Equity Investment in Startups

Hey All,
I just wanted to start a thread on the idea of investing in startups for an equity stake in the business.

YES Shark Tank is my favorite show on TV but it goes beyond me wanting to take a cushy couch whilst eating all the amazing food dissecting entrepreneurs ideas.
I truly believe that to be rich you need to own or invest in business.

There simply is no higher return than what is achieveable through successfull business (let’s park Bitcoin discussions for now).

Now obviously business ownership is going to yield the best returns but that takes a lot of work and of course you need the idea.
I’m more interested in the idea of being Shark Tank style investor albeit with smaller investments.

I have done some research and see their are a few different sites that provide a platform to do this. Browsing through them it appears they are most restaurants and the ones I looked at anyway were not providing equity but a percentage return.

So I thought instead of spending the next week reading about it I would just ask my trusted PC family. So has anyone invested in a business for an equity return?

If so how did you do this?
How have you found it? Good/Bad? Returns and losses.

Any information or experience would be greatly appreciated.

And yes I know business investment is risky and startup even worse. But I have a fairly high risk tolerance and would prefer to lose backing a long shot business than the horses I seem to back

 

Not a start up but I still hold a pharma company as a reminder as to why I'm not stock picking. Today was a good reminder.



I have no idea how to effectively pick these things. Like to read and would like to give it a proper go one day

 

Start here:

Startups in Australia

Read the book "Angel" by Jason Calacanis. Also listen to all his Angel podcasts and more than once.
His Angel podcast is here:

Angel Podcast

I think you'll find those interesting as he interviews VC's and most of whom are past founders as well. He also does this week in startups and there a hundreds of episodes. Really too much. Just those circa 20 angel podcasts are the best.

I have been investing at angel and seed level since 2015. Also private equity and occasional Series A that I can be availed to.

I have gone through many learnings and made mistakes especially with early stage direct to founder dealflow. Syndication with high quality syndicate leads is easier although there are fees obviously. You will need to qualify as a sophisticated/wholesale investor. The retail sites that exist for crowd funding generally have deals as you've indicated such as cafes, burger joints and other nonsense.

That "Angel" book is a very simple but informative read. Treat it like a text book. Once you've read it post questions here or PM me. You don't know what you don't know and I learnt the hard way..... just make sure your questions are well directed. I wish that book was available four years ago when I started.

 

You are talking private businesses only, not listed micro-caps/small IPOs?

For me I wouldn’t go any smaller than the listed stuff, and I would want to be able to diversify as widely as possible. I think when you are getting down to the micro stuff there is a much greater chance of doing your dough than picking a winner.

 

Bad clinical trials/approvals or just another capital raising?

 

"Partnership" giving away their rights to possibly their main drug in North America in exchange for funding etc.

Company is Neuren (NEU). I don't actually follow them in anyway, just keep the stock there as a reminder. Big swings in price are a good reminder about what I'm doing these days and what I'm not.

 

@albanga I agree with your conclusions, however have only invested in private companies where I was part of the founding team. I am 3/3 on that front as all of them still exist, returned seed capital (treated as loans) and pay regular dividends.

As player has pointed out, the micro PE / Angel / Seed space is one with a lot of pitfalls. In my view it will be difficult to get in to the very best opportunities leaving you to pick through the rest for something viable. There will be no shortage of “opportunities” but few will be of note. Business operating experience will be very useful to you here as will knowledge of business models and sources of competitive advantage - this will give you a lense through which to assess these investments. Failing that you could take a basket approach I suppose.

 

Recommend you look at OurCrowd. A better way to invest in startups | OurCrowd

Provides access to start ups, they do DD for their investors, only make available businesses they themselves invest it, goal is liquidity event (sale or stock listing). Many high net worth and ultra high net worth individuals use them.

 

Good DD will cover all those things, incl management, ability to execute etc - but such extensive DD is expensive, especially if you look at multiple opportunities. One of the reasons OurCrowd has been successful to date - they look after that & you only pay if it passes vetting presented as a viable opp & you actually invest.

 

Are you taking pitch decks/proposals by PM?

The government has a great chance to open up this end of the market to a larger pool of investors, but I don't believe they've made it very easy.

Legislation for crowd-sourced funding eventually arrived, but was very slow. CSF platforms (such as Birchal) will start to increase in number and others which were only for sophisticated investors (such as Home - VentureCrowd) may start opening up to retail investors.

They provided tax benefits for startups / early stage investors (Tax incentives for early stage investors), but made the rules too rigid (in my opinion).

 

Lol no but I can for an equity stake if I must

Agree, current legislation does not sufficiently provide access to incentives, especially when compared to places like UK, Israel etc one of the reasons Aus can’t compete as an innovation hub

 

As @d_walsh has mentioned, Our Crowd is worth a look. Understand this is not an Australian platform. They have an office in Sydney and I have met with Dan Bennett a few years back for a chat. The parent company is based in Israel. I have made investments with them and also i-angels which is another Israeli outfit. iAngels - Invest with Influence on Your Side They do punch above their weight for a nation of only eight or nine million.

Agree there is benefit of vetting as they invest in the deal flow they present to investors on their platform, however DD does not stop there. It is merely the starting point for further investigation which need not be expensive at all. Founder personality and past history of being able to execute and preferably with exits are all important also as @geoffw mentions.

Also you need to be clear on what thematic appeals to you as an investor. Health, medical, education, fintech, and so forth and whether there are any areas that you would never invest. I am also a part of an investment group that pursue (mostly Aussie) opportunities that have impact and that would address for example health, nutrition, environment, equality and so forth.

I am also subscribed to Birchal and Venture Crowd that Guest indicated above, however have yet to make an investment with them as I haven't really seen anything compelling in their offerings.

Here is another Australian platform

Australian Investment Network - Entrepreneur, Angel Investor, & Business Investment Opportunities

To all those wishing to start in this space, as I indicated in an earlier post to @albanga get that "Angel" book by Jason Calacanis. It will give direction and structure so you aren't spinning wheels and trying to learn everything from scratch like I did. Get to pitch events by searching on eventbrite or meetups for angel investing, pitch evenings and startup weekends. Speaking to founders and other investors is also a good learning tool.

For me, the best investments by way of deal flow that are likely to scale has come from belonging to syndicates based in San Francisco and Silicon Valley. These are run by ex-founders who are now investors and have the connections to a decent pipeline. I do have Aussie investments however none are as exciting or innovative and those from the bay area.

Also be aware of how much you will allocate to each deal. Our Crowd and i-angels for example have a minimum of 10,000 USD. I envisage allocating circa 10% of net worth to these ventures with about another four or five years of investing ahead of me. I am mid fifties and imagine being finished with this type of investing by age 60 so that allows a 10 year window for later deals to come to fruition or flop.

Make sure whatever funds are allocated must be money you can afford to kiss goodbye. For this reason investing in (say) only five deals would be foolish. A portfolio should have a minimum of 20 positions in varying sectors that resonate with you on the thematic. Even better (if direct with founder) the space being invested in is in your domain of expertise.

Merely my 0.02......................

 

Thank you to everyone for your detailed and extremely informative responses.
I’m definitely going to start out by reading the Angel book and will go from there! I’m going to apologize in advance for some of the questions that might come from my findings.

@Player 10,000USD is probably outside my scope right now but hopefully when I’m ready from a financial perspective then I’ll also be a lot more up to speed.

If you don’t mind me asking.
What has been your biggest ROI?
And also loss?
I would also be really interested to know who the companies are and what their product is/was?

 

@albanga I haven't had any stupendous home runs to date. I started in this space in 2015. One exit (for 40% loss) occurred last year. They were bought out by a competitor as the company obviously didn't execute as per plan. Better than losing the lot, in any case. Realistically this is a long game of anywhere from 7-10 years for an exit or a loser to manifest.

Most of my syndicated and direct with founder dealflow has quite onerous non-disclosure requirements so there's not a lot I can share. A few (without any information about amount of raise or valuations) I can share are as follows:

Throat Scope https://throatscope.com/ This was one of the Steve Baxter investments from the
early series of Shark Tank. Invested twice in this; once at initial angel round and a second pre-seed round.

I have also invested in Cafe X
Even coffee is likely to be disrupted.

Blokable Blokable

The three above are all physical product type investments albeit with some tech along the way. The vast majority of my portfolio is tech/platform plays. These are obviously easier to scale and theoretically should have the most potential. I have circa 40 separate companies in my portfolio with investment amount anywhere from 40-50K all the way down to as little as 2-3K USD.

Valuations are very important. Lately in Australia, I've been coming across more and more ridiculous caps that founders are putting on their ventures. For example a health related product pre MVP (minimum viable product), they were raising 3 million for prototype on a 10 million pre-money valuation. Others in the one million raise for 8-10 million pre-money valuations aren't uncommon for ventures that have zero revenue and barely nominal traction. Earlier this year I got so fed up of the unrealistic expectations of Aussie founders, that I reached out to SF and SV syndicates and I haven't looked back.

 

@albanga and others who might be inclined and interested.

Here's some information I came across from Seed Invest about investing in this space. Be mindful it is US based so some laws and process/protocol are US-centric. Nevertheless fairly handy introduction to the investing in this area:

Academy Guides | SeedInvest