Intro to Angel Investing | Lecture #4 | Set A Measurable Goal - Taught by Garry Johnson III
Dear Students,
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.
Watch Me Teach Lecture #4:
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?