When it comes to early stage investing, there is so much to learn and an ever-evolving landscape. And there are some great books out there that can help you establish a solid knowledge base in this asset class.Read More
Most people who talk about angel investing or early stage investing in general often accompany it with a stern warning: “Be ready to lose all of your investment.”
And while this is definitely a possibility, we know that avoiding the companies that implode in a spectacular fashion is half the battle to building a portfolio with a strong IRR. For every company that goes completely bust, you need to generate a 2x return from another investment just to break even.
So here are our top ten warning signs to look out for when you are considering an investment.
One of my clients, Jeff, is a high net worth individual who has worked in finance for years. Although he is very familiar with stock market investing, he was a little stumped when it came to understanding the nuances of startup investing.
He was looking at two different deals. Both had great founders, a great market opportunity and some good initial traction. One was raising $2 million at a $10 million valuation and the other was raising $1 million at a $5 million valuation. He wasn’t sure what to do.
“How do I calculate the PE ratios? How do I know what the market cap is going to be?” In short, he needed to know how to evaluate this very special asset class that is a startup investment. And the tools he learned to evaluate public market investments weren’t going to be very helpful to him in this case.Read More
Venture capital is money provided by investors to startup firms and small businesses with perceived long-term, high-growth potential. This is a very important source of funding for startups that do not have access to capital markets.
Although these investments are much higher risk than public market investments, they also tend to have much higher expected return potential. This high-risk, high-return-potential asset profile makes it very important to take a portfolio approach when making venture investments.
Venture Investing has become a very important source growth capital for the US economy over the last 30 years. More and more innovation is happening outside of large corporations and inside small, nimble startups. Do you wonder why that is the case?Read More
Topics: Venture Investing
Runway tells you how much time a company has before it proverbially “crashes and burns” or for the more optimistic, how long it has to “get off the ground”. This means, how many months can the company continue to cover overhead and salaries before it runs out of cash and needs to close down. Hopefully the company will either reach cash flow break even, or some sort of inflection point in growth that will encourage follow on investment before that point.Read More
As an early stage investor, finding a great company is only half the battle. As in life, in investing “it takes a village” as they say. And that is why companies are very careful about who they invite to be on the cap table. Certain investors can add a lot of strategic value to a startup, providing the “grown up in the room” to young teams by harnessing their experience through service on the board or in an advisory role.
Unless you want to be single handedly responsible for driving the growth of the company and an eventual liquidity event, make sure you have some high quality co-investors in the round. Beyond the ability to use their experience to help your founding team avoid startup pitfalls, experienced value add investors can also help the company find funding for follow on rounds.Read More
For high net-worth individuals with investible assets of $1 mm or more, adding venture investments to your portfolio can be a very smart move. Just as you probably counterbalance your investments in public equities with a certain amount of very stable assets, such as bonds, and cash equivalents that are intended to preserve capital but provide low returns, adding a small amount of high-risk, high-return assets can enhance the performance of your portfolio.
But you ask, how is that possible? Well it’s a little thing called portfolio theory. As you add uncorrelated assets (assets that don’t necessarily move in the same direction at the same time) to your portfolio, you tend to enhance your risk adjusted return. Which means, that for the amount of risk you are taking, you are being better compensated with the return on your investment.Read More
Topics: Venture Investing
A liquidation preference is an investor right that guarantees the return of investor capital before any distributions are made to common shareholders. It typically applies in every liquidation scenario except an IPO. Liquidation preferences are typically set at one times capital invested, but they can go as high as two times, three times, or more in situations where the founder is really desperate.
After the market correction in the tech sector in the early 2000’s we saw companies that were desperate for money taking cash from “vulture” capitalists who structured deals with liquidation preferences of up to 10x, effectively wiping out the interests of previous investors by using these to capture so much of the upside for themselves. It was a difficult period, but as they say, the best time to invest is when there is proverbial “blood on the streets”. And investors with cash saw this during that time period.Read More