To many ‘experienced’ investors the idea of allowing anyone to invest in early stage deals seems unreasonable. They argue that non-accredited investors aren’t educated enough to make good investment decisions or it’s “too risky” for them.
However, VC’s themselves see a less than 10% success rate and that is with their larger checks.
Startup funding is evolving and growing past its reliance on venture capital. Founders are finding alternatives and taking control of their businesses with the help of retail investors. This group makes smaller investments from $100 — $4,999. The risk is still high, but decreased because of the size of the investment.
Micro angel investors are the future of startup funding. Leveraging the power of small checks can make a big impact to build companies and create generational wealth in communities who have historically been left out of opportunities. It also gives more equal access to founders that have been historically marginalized and left out of the old boys club investing networks.
What is often described as an already crowded investment landscape includes less than 10% of the population. Imagine considering that to be ‘too crowded’.
To seek a higher return on investments, investors often turn to more speculative (and much riskier) opportunities, such as investing in privately-held companies.
The problem is this: unless you have a disciplined portfolio strategy, your one or two private equity bets may not work. The companies you invested in may fail. Statistically, this is likely to happen. Investing in private business is very risky, but you are rewarded when a company succeeds.
Without further ado, here are five things to look for when investing in startups:
#1: The Founders
When it comes to building a successful business, people come first. This means you want to evaluate how focused and passionate a founder or a group of founders are.
It is true that having a strong educational degree from a competitive school is important, but it is not as valuable when it comes to building a business from scratch. What you need to build a business is grit, the intersection of passion and resilience.
When the founders of a company quit, the business has little chance of success. Founders that demonstrate the right amount of passion for the mission are a huge advantage. They are not working for money. The right founders are on a campaign to change the world, to improve people’s lives or make an industry more efficient.
When the right founder talks about their company, it feels very personal, and listening to them speak will inspire anyone they get into contact with. Often, people criticize founders for being willing to listen or take any advice from experienced professionals. Alternatively, plenty of founders experienced bankruptcy every 6 months, and yet they never gave up. All of these traits are what you should expect from a very risky investment that becomes a success.
For example, tech pioneers like Angela Benton raised $1.07M in a week, Pierre Laguerre became the first Black male founder to raise over $1M in Reg CF, and Isaac Hayes III raised over $4M and counting… to name a few. There’s a growing pipeline and a community of micro angel investors with the hopes of seeing even more founders become educated on the process and consider crowdfunding as a viable option to raise capital.
#2: The Team
Besides the founders, you want to see a team of people who complement the skills of the founder. Some founders are visionaries but terrible at managing people. Others are excellent managers but lack the technical expertise to build the product they’re overseeing.
You should look for a team with expertise in the areas that the founders lack. Look into key areas of a business, such as product development, marketing and sales. Make sure that the team is well-balanced and has the right tool sets for growth and for building out the product they sold in their pitch.
Founders steer the ship, but the team provides the manpower. Without a dedicated team, a startup won’t succeed.
#3: The Idea
When reading business plans, it’s common to see a great idea or innovation, but is it going to be commercially viable? Is the technology or solution going to work once it’s actually deployed? Is the business scalable? A successful business is far more than just an idea; it’s about execution and market-fit.
Patents or proprietary technology demonstrate the depth of knowledge and creativity from the founders or their technical team. For non-technical companies, look for a strong sense of the customers and their needs. Sometimes the founders themselves are the market they are trying to target.
#4: The Competition
It is important to understand the landscape of the competition. Is this idea being pursued by a number of companies? Is there a large business like Amazon poised to enter, or pivot to, the same space and destroy every startup innovator in sight?
Competition is actually important and should not be taken as an outright negative when considering a startup investment. In a way, competition serves as a proof of concept and demonstrates a marketplace and its viability.
No competition is actually very rare when you consider that every startup is disrupting something: Amazon disrupted book stores and then all of retail, Uber taxis, Airbnb hotels. For example, Acclaim disrupted the existing video game industry from the 1990s by building online games. If a company doesn’t have direct competition in the form of another company trying to do the same thing, there is still the competition of whatever company has the attention of the consumers the startup wants to target.
However, while competition can be a healthy sign, in some circumstances it is negative. If the competition is against a large company that is also disrupting the same market, it can be more difficult for the smaller company to succeed—though it’s not enough to discount the investment altogether.
Large companies simply have more resources to put into solving the problem, building the product and marketing it to consumers. These resources reduce the time it takes for a large company to get control over a segment of the market, which means the startup has less time to launch. In this scenario, companies who are not careful can be easily “Amazoned,” swallowed, and taken out of the market.
#5: The Money
Look for founders who invest some of their own savings into their company, even if it is a small amount (though it is often a big financial commitment from them). Sometimes, the founders are not paying themselves until the business reaches some scale. This is a great sign of personal sacrifice and proof of “skin in the game.”
Good founders are also resourceful when it comes to securing capital. Some will go the traditional routes of VCs and banks. However, this route is hard for most founders because Venture Capitalists are only interested in a narrow segment of founders and ideas. They are looking for the next unicorn valuation in order to deliver promised returns to their limited partners, but their limited reach has made it historically difficult for certain founders, especially minority and female founders, to access capital. However, only 5% of VCs provide returns to their investors, so whatever formula they use to predict the winners isn’t necessarily right.
Other founders will target angel investor networks or leverage their friends and family. Others will go to Kickstarter to test out their idea, and after they complete a successful campaign, the business has some capital as well as lots of eager customers. Still others will try equity crowdfunding, which in the 3 years of its existence in the US has helped over 1,500 companies raise capital.
Founders who are ready to explore new avenues for capital demonstrate a strong will to do whatever it takes to win.
In 2018, when it was time for PopCom to raise its post-seed round, they decided to forge a different path. The traditional funding environment was not exactly welcoming to Black, female, hardware founders. Fatigued after closing the $1M seed round from VC and angels the previous year, being asked “Is that your real hair?” and being told “you should be a model” in investor meetings, it was time to raise money from people who can look past a demographic profile to see a founder with an incredible vision.
The JOBS Act allows startups to raise capital from both accredited and non-accredited investors. Essentially anyone can invest and secure equity in an early-stage company. PopCom took advantage of this legislation in 2019 and Dawn became the first female founder to raise over $1M in a Reg CF equity crowdfunding campaign. PopCom partnered with StartEngine because the team was very hands-on throughout the process of crowd raising, which was very new at the time.
PopCom demonstrated the possibility of leveraging their community to fund the business, no longer having to be at the mercy of venture capital – it felt like the flood gate opened. To raise $1 million from the people was a big deal, and over the past four years we’ve seen a growing number of Black and Brown founders choosing to leverage crowdfunding to take the place of their friends, family and seed rounds.
Conclusion
Investing money is not easy and requires research and vetting, and there is no way to guarantee success. However, only those who take risks have a shot at the potential returns if it pans out.
We are excited to see how the next 5-10 years play out and how many millionaires are made from crowdfunding exits. We hope to see more people change the trajectory of their families from ‘non accredited’ to ‘accredited’ by making good investment decisions. Crowdfunding is gaining more and more steam, and represents a potential key to private capital for all entrepreneurs and investors.
Our country has hundreds of examples of entrepreneurs who were bold enough to believe they could change the world, and they did. Your role as an investor is to back those dreamers, be part of the journey to success, and fund the future.
