow account as they waited for the startup to finalize its deal terms.
Alternatively, if you transferred funds into an escrow account through the investment platform, you could confirm your investment and subscribe to the updated terms. Once you subscribe to the updated terms, and a startup closes its investment campaign, that's when your investment is finalized with the company. Your investment dollars are then deposited into the company’s bank account and they then have a fiduciary duty to operate in your best interest as an investor in the company.
Lecture #4 | Set A Measurable Goal
When it comes to investing, you want to have goals in mind. After all, you've set out to become an angel investor for a reason, and you need to decide what your goals are so you can determine whether you’re successful in your endeavors or not.
Now, I’d venture to say that so long as you get started in your investment journey, that alone is a success. If you’ve already started, then you’re already winning! Even still, you want to set goals that allow you to attain higher levels of financial freedom and personal fulfilment.
As you progress, you’ll likely want to increase your performance in the investment landscape — you might want to build a large portfolio of investments (ie. 10+ companies), or you might want to support a certain number of founders (ie. 100+ entrepreneurs).
You can even dive deeper into any of those metrics. You might want to specifically invest in 10 black entrepreneurs and 20 women entrepreneurs within the next year.
Each of those are are measurable goals.
Alternatively, you could set a goal to have an exit with your investments which could come in the form of an IPO.
“The term venture capital-backed IPO refers to the initial public offering of a company that was previously financed by private investors. These offerings are considered a strategic plan by venture capitalists to recover their investments in the company. Investors normally wait for an opportune time to issue this type of initial public offering in order to maximize their return on investment (ROI).” - Source: Investopedia
An “exit” is when a company goes on to be listed on the stock market, becomes acquired by a larger company, or has some form of a what's called “liquidity event” where investors who own equity in the business are able to cash out and get paid.
This is a lofty goal, so maybe one exit is your personal goal. Perhaps you’re more ambitious and decide that 10 exits is your goal. Whatever your goals are, they should be measurable so you can track your performance. You also want to be able to hold yourself accountable. If you're a part of an investment group, you can hold one another accountable to achieving your goals as a collective.
Now, let's start with the first set of measurable goals. And that could be…
I want to invest $100 into my first startup.
This goal is very easy to attain, because as long as you're able to save $100 and find an investment opportunity where the minimum investment is no greater than $100, then you're able to make your first investment into that company. Exciting, right?
Setting a measurable goal is important because you want to be able to achieve it, and after you’ve achieved one goal, you can roll into the next one. You want to set some goals that are attainable for yourself, allowing you to comfortably get started and gradually build upon your success.
The reality is that making one investment is not at all likely to make you wealthy.
In fact, no wealthy individual invests in just one thing and neglects every other investment opportunity out there. In order to build wealth, you have to build a portfolio of investments.
“A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents.” - Source: Investopedia
Now, we're not going to talk about stocks here — The Ghetto VC is focused on privately held companies such as technology startups and small business. However, if you take stocks for example, any financial advisor is going to tell you to build a diversified portfolio — a portfolio of not only shares in different companies, but shares in different companies operating in different industries.
To diversify even more, your shares should be in different companies in different industries, with different market sizes. To take it further, these should be shares in different companies, in different industries, with different growth trajectories. Not just stocks but also bonds, and potentially treasury bills — different assets that allow you to diversify your exposure to various investment opportunities. You will then have exposure to different markets, with each carrying their own level of risk.
Remember, all investments involve risk, and some are more risky than others.
A wise investor is going to build a diversified portfolio that includes some less risky investments and some more risky investments, and they're going to diversity their portfolio to avoid having all of their eggs in one basket while increasing their likelihood of receiving a return on their investment.
When we think about private markets, just like the stock market, there are many different types of companies to invest in.
If we start with traditional small businesses, these are going to be less risky investments than technology startups. These are potentially less risky if their business model is recognizable and they’ve already started generating revenue. Think about local brick-and-mortar businesses like coffee shops, bakeries, mechanics, bookstores, etc. These each have proven revenue models with customers coming in regularly to buy their products or pay for their services.
This type of company is more likely to provide an investment opportunity in the form of debt — a loan of some sort. Debt just means that an investor (like you) is able to invest in this business today, and are then owed what’s called the principal — how much you put in — then, depending on the investment terms, you're likely owed some sort of interest on that principal. There's going to be some percentage that your investment grows over time — so the longer the small business takes to repay you, the more money they owe you.
Other ways that a small business might offer up an investment opportunity could be through a revenue share loan. A revenue share loan is still debt, but it does not always have an interest rate added to the principal. For the most part, a revenue share loan is likely to have some form of a an investment multiple on it, with the business making repayments either quarterly or annually.
The business is going to allocate a percentage of its revenue to repaying this loan over a certain amount of time.
For example, 6% of a local coffee shop’s quarterly revenues go toward repaying its revenue share loan. The investment multiple comes into play as the coffee shop is obligated to repay you your principal in addition to some multiple on your original investment.
Let’s say the coffee shop decided to agree to a 2x multiple on your investment. If you invested $100, then the small business owes you $200. As the coffee shop puts your investment dollars to work and generates revenue through coffee sales, 6% of its quarterly revenues are going to go toward repaying it’s investors. This means that you're going to get a payment every quarter until you receive your full $200 owed.
Depending on the maturity of the business and its revenue growth, it may take a few years to get your full investment back plus the multiple.
So you might be thinking, “If I invest $100, and I’m going to get paid back $200, that's an okay deal…” You're right, it's an okay deal. But if you think about investing a larger amount of money, say $1,000, this business now owes you $2,000 — you still expect to double your money, but your earnings can be bit more substantial due to your larger investment.
Remember to set a goal for how much you plan on earning from your investments.
How much wealth do you want to build from investing in private businesses?
Think about where you are financially today.
Think about your net worth today…
“Your net worth is the amount by which your assets exceed your liabilities. In simple terms, net worth is the difference between what you own and what you owe. If your assets exceed your liabilities, you have a positive net worth. Conversely, if your liabilities are greater than your assets, you have a negative net worth.” - Source: Investopedia
… and think about what you want it to be in the future.
That will help you determine what types of investments you need to start looking at.
Let's say you have $100,000 in student loan debt and you want to pay that off by a certain time. Think about how your investment portfolio can help you earn more income to be able to pay that debt off. The debt that you provide to a small business can help you pay off the debt you owe to other lenders.
Generally speaking, investing in small businesses is going to be on the lower end of the risk spectrum. That's if you're looking at the type of business that’s generating significant revenues, has outlined a solid plan with realistic financial projections, and is on a path to repaying you and other investors in a timely fashion.
Keep in mind, if you're investing through an investment portal, like Wefunder, Republic, or StartEngine, the business doesn't just owe you money — it owes everyone who invested in that particular funding round.
Remember the coffee shop’s 6% Revenue Share Loan that goes back to repaying investors? That’s owned by the crowd — so that 6% has to be divided up by all of the investors in that round (and that's okay). This is why it’s important to manage your expectations and understand how long of a ride you’ve signed yourself up for.
As an investor, you don't want to receive a couple of dollars every quarter, right? You want to find businesses that can provide you with more significant earnings over time. So now, let's focus on the other side of the risk spectrum…
Let's think about technology startups — these are going to be the most risky investments out there, but they're also the investment opportunities that provide the potential for the greatest returns. These investment opportunities are the ones that are typically going to offer some form of equity in the business. Their investment terms are going to typically be in the form of a “priced round” where investors are purchasing ownership shares in the company. The company will set a price per share and offer a certain number of shares for sale.
The company could be offering a SAFE, which is almost like an I.O.U. for investors. You’re basically providing capital today for the startup to use and to grow, and when they grow to a certain point, they owe you equity in the business. Since you invested early on, you will receive an equity stake that is in proportion to your investment and company’s valuation cap at that time.
“The Valuation Cap is the most important term of a convertible note or a SAFE. It entitles investors to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent financing.
Let's say you invest in a startup using a note with a $3 million cap. If the series A investors decide that the company is worth $6 million dollars and pay $1/share, your note will convert into equity AS IF the price had actually been $3 million. By dividing $3 million by $6 million we get an effective price $.50/share. That means that you will get twice as many shares as the series A investors for the same price.” - Source: Wefunder
Technology startups are the types of companies that have historically gone on to create significant wealth for investors in Silicon Valley, and other ecosystems that focus on technology and innovation.
This is because these startups, with the right resources, the right teams, with the right amount of capital, at the right time can go on and produce exponential returns for early investors.
A traditional venture capitalist or wealthy angel investor is likely expecting a 10x return or more on their investment.
So if they invest $100, they’re expecting $1,000 back.
More realistically, they might invest $1 million and expect a $10 million return.
If they invest $10 million, they're expecting a $100 million return on their investment.
This is possible because technology startups are building highly scalable businesses with lots of growth potential. These are companies that are able to serve large amounts of customers, large numbers of users, or a significant number of customers with very big bank accounts (think corporations and large enterprises).
Tech startups can also serve a very large number of customers with small bank accounts, but they're able to scale and serve potentially millions of users. In Facebook & Google's case, they’re serving billions of users, many of whom never pay them a dollar.
A local coffee shop isn’t able to serve billions people, but a technology startup can, and there were people who invested in Facebook very early on — when it was just a concept, and when it was a simple app for college students. Those investors from Silicon Valley saw the potential in the company and they got in early. Since then, the company continued to grow — it continues to scale by adding new ways to earn revenue. The company built new features for its platform, acquired other platforms like WhatsApp and Instagram, scaled internationally, and even became listed on the public stock market. Today, you can go in and buy stock in Facebook (now Meta).
Many investors have made money owning Facebook stock (they’ve lost money too), but the people who earned the greatest returns are the ones who invested in Facebook before it was listed on the stock market.
That's what you need to take into consideration, and expose yourself to similar opportunities.
There are people who invested in Facebook, and every other company listed on the stock market, before they were publicly listed for everyday people to invest and trade. That’s why we’re focusing on the private markets.
Now, back to your goals…
If your goal is to 10x your money, then your investment portfolio is going to need to include startup investments in the technology space.
These investments, just like all others, are incredibly risky. By investing in these startups, you should expect to potentially lose all of your money. Venture capitalists know and accept this fact. They invest in a portfolio of companies — they don't just invest in one and assume it's going to be the next Facebook. They invest in 10, 20, 30, or even 100+ companies to increase their likelihood of success. VC’s set a goal of how many startups they want to invest in and then they do the hard work of going out there looking at different startups, different deals, hearing pitches, evaluating the deals, doing their due diligence, and then finally determining where they are going to invest their money.
That's how you need to think, so I want you to set a measurable goals for yourself.
Setting a goal of making 10 investments in one year is a great goal, and it's feasible because you can get started with your first investment for as little as $100 in many cases. Maybe you're able to allocate $1,000 out of your annual salary to invest in the private markets, and maybe you want to make one new $100 investment each month.
In 10 months, you’ll have a portfolio of 10 companies! If you had zero companies in your portfolio before, and you end the year with 10, that’s something to be very proud about.
If you had zero before, and you end the next year with one investment, that's also great!
The most important thing is to get started.
But you can't get started and then stop — you have to play the game by being in the market. You have to increase your exposure and diversify your portfolio. The way that I think about things is I have an investment portfolio that includes both traditional small businesses and technology startups.
Why do I do that? Well, for one, I can look at a small business, and if it's generating revenue, it's got consistent revenue over the past couple of years, if it's growing and needs to raise some debt capital to hire staff, to buy a new building, whatever it might be, I want to invest in that. Maybe it's a business in my community and I want to support by becoming a minority owner in my community — I'm able to do that.
I can go to a brick-and-mortar business and I can shop with it, I can send its products to my family members, I can tell my friends to go and support it. There are tangible ways for me to get involved and support my investment, as well as my community.
Maybe your personal goals involve investing in businesses in your local community — that's great, and much needed.
But if your investment goals are to achieve significant financial returns as well, you need to include technology startups, which have the potential to provide the greatest returns.
If you’re like me and you want the best of both worlds, you might want to invest in five small businesses and five startups this year. Even still, five and five is not diversified enough. You want to have diversification within your small business portfolio. Maybe you look for one coffee shop, one bookstore, one trophy manufacturer, one recycling company, and one computer repair shop.
Those are all small businesses, but they're all different types of small businesses — you're not investing in five book shops. This diversification is how you need to think about building your portfolio.
Now, when you think about investing in technology startups, it's the same type of strategy. You don't just want to invest in five of the same types of tech startups, you want to invest in maybe one financial technology company, one healthcare technology company, one educational technology company, one data analytics company, and one artificial intelligence company.
Start setting measurable investment goals by asking yourself the following questions:
How much money do I want to make?
How much money am I willing to invest?
How many companies do I want to invest in?
How long am I willing to wait?
Lecture #5 | Finding New Opportunities
In this lecture, we will focus on how to discover new investment opportunities. We will answer the following question: Where can I find investment opportunities?
Every day, small businesses and technology startups in private markets are raising money. On any given day, there are hundreds, if not thousands of businesses actively fundraising.
To allow everyday people to invest in these businesses, there are investment crowdfunding platforms that leverage Regulation Crowdfunding (Reg CF). This enables individuals who are not wealthy to invest in privately held businesses.
We will discuss the three main platforms: WeFunder, Republic, and StartEngine. This is not an endorsement of any particular platform, but these are the ones I use most often and find to be the most credible, given that they are among the top players in the industry.
I must disclose that I am an equity owner in both WeFunder and StartEngine, and when Republic launches their next public fundraising campaign, I plan to invest in their platform as well. On each of these platforms, you can create a free account to find investment opportunities.
WeFunder is an inclusive platform with a wide variety of traditional small businesses and high-growth technology startups. On WeFunder, you can find deals ranging from debt rounds to equity rounds, or a combination of both through convertible debt. The platform is accessible to small business owners and startups, as anyone can launch a campaign within 30 minutes to an hour and start fundraising from their community.
On WeFunder's website, you can explore different startups in various industries, from brick-and-mortar stores to fintech startups innovating in the banking industry.
To search for new investment opportunities on WeFunder, first, visit their website at www.wefunder.com. On the homepage, you'll find a selection of featured campaigns. To explore a broader range of opportunities, click on the "Explore" tab at the top of the page. Here, you can filter startups by various criteria, such as industry, location, and fundraising status. Additionally, you can sort startups by popularity, valuation, or closing date.
By clicking on a specific startup, you will be taken to their campaign page, where you can find comprehensive information about the company, its team, financials, and the terms of the investment. To stay updated on new opportunities, consider signing up for WeFunder's newsletter, which highlights new and noteworthy campaigns.
Republic features similar types of companies but has a better user experience. The platform has a stronger community aspect, with public profile pages where you can follow other individuals, founders, and investors. On Republic, you will primarily find equity rounds involving consumer packaged goods brands with high-growth components. Republic is also unique for offering an auto-investing feature.
To find new investment opportunities on Republic, go to their website at www.republic.co. On the homepage, you will see a selection of featured campaigns. For a more extensive list, click on the "Explore" tab at the top of the page. Here, you can filter startups by industry, funding stage, and location, or sort them by popularity, newest, or closing soon.
By clicking on a specific startup, you will be directed to their campaign page, where you can find detailed information about the company, its team, financials, and the terms of the investment. Republic also offers a "Discuss" section on each campaign page, where you can ask questions and engage with the company and other investors. To stay informed about new opportunities, sign up for Republic's newsletter, which features updates on new campaigns and investment insights.
StartEngine is an equity-based platform focusing on buying shares in companies with set valuations. They do not cater to traditional small businesses or service-based businesses. Instead, they focus on highly scalable companies. StartEngine is currently the only platform among the three making progress with its secondary trading market, allowing investors to trade their shares after holding them for 12 months.
To search for new investment opportunities on StartEngine, visit their website at www.startengine.com. On the homepage, you will find a selection of featured campaigns. To explore more startups, click on the "Explore" tab at the top of the page. Here, you can filter startups by industry, funding type, and location. Additionally, you can sort startups by the amount raised, closing date, or alphabetically.
By clicking on a specific startup, you will be taken to their campaign page, where you can find in-depth information about the company, its team, financials, and the terms of the investment. StartEngine also features a "Discussion" section on each campaign page, where you can ask questions and interact with the company and other investors. To stay updated on new investment opportunities, consider signing up for StartEngine's newsletter, which highlights new campaigns and provides investment insights.
In conclusion, finding new investment opportunities on WeFunder, Republic, and StartEngine is a straightforward process. By utilizing the "Explore" feature on each platform, you can filter and sort startups based on your preferences and interests. Don't forget to sign up for their newsletters to stay informed about the latest campaigns and investment insights. By keeping an eye on these platforms and regularly exploring new startups, you can identify promising investment opportunities that align with your goals and interests. In the next sections, we will dive deeper into a high-level overview of what you can find on each page and how to discover startups. Afterward, we’ll move on to analyzing various deals.
Lecture #6 | Analyze Interesting Deals & Doing Your Due Diligence
Now, we won't delve into the full due diligence process just yet, but we will discuss high-level methods for analyzing deals. Analyzing deals is where things start to get serious for you as an investor. You want to determine whether a particular opportunity is a good, great, or terrible investment.
When you analyze potential deals, you will examine the variety of information the company provides on their campaign page. One of the first things to determine is whether the company has filed its Form C. If it has, that means this is an official investment offering. The filing of Form C ensures that the investment terms offered on the campaign are finalized and cannot be changed.
If the company hasn't filed its Form C, it likely means they are still in the "testing the waters" phase. They have set up a campaign to gauge investor interest, and any commitments made are non-binding. Investors are not obligated to transfer any funds, and the entrepreneurs behind the company can decide whether to make the raise official based on the interest they receive.
When you first land on a company's campaign page, make sure to check whether it is an official campaign. Next, examine the various sections of the campaign page. For example, on WeFunder, you will see the company name, a quick tagline, a pitch video, and information about where the company is based, its website, and the industries they operate in.
As you scroll down, you'll find details about the company's team, an overview of the company, and a presentation deck. Look for information about the problem they are solving, their solution, financial projections, key partnerships, revenue streams, and their intended use of funds.
In the “Details” section, you will find financials, management's discussion and analysis of financial condition and results of operations, and risks and disclosures. This information will give you insight into the company's financial standing, milestones, liquidity, capital resources, and potential risks associated with the business and its industry.
Pay attention to the company's capital structure, ownership, past fundraisers, outstanding debts, and use of funds. You can also view the official Form C filing on the Securities and Exchange Commission's (SEC) Edgar website.
In summary, when analyzing potential investment opportunities, ensure you carefully examine the campaign page, determine if the company has filed its Form C, and review the provided financial and operational information. This process will help you make informed decisions about whether to invest in a particular company or not.
Here’s a hypothetical scenario to illustrate a realistic example:
As a first-time investor with a budget of $100, I came across a coffee shop investment opportunity on WeFunder that piqued my interest. Given my limited budget, I want to ensure I am making an informed decision before committing my funds to this investment.
First, I verified that the coffee shop has filed its Form C, confirming that this is an official investment offering. Next, I started examining the different sections of the campaign page to better understand the business and its potential.
The coffee shop's quick tagline and pitch video grabbed my attention. The video showcased the unique ambiance and offerings of the coffee shop, which sets it apart from other competitors in the market. The founders explained their vision for the coffee shop, emphasizing their focus on sustainability, locally sourced ingredients, and providing a cozy atmosphere for customers.
In the company overview section, I learned that the coffee shop is solving the problem of offering high-quality, ethically sourced coffee and pastries in a comfortable environment. Their solution is a brick-and-mortar shop that emphasizes customer experience, eco-friendly practices, and strong connections with local suppliers. Their financial projections showed promising growth and revenue streams from both in-store sales and online purchases of their signature coffee blends.
After reviewing the “Team” section, I was impressed by the founders' background and experience in the coffee industry, as well as their passion for creating a unique coffee experience.
The “Details” page provided me with insight into the coffee shop's financials. The shop is relatively new but has demonstrated consistent growth in revenue and customer base. Their debt ratio is low, and the earnings per share show promise. The management's discussion and analysis section highlighted their achievements and plans for expansion, including opening new locations and developing an e-commerce platform.
“The term debt ratio refers to a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.” - Investopedia
The debt ratio is important because it provides insight into the financial health of the coffee shop. Understanding the debt ratio helps me determine the company's level of leverage and financial risk.
A company with a high debt ratio may have difficulty obtaining additional financing, making it harder for them to grow and expand. High leverage can also make the company more vulnerable to economic downturns, as it may struggle to service its debt in times of reduced revenue. On the other hand, a low debt ratio indicates that the company relies less on borrowed funds, which can be seen as a sign of financial stability.
In the scenario, the coffee shop has a low debt ratio, which suggests that it has a lower financial risk and is in a healthier financial position. This information can contribute to my decision to invest in the coffee shop, as it indicates that the company has a manageable debt level and might be better equipped to weather challenges in the future.
By assessing the debt ratio, I can make a more informed decision about whether to commit my funds to this particular investment opportunity. This is essential in ensuring that my limited budget is allocated wisely and that I am aware of the potential risks and rewards associated with the investment.
The “Risks and Disclosures” section outlined potential risks, such as fluctuations in coffee prices and increased competition. However, the company has plans to mitigate these risks by expanding their product offerings and focusing on customer loyalty programs.
Considering my $100 budget, the minimum investment required for this coffee shop is within my reach. Given the strong team, unique value proposition, and promising financials, I am inclined to invest my funds in this opportunity. However, as a first-time investor, I must also remember that investing in startups carries inherent risks, and there is no guarantee of returns. In conclusion, after thorough analysis, I feel confident in allocating my $100 budget to this coffee shop investment opportunity on WeFunder.
When it comes to performing due diligence, this is the next level of being a great investor. You want to ensure you are making not only an educated investment but a highly informed one. This is where you get to do your homework as an investor, diving deep into understanding whether the claims made by the startup and the founders on their campaign are accurate, believable, and trustworthy. This requires extra effort on your part as an investor since you can't solely rely on what is included on the campaign page.
To conduct your due diligence, there are numerous approaches. In the pitch deck provided by the entrepreneurs, they will have listed their market size, the market opportunity, and the growth of that market. It's straightforward to perform a Google search to investigate that market and conduct your research to determine if the market is growing at the rate the founder claimed. Verify if the sentiments expressed in various reports, articles, and research align with what the founder outlined in their presentation.
There is also due diligence when it comes to the founders. Of course, on a campaign page, everyone will present themselves in the best light. You have to dig deeper by examining the founders' LinkedIn, Instagram, and other social media accounts. Assess what they post about, ensuring it aligns with what you see on the campaign page and that they represent their business positively.
When considering the business perspective, examine the founder's LinkedIn, looking at their background, achievements, and testimonials from others. Investigate the other team members, ensuring they represent the business outside of the campaign page on their social media.
Additionally, do a Google search for the company and see what articles appear. Are they positive or negative? If the company is building an app, check the app store for reviews and comments.
Remember to visit the Q&A page on every campaign and look at the questions others are asking. The founders' responses can be a test of their character and can influence your decision about whether or not to invest.
Other ways to conduct due diligence include verifying the company's intellectual property claims by searching through the USPTO website and researching the competition. Investigate the competitors' performance, fundraising, user experience, and product quality to make an informed decision.
In summary, due diligence is an essential part of making informed investment decisions. Use the power of the internet to gather information about companies beyond what they provide themselves.
Here’s a hypothetical example:
Jason, a first-time investor, came across an investment opportunity on Republic for a financial literacy app called "FinLitPro." Intrigued by the app's mission to promote financial education, he decided to perform due diligence before making a decision to invest.
First, Jason examined the campaign page to understand the market opportunity, growth potential, and the team behind FinLitPro. He noticed that the app aimed to target millennials and Gen Z individuals, promoting financial literacy through engaging and interactive content. The market size was promising, with an increasing number of young people seeking financial knowledge.
Next, Jason researched the market growth independently to verify the claims made by the FinLitPro team. He discovered articles and reports confirming the increasing demand for financial literacy apps, particularly among younger generations. This information reassured Jason that the market was indeed growing and that the app had potential.
Moving on, Jason decided to investigate the FinLitPro team. He browsed their LinkedIn profiles, examining their backgrounds, accomplishments, and recommendations from other professionals. He found that the CEO had a solid background in finance and had previously worked at a reputable financial institution. The rest of the team comprised experienced professionals in software development, design, and marketing, which gave him confidence in their ability to execute their vision.
To further assess the app, Jason downloaded FinLitPro from the app store and tested it himself. He found the content to be engaging, informative, and well-organized. Moreover, the app's reviews were mostly positive, with users praising its ease of use and effectiveness in teaching financial concepts.
Curious about the competition, Jason researched other financial literacy apps on the market. He compared the features, pricing, and user reviews of FinLitPro with its competitors. While some competitors had a larger user base, FinLitPro's unique approach and focus on interactivity set it apart from the others.
Finally, Jason visited the Q&A section of the campaign page to observe the FinLitPro team's interactions with potential investors. He noticed that the team was responsive, transparent, and respectful in addressing concerns and answering questions.
After performing thorough due diligence, Jason felt confident in the potential of FinLitPro and its team. He believed that the app had a competitive edge in the growing financial literacy market and decided to invest $100 in the campaign. By conducting due diligence, Jason gained a better understanding of the opportunity and made an informed investment decision, mitigating his risk as a first-time investor.
Lecture #7 | Create Your Own Opportunities
This is one of my favorite lessons in this course. It's about creating your own opportunities and realizing that you have everything you need to build the life you want. When it comes to building an investment portfolio and investing in startups, it doesn't have to be a passive game. You can play an active role in not just finding and investing in interesting deals, but also helping entrepreneurs and small business owners understand that they can raise investment money from their community.
Shift your mindset from focusing on what's readily available to you, like websites for finding opportunities, to thinking about how you can create new opportunities that may not exist yet. As an investor, you can see the value in different products and services that entrepreneurs bring to the market, and you can be an advocate for equity crowdfunding.
There may be entrepreneurs in your community with phenomenal products who need access to capital to scale but have struggled to raise traditional investment rounds or gain funding from a traditional bank. You can help these entrepreneurs see that there are other ways to raise funding, and as a customer and advocate, you can educate the founder on what it means to raise from the community and why you want to be an investor.
Don't just sit back and let the powers that be control sourcing capital to entrepreneurs. Everyday people in the community can stand up and say, "Hey, I want to be an investor." Even if you, as an individual, can only commit $100 to investing in a business, you can galvanize your community and show entrepreneurs that there are other people in the community who are interested, willing, and ready to invest in their business.
Taking on the mindset of an angel investor means thinking about how to gain ownership in your community and the startup ecosystem. You have to play an active role and become someone who creates opportunities, not just takes them.
Here are 3 ways to create your own opportunities:
Let an entrepreneur know that you are interested in investing in their business. If you are not an accredited investor (meaning you're not a wealthy individual), let them know that if they opened a community round and allowed everyday people to invest in their company, you would be in and how much you would invest.
Create opportunities to gain ownership interests and equity in a business without having to put up your own capital. This can be done through advisory shares, where you contribute your skills, ideas, and talents to a startup in exchange for equity.
Serve as a venture scout and source deals for VC firms, helping them find new deals that they may have overlooked or not had access to. If a VC firm invests in a company you've connected them with, negotiate for carried interest, meaning you own a percentage of the success.
By creating your own opportunities, you can help entrepreneurs raise the money they need, and you can gain ownership in your work and your community. Don't be left out of the potential upside – take an active role and create opportunities for yourself and others.
Here’s a hypothetical scenario:
In a bustling city, a group of five ambitious young women came together with a shared passion for entrepreneurship and community development. They understood the power of investment and the potential impact it could have on their community. Inspired by the principles outlined in this course they decided to create new investment opportunities in their community.
As they began brainstorming ideas, they realized that there were many local businesses and startups with great potential but limited access to capital. These businesses needed the support of the community to grow and flourish. To address this gap, the group decided to launch a local equity crowdfunding platform that would enable everyday people in their community to invest in promising businesses and startups.
Each member of the group took on a specific role based on their individual strengths and interests. One of them, who had a background in finance, focused on developing the platform's financial and regulatory framework. Another member, with a strong marketing background, took charge of promoting the platform and educating the community about the benefits of investing locally. The others took on tasks such as identifying potential businesses to feature on the platform, organizing educational workshops for entrepreneurs, and building relationships with local government and business organizations.
As the platform grew in popularity, the group expanded its offerings to include mentorship programs and networking events to further support the businesses they were helping to fund. The platform became a catalyst for community growth, fostering a culture of collaboration and collective prosperity. The group's success attracted the attention of investors and venture capitalists, who began to see the potential in the local market.
The young women's initiative not only provided new investment opportunities for their community but also inspired other residents to take charge of their financial futures. By creating a platform for local investment, they helped empower their neighbors to take ownership of their community's growth and success.
As the businesses and startups funded through the platform thrived, the community reaped the benefits in the form of job creation, economic development, and improved quality of life. The group's efforts demonstrated the power of grassroots investment and the potential of everyday individuals to create lasting change in their communities.
Through their determination and innovative thinking, these young women embodied the lessons of this course and proved that with the right mindset, it is possible to create new opportunities, foster growth, and transform a community.
Lecture #8 | Manage Your Expectations
The reality is that when you're investing in early-stage startups or even small businesses, many of your investments are likely to fail. It's more probable that an investment will fail than succeed, depending on the type of business, its stage, financials, and other factors. However, statistics tell us that the majority of startups do fail.
As a business matures and figures out its revenue model and efficiencies, it becomes more stable, and its financial performance becomes more reliable. The management team understands that if they invest a dollar, they can expect a certain return. With younger startups, there is less proof and evidence of success. As an investor, you must understand that failures in your investment portfolio are normal and part of the game.
The term "shots on goal" refers to the idea that the more investments you make, the more likely it is that you will have success. Putting all your eggs in one basket is typically a terrible idea as an investor. Instead, you need to ensure that you have a diversified portfolio, given that even with diversification, you will have investments that fail.
Investing in technology startups and companies with high growth potential requires a long-term perspective. You should not invest money today and expect to receive it back in as early as one or two years. When investing in startups, you're playing a decades-long game. Venture capitalists think in terms of decades, and their funds typically operate in that timeframe as well.
When you invest in a technology startup, consider the stage of the company and the team behind it. If the company is in its earliest form, it's like a baby. You can't expect a return on your investment until that company matures, which can take years. Generally, it takes five to ten years for companies to grow into stages where they can potentially create returns for their investors.
There are a few ways for startups to have an exit and provide returns to investors. One popular exit strategy is an IPO, or listing on the stock market. This allows early investors to cash out as their shares are sold on the public market. Another way is through acquisition by a larger company.
An emerging method for receiving returns on your investment is to sell your shares through secondary markets. Platforms like StartEngine have begun building their own secondary markets where you can sell your shares to other investors. This allows you to cash out if you don't want to wait any longer or if you need the capital for other investments or expenses.
Here’s a hypothetical scenario:
Jack, a young professional, had always been interested in investing and supporting small businesses. When he heard about a promising startup in the green technology industry, he felt compelled to invest. He carefully reviewed the company's business plan and financials and decided to take a chance, investing $100 in the early-stage startup. The company, EcoTech, aimed to revolutionize the way people consumed energy by developing affordable, efficient solar panels for residential use.
Over the next five years, EcoTech experienced steady growth, securing additional funding from venture capitalists and government grants. The company expanded its operations, opening new facilities and hiring a skilled workforce to meet the increasing demand for its products. Jack stayed connected with the company by attending annual shareholder meetings and keeping up with the company's progress through quarterly financial reports.
In the fifth year, EcoTech's hard work and persistence finally paid off. Their innovative solar panels had become popular in the residential market, and the company's sales were skyrocketing. As a result, a leading renewable energy corporation recognized the potential of EcoTech's product line and initiated acquisition talks with the startup's management team.
After months of negotiations, EcoTech announced that it would be acquired by the large corporation for a significant sum, resulting in a liquidity event for its investors. This acquisition meant that Jack's initial investment of $100 would generate a considerable return, multiplying his initial stake many times over.
When the acquisition was finalized, Jack received an email from EcoTech, outlining the details of the liquidity event and his options for realizing the return on his investment. As an early investor, he was given the choice to either cash out his shares or convert them into shares of the acquiring corporation.
Remembering the lessons from Chapter 8 about managing expectations as an investor, Jack took a moment to reflect on his investment journey. He understood that not all investments would be as successful as EcoTech, and he was grateful for the opportunity to support a company that shared his values and vision for a greener future. He ultimately decided to cash out a portion of his shares, reinvesting the remaining shares in the acquiring corporation, thereby diversifying his portfolio and preparing for new investment opportunities in the future.
Lecture #9 | Build Your Portfolio & Support Your Investments
Build Your Portfolio
Remember, as an investor, you should not expect to get rich or become wealthy after investing in just one or a few companies. You must think at scale, investing in a portfolio of many different companies across varying industries and stages to become diversified.
When building your portfolio, consider how much money you have to invest. For example, let's say you want to invest in 12 startups in 2023, with each investment being $100. This means that within the year, you have $1,200 to invest in companies. By the end of the year, you have 12 startups in your portfolio. This is a great goal because you're spreading your bets out.
As you build your portfolio, remember that you are in control of your investment thesis. You may believe in the potential of certain companies more than others. As you construct your portfolio, ensure that you've explored the options, done your due diligence, and created a diverse mix of investments.
Be cautious not to overreact to the performance of individual investments. For example, if you invest in one healthcare company that fails, it's not enough evidence to conclude that you shouldn't invest in healthcare anymore. Instead, base your decisions on patterns in your portfolio's performance.
It's important to consider the stage of the companies you invest in. Generally, the more mature a company is, the more likely it will have a liquidity event for investors. However, the potential for returns decreases as the company matures. Early investments in startups may be riskier but can offer larger returns if the company succeeds.
As an investor, spread your bets out and invest in companies at various stages. Sometimes, unique investment opportunities may pop up, but it's crucial to manage your expectations and resist the fear of missing out. Great investors are more selective in their investments, focusing on the best deals for their portfolio.
Remember that opportunities will always arise, and founders raise funds every day. Just because a business raises a lot of money quickly doesn't guarantee its success. Be measured in your approach, and don't throw money at every opportunity that comes your way. Strategize your investments throughout the year, considering the best deals and timing for your portfolio.
Building a diversified portfolio of 12 startups in various industries and stages requires careful planning, research, and strategy. Here are some steps to help you create a balanced investment portfolio using principles from previous chapters:
Determine your budget: Begin by establishing how much money you have to invest in startups. As previously mentioned, let's assume you have $1,200 to invest throughout the year, with each investment being $100.
Develop your investment thesis: Identify the industries, markets, and types of startups you're interested in investing in, based on your knowledge, interests, and beliefs. Your investment thesis should guide your decisions in selecting the startups for your portfolio.
Diversify across industries: To build a diversified portfolio, aim to invest in startups across different industries. This could include healthcare, fintech, edtech, clean energy, consumer goods, and more. Spreading your investments across various sectors helps to mitigate industry-specific risks and allows you to benefit from growth in different areas.
Diversify across stages: In addition to investing in startups from different industries, consider the stage of the companies. Investing in early-stage startups can be riskier but may offer higher returns if the company succeeds. At the same time, later-stage startups might have a higher likelihood of success but may offer lower returns. Balancing your portfolio with a mix of startups at different stages can help manage risk and maximize potential returns.
Conduct due diligence: Thoroughly research and evaluate each startup before investing. This includes understanding the market, competition, management team, financials, and growth potential. Use the knowledge from previous chapters to assess the startup's potential for success.
Consider the investment terms: When investing in a startup, carefully review the terms of the investment, such as valuation, share class, and voting rights. Ensure that the terms align with your investment strategy and goals.
Leverage investment platforms: Utilize equity crowdfunding platforms or angel investor networks to find investment opportunities in startups. These platforms can help you discover and invest in a variety of startups across different industries and stages.
Monitor your portfolio: Regularly review the performance of your investments and stay informed about the progress of each startup. This will help you make informed decisions about whether to continue investing in a startup, exit your investment, or adjust your portfolio strategy.
Rebalance as needed: As your portfolio grows and changes, it's essential to periodically rebalance your investments to ensure proper diversification. This may involve investing in new startups, exiting existing investments, or adjusting the weight of your investments in specific industries or stages.
Learn from experience: Building a diversified portfolio is an ongoing learning process. Continually assess your investment performance, learn from successes and failures, and refine your investment thesis and strategy accordingly.
By following these steps and principles from previous chapters, you can build a diversified portfolio of 12 startups in various industries and stages, increasing your chances of success as an investor while managing risk.
Support Your Investments
Being a value-add investor means you don't just contribute capital; you also provide other resources to help your portfolio grow. Here are four ways you can support the companies you've invested in:
Advocate for the company: Share investment opportunities within your community, especially if the company is actively raising funds. This increases awareness and helps attract more potential investors.
Become a customer: Support the business by purchasing their products or services. Whether they offer a software subscription, physical products, or other services, your patronage directly contributes to the company's growth.
Provide feedback: Offer constructive criticism by reviewing the company's website, marketing materials, and overall branding. If you find any issues, such as typos or bugs, inform the company so they can make improvements. This added value shows your commitment to their success.
Open doors for the business: Leverage your network to expand opportunities for the company. Connect them with potential partners, customers, or investors, and think about how you can contribute to their success.
One practical way to showcase your support is by adding the company you've invested in to your LinkedIn page. Under your title, you can mention that you're an angel investor in the company. This not only highlights your status as an active investor but also draws attention to the company, increasing its visibility and potential followers.
By promoting the company on your LinkedIn page, you're helping them attract more visitors to their website, particularly if they're raising funds. The more people who view their campaign, the better their chances of success.
As an investor, your goal is to help the businesses in your portfolio succeed. Consider how you can add value beyond just providing capital. By actively participating in a company's growth, you can take pride in knowing that you're contributing to their success in more ways than one.
Here’s a hypothetical example:
Sophia, an angel investor, had recently invested in a sustainable fashion startup called GreenThreads. She understood the importance of being a value-add investor and was keen on actively contributing to the company's growth. Here's how Sophia added value to GreenThreads:
Advocacy: Sophia used her social media presence to share news about GreenThreads, raising awareness about their eco-friendly fashion line. She also reached out to her contacts within the fashion and retail industries, highlighting GreenThreads as an innovative, sustainable brand. This led to a few influential fashion bloggers writing about the company, bringing in more potential customers and investors.
Becoming a customer: Sophia not only bought GreenThreads clothing for herself and her family but also recommended the brand to her friends and colleagues. She shared her positive experiences with GreenThreads' products, emphasizing their high quality and environmentally friendly nature. This word-of-mouth marketing helped boost the brand's reputation and attract more customers.
Providing feedback: As an experienced investor with a background in marketing, Sophia offered valuable insights into GreenThreads' branding and marketing strategies. She suggested improvements in their website design, making it more user-friendly and visually appealing. Sophia also provided feedback on their social media content, recommending a more consistent and engaging posting schedule to build a loyal online following.
Opening doors: Sophia leveraged her network to introduce GreenThreads to potential partners, including eco-conscious retailers and fashion brands. She also connected the startup with marketing experts and potential investors interested in sustainable businesses. These connections helped GreenThreads expand its reach, collaborate with like-minded companies, and secure additional funding for growth.
By actively supporting GreenThreads, Sophia played a significant role in the company's success. Her efforts not only helped the startup gain traction and build its customer base but also fostered a strong, trusting relationship between the investor and the company. Through her value-add contributions, Sophia demonstrated that an investor's involvement can extend far beyond financial support and significantly impact a company's growth and success.
Lecture #10 | Track Your Performance & Get Others To Join You
Track Your Performance
To be a successful investor, you need to know how to measure your success, which comes with tracking your performance over time.
Typically, a venture capitalist will have a team of individuals, including analysts who review the financial performance of their investments and follow up with founders. However, as a "Ghetto VC," you might not have access to such resources. Instead, you will need to track your own performance. Fortunately, there are tools and resources available to help you do this. One such platform is KingsCrowd (disclaimer: I’m an investor in this platform, and you can check out my interview with the CEO below!).
Often referred to as the "Bloomberg of the private markets," KingsCrowd allows you to conduct due diligence and analyze various deals. Furthermore, you can upload your portfolio and add your investment companies to track your progress. The platform keeps track of how much founders are raising, your return on investment, and how the value of your investment is changing over time.
Building a routine to review your portfolio is essential. Whether you check in monthly or quarterly, consistently evaluating your investments will help you understand how they're performing. Monitoring this data allows you to make more informed decisions and stay updated on your portfolio companies' progress.
By using a platform like KingsCrowd, you can keep all your investment information in one place, making it easier to review and update as needed. Regularly checking in on your investments also allows you to ask questions and seek updates from the companies you've invested in. While you shouldn't expect monthly updates, staying informed on an annual basis is reasonable.
As you monitor your investments, you may decide that it's time to exit some positions. Platforms like StartEngine offer secondary markets where you can potentially sell your shares. However, to make these decisions, you must first evaluate how each business is performing alongside others in your portfolio.
In conclusion, tracking your performance is vital to your success as an investor. Using a platform like KingsCrowd can help you stay organized and informed, allowing you to make better decisions and maximize your investments.
In this example, let's consider Lisa, an individual investor who has built a $1,200 portfolio of 12 startups over the course of three years. Lisa invested $100 in each startup, covering various industries and stages of development. She used KingsCrowd to manage her portfolio and track her performance.
In her first year, Lisa noticed that two of her portfolio companies, a fintech startup and a healthtech firm, experienced rapid growth. They successfully raised additional funding rounds at significantly higher valuations, which increased the value of her investments in these companies by 60% and 45%, respectively.
On the other hand, two other companies in her portfolio, a retail tech startup and a travel-focused business, faced challenges due to market shifts and increased competition. As a result, these companies failed to raise new funds and eventually ceased operations. Lisa's investments in these companies were lost.
During the second year, Lisa's portfolio experienced mixed results. Four of her startups raised new funding rounds at modest valuations, resulting in a 15-25% increase in the value of her investments. Meanwhile, two other startups in her portfolio struggled with product development and market traction, leading to stagnant valuations.
By the end of the third year, Lisa's remaining four investments showed varying outcomes. One of her companies, an AI-driven marketing startup, had a successful exit via acquisition, netting her a 100% return on her initial investment. Another startup in the clean energy sector raised a substantial funding round, doubling her investment value. However, the final two startups saw modest growth, with one raising a small bridge round and the other remaining at the same valuation.
After three years, Lisa had a deeper understanding of her portfolio's performance. She had experienced both successes and failures, and her initial $1,200 investment had grown to $1,780. While some of her startups had failed, others had achieved significant growth, ultimately leading to a positive return on her overall portfolio.
Throughout this journey, Lisa regularly reviewed her portfolio performance using KingsCrowd, ensuring she remained informed about the progress of her investments. This allowed her to make better decisions, learn from her experiences, and continue refining her investment strategy.
Get Others To Join You!
This is where you can multiply your potential and practice cooperative economics. When a community of individuals comes together to build wealth collectively, true impact occurs. Focusing on personal wealth by building an individual portfolio is essential, but a community that takes pride and ownership in building wealth as a collective becomes an unstoppable force.
In a previous chapter, we discussed adding value to startups and helping them find other investors. You have the power to advocate for a company within your network if you believe in it after conducting due diligence. While you can't make investment decisions for others or provide investment advice, you can recommend that they check out a company you've reviewed and believe in.
There's power in community, especially when supporting a local company that you want to help scale. Word of mouth and advocacy can make a significant difference in getting a business off the ground. In the traditional VC world, signaling is crucial – who your lead investor is, and which VCs have backed you in the past or current round. If people in your community trust you, your investment in a company might prompt them to look into it themselves.
As a "Ghetto VC," it's essential to share investment opportunities with others while also ensuring they have access to resources to make informed decisions. Encourage others to be informed investors, just as you would for yourself.
The "Ghetto VC" approach is about building a community that values ownership and supports small, high-growth potential businesses. Whether you provide a small business loan or invest in a high-growth financial technology company, you're taking control over where money flows, who gets access to capital, and which businesses can create thriving communities.
Remember, if you're not pulling up a seat at the table, you might end up on the menu. As everyone else reaps the benefits of investing, consider what's at stake for you and your community. Embrace the opportunity to make a difference and create a powerful, united community focused on collective wealth-building.
Here’s an example to see these lessons in practice:
Maria had always been passionate about her community and creating a better future for its residents. When she learned about the concept of cooperative economics and the power of investing in local businesses, she was eager to apply the lessons of Chapter 12 to make a real difference.
She started by educating herself on the investment landscape and the various opportunities available. After conducting thorough due diligence and developing her investment thesis, she began investing in a few promising local startups. Maria was excited about the potential of these businesses, not just for her own financial gain but for the positive impact they could have on her community.
As Maria continued to invest, she realized that she could multiply her impact by getting others to join her. She organized a monthly meetup group to discuss investment opportunities, share knowledge, and support one another in their investment journey. The group quickly gained momentum, and more people joined as they saw the potential of investing in their community.
Maria also made it her mission to spread the word about local businesses seeking investment. She actively promoted these companies on her social media channels, wrote blog posts about their missions and goals, and even reached out to local news outlets to share their stories. Her efforts started to bear fruit as more people in her community became aware of these investment opportunities.
One day, Maria came across a local company called GreenGrow, which aimed to create sustainable urban agriculture solutions for her community. Maria believed in the company's potential to address food insecurity, create jobs, and promote sustainable practices. She decided to invest in GreenGrow and encouraged her meetup group to review the opportunity as well.
Maria's advocacy for GreenGrow caught the attention of local investors, and soon the company had raised enough funds to build a new urban farm in the heart of the community. The farm not only provided fresh, locally grown produce but also created job opportunities and educational programs for residents.
As GreenGrow thrived, Maria continued to apply the lessons of Chapter 12 by supporting other local businesses. She invested in a tech startup that developed an app to connect local businesses with consumers, a social enterprise that provided job training for at-risk youth, and an eco-friendly manufacturing company. Each investment had the potential to create value for the community and its residents.
Maria's dedication to her community and the power of cooperative economics inspired others in her network. Many members of her investment meetup group started to invest in local businesses as well, creating a ripple effect of positive change. Together, they were making a tangible difference in their community by supporting job creation, economic growth, and sustainable practices.
Over time, the community witnessed a transformation. New businesses blossomed, existing ones thrived, and the local economy grew stronger. The residents felt a sense of pride and ownership in their community, knowing that they had played a role in its success.
Maria's journey had begun as a personal quest for financial growth, but it had evolved into something much more significant. By applying the lessons of Chapter 12, she had managed to unite her community in a collective effort to build wealth and create a better future for all. Her actions had not only transformed her own life but had also inspired others to take control of their financial destiny and, in turn, the destiny of their community.
Maria's story demonstrates the power of cooperative economics and community-focused investing. By working together and sharing knowledge, individuals can make a real difference in their communities, fostering growth, sustainability, and prosperity for all.
Conclusion
Congratulations on completing your journey through "Introduction to Angel Investing"! As you stand at this pivotal point, ready to venture into the world with new insights and skills, remember that your investment journey is just beginning. The knowledge you've gained here is a solid foundation, but the real growth happens when you apply these learnings in the real world.
Remember, the path of an angel investor is not just about financial returns; it's about becoming part of a larger narrative - supporting dreams, driving innovation, and contributing to a more diverse and dynamic economic landscape. As you embark on this exciting path, set measurable goals, build a diverse portfolio, and stay committed to your investment philosophy. Whether it's backing startups or contributing to local businesses, every decision you make has the potential to leave a lasting impact.
So go ahead, make your mark in the world of angel investing. Use your resources wisely, but more importantly, invest with a vision - a vision that aligns with your values and aspirations. Here's to your success as an angel investor, and may your investments not only yield financial returns but also bring about positive change in the world around you. Happy investing!