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In my last piece, I highlighted how we can all invest in startups via equity crowdfunding platforms and why this is a worthwhile way to diversify your investment portfolio. Now that you are aware of this investment asset class, I want to break down how to invest.
There are two key pieces I want to cover regarding how to invest:
- How to Analyze A Tech Startup Investment Deal?
- Where Do You Go to Invest?
How to Analyze A Tech Startup Investment Deal?
When investing in tech startups remember that it is a risky asset class where many companies fail, which is why it is key to diversify your investments by investing small amounts in lots of companies.
Most importantly, it is key to do your homework before investing in any company.
What do I mean by that?
Essentially, at KingsCrowd, before we ever recommend a startup or company for investment, our team of analysts dig into the business and conduct our in-depth ‘due diligence’.
Our due diligence process involves digging into all facets of the business to learn as much as we can to determine if this company can actually grow and succeed or fail. While we are not going to be correct every time, ‘due diligence’ helps to cut down on making poor investment decisions, which can help in driving better long term returns.
Below, I break down in further detail the key factors we look at in a business when conducting our due diligence process. When performing your own due diligence, consider the data points below as key areas of the business to focus on.
1. Market Size
We like companies that are solving big problems. Tech companies in massive sectors like healthcare and finance can win small shares of a market and still be billion dollar companies.
You can be the largest maker of mittens in Chester, Vermont, but growth will be capped by your small market. At the end of the day, the economic size of the problem the startup is solving is the first key element to determining if there is a big upside opportunity at hand. In order to make a return on your investment, startups need to see huge 10x to 100x growth in valuation.
2. Founder Experience
When investing in a startup, you are investing in the founders more than anything else. The question you have to ask yourself is, do you believe these people have the technical skill, vision and managerial ability to succeed?
This is why we try to always speak with the founders when conducting due diligence. Understanding their vision for the business, their integrity as business people and their industry experience is invaluable
determining the viability of the business.
3. Terms
Terms of the offering document form an important part of the due diligence process. Investors should analyze the entire deal and its conditions before deciding to invest. The terms include valuation cap, dilution, pro-rata rights etc. and they help the investors understand their rights as an investor.
Check out the valuation and compare it to other companies in the industry, and ask yourself how this company stacks up to other similar proxies. It’s also helpful to look at what
or IPOs in the same market look like to get a sense of whether or not there is a large upside from the current valuation to be had via acquisition or IPO.
4. Product / Service Differentiation
We constantly ask ourselves, is this product or service 10 times better than current competitors? It’s important to understand the competition and determine why users would decide to utilize this company over any other. If nothing else exists, even better.
Even in a stagnant market, you can win big if the product or service is way better than anything else that exists. What made the S’well water bottle so special? It came down to exceptional design and branding that was missing from the industry. We’ve also covered other companies that won out in crowded markets with the best product.
5. Business Model
Getting down to the basics, we find ourselves asking, is this business actually viable? While some businesses like Twitter and Uber can go years with no profits, that is not necessarily a winning strategy for most companies.
It’s important to understand the monetization strategy and if there is a sustainable business model that is scalable and profitable. The business model takes into account everything we have talked about above. The question we ask is, can this team execute on the product or service proposed and attract enough demand to be scalable while growing the bottom line efficiently enough to be profitable?
The Key Platforms: Where to Invest?
While there are 46 FINRA-registered equity crowdfunding portals, for the purposes of finding quality deal flow, we are going to focus on what we consider to be the top 5 equity crowdfunding platforms, both from a dollars raised perspective and quality perspective.
Republic: A spinout of Angellist, Republic is the face of bringing capital to underrepresented founders (e.g., African American, Latinos, Immigrants) from investors and venture capitalist (VC) firms. If you care about investing in female and minority founders, this is the platform for you. In 2017, 44% of all dollars raised on Republic went to startups with a female founder and 25% of all capital raised went to underrepresented founders of color.
But it’s not just about investing in founders you care about, it’s also about finding some of the best, potentially high-growth tech startups out there. For instance, Vacayo, a travel-tech startup founded by Truth Oladapo, an African American entrepreneur, and his wife Isabel Berney raised over $200K in capital from 445 investors just like you!
Republic also has a TV show called Meet The Draper’s, which is a ‘Shark Tank’ show featuring 3 members of the famous Draper VC family. These are the investors in some of the biggest names in tech over the past 40+ years including companies like Skype, Coinbase, Robinhood and so many more.
Each season, on this wealth-minded show, they judge and invest in their favorite Republic companies and give you a chance to invest alongside them. If you want to invest alongside some of the most famous and successful VCs, this is the platform for you.
Wefunder: Perhaps the first equity crowdfunding portal to be founded back in 2012, I often call Wefunder the Shark Tank of the equity crowdfunding platforms from the perspective that they tend to have the most consumer-focused brands and ideas that we all can understand and get behind. Think Cleveland Whiskey, a tech-enabled whiskey company that makes award-winning whiskey literally overnight and has found product/market fit and strong distribution with $1.7M in 2018 sales.
The Wefunder team is a Y-Combinator graduate itself and tends to source amazing companies from the Y-Combinator accelerator, including companies like Circle Medical, and Tesseract. Being associated with Y-Combinator, one of Silicon Valley’s best incubators with famous companies like AirBnB and Dropbox coming from its program, Wefunder has done an outstanding job of providing quality investment opportunities since the early days of equity crowdfunding.
And with a 41% unrealized net IRR between its 2013 to 2016 cohort of startups, Wefunder has proven their ability to not only offer startups for investment, but actually drive returns with over $2.2B in capital raised. That is an astounding number, and this company isn’t only doing well, but is also doing some good. They recently became a Certified Public Benefits Corporation, started a Female Founder Fund, and started an accelerator for female founders to help democratize access to capital.
SeedInvest: SeedInvest is the most institutional-grade startup investment platform you will find. This team only selects the top 1% of all companies that apply to raise capital and the quality of deals often shows. With over $100M raised to date for 150+ startups and over 250K investors on its platform, SeedInvest is the place to look for top tier startups.
While most platforms currently focus on very early stage ventures (e.g., companies with $0 to $250K in revenue), many companies on SeedInvest tend to weigh more heavily towards companies with more traction (e.g., $250K to $1M in revenue). If you prefer to invest in companies where you have more track record to look at, this tends to be the platform for you.
Think NowRX, an on-demand pharmacy with over $4M in annual revenue, IfOnly, a travel-tech startup, and Knightscope, a security and autonomous vehicle company.
Other interesting notes, SeedInvest recently was acquired by Circle, a large player in the crypto space with an aim of bringing liquidity to the private markets. This platform also provides an option to have investments made for you in an automated way to help you achieve diversification with more ease.
Netcapital: Netcapital is led by Jason Frishman and is out to build the next-gen private marketplace focused on raising capital, both for early-stage startups and larger companies raising $100’s of millions of dollars!
Last year, they partnered with one of the top accelerators in the US called TechStars to bring you some of the most innovative startups pursuing capital. Better yet, Netcapital has an exciting feature where every company you invest in on the platform will be tradeable via a secondary market that the team is building. This means you can buy a share in a startup today and if it’s doing really well in 2 to 3 years, you can sell it right on the marketplace they have built for more money!
Their management and advisory team is also one to keep an eye on, which includes advisors like John Fanning, founding chairman & CEO of Napster. He and his family were also the first investors in Uber, an investment that is now worth hundreds of millions of dollars.
Put simply, this team knows what they are doing when it comes to private market investing. Look for Netcapital to continue to become one of the top platforms in the space.
StartEngine: If you like quantity, StartEngine certainly has it. As one of the largest players in the space, StartEngine does an exceptional job of providing tons of investment options at all times. If your interests are varied, StartEngine is sure to have an investment for you.
From GolfBoard, a new age golfing cart, to Hacker Noon, one of the most successful upstart tech publications, to ModVans, a new age crossover utility vehicle/RV, StartEngine has a little bit of everything. They are also a pioneer in the regulated ICO (initial coin offering) and STO (security token offering) market
This team is at the forefront of reimagining the way startups raise capital and are continually working to offer more benefits and services to their investor base.
StartEngine even let the crowd own a piece of the platform with a $5M round of investment this past year; and are now accepting reservations for its $10M STO round. That means if you invest in the round, you can support your investment each time you put money into another deal!
Other platforms you might consider are MicroVentures, another well-established player in the space, upstart Wunderfund, which is bringing access to midwest startups, EnergyFunders, focused on oil & gas as well as clean energy startup investments, and Redcrow (accredited only) focused on providing highly vetted healthcare deals.
Is Equity Crowdfunding Right For You?
Now you know what equity crowdfunding is, where to find deals, and how to evaluate companies before investing. In our next piece, we break down just how much you should invest and some key tips on ways to diversify your startup investment portfolio.
Have you ever invested in a startup before? What kind of things would you look for in an company you would invest in? Leave a comment and join the discussion.
Chris Lustrino is the Founder & CEO ofKingsCrowd, the first ratings and analytics platform for the equity crowdfunding market. He’s a former management consultant gone rogue writing a fintech blog focused on the alternative lending and investing markets with a passion for bringing improved access and transparency to financial markets.
If you are interested in investing in startups, KingsCrowd can help. Sign up for a membership with coupon code KINGSCROWD3FOR1 atcheckout.
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