There are lots of investment opportunities out there but for those that want to put their money into action so that it can make more money for them, there may not be any better option than investing in private markets including investing in private companies. According to successful financial planner, author, speaker, and podcast host Derrick Kinney, "You make money twice. First, you work hard to earn it. Then, you work hard to invest it wisely. Build assets." Kinney goes on to add that "working hard for your money isn't enough, however. Leaving your money to hang out in your checking account won't cut it. Your money deserves better treatment. It's ready and willing to work for you, so put it in places where it will."
While it's not difficult to find companies that are raising money from investors, the key to investing in private companies is gaining access to experienced founders and competitive deals at an early enough period to realize outsized returns when those companies are acquired or go public. If you are looking for such an opportunity, send me an email to start a discussion about getting started investing in our Quarterly Rolling Fund.
As detailed below, investors have several options of how to proceed in getting started investing in private companies.
Equity crowdfunding sites
Crowdfunding is the pooling of resources to create or maintain an initiative from a large number of backers—the “crowd.” In equity-based crowdfunding, the investor receives shares of a company in exchange for the money that they committed. This can be done through a number of websites offering syndicates here in the United States including AngelList, SeedInvest, and Funders Club. Founded in 2010, AngelList is one of the oldest, most successful, and most established equity crowdfunding platforms that exist.
Did you know. . .
The earliest instance of crowdfunding traces back to the 19th century. After the Statute of Liberty was paid for by the government of France, the US was unable to raise $250,000 for a granite base for the statue. A campaign launched by Joseph Pulitzer in his newspaper, The New York World, eventually raised money from more than 160,000 donors with 75% of the donations amounting to less than a dollar.
Angel investing: this can be done either directly by an investor that has access and is invited to participate in certain deals or through an angel syndication. An angel investor typically invests tens of thousands of dollars in each deal and participates in 5-15 startups a year.
Angel investing is the act of putting money into the earliest investment rounds of a private business with the goal of getting back more money than you put in--much more than you can return in a safer, more established investment vehicle.
In order to be an effective angel investor, you need some combination of money, time, network, and expertise.
When a company achieves product/market fit, has a revenue model, and has scaled to millions of customers then it is too late--if they've hit those milestones then they have probably already gone public! When you have predictable revenue, you can attract unlimited capital. Companies that are just starting out have to lean on Angel investors and VCs to attract capital.
Syndications: Successful angel investors may also create an investment group, or syndicate, to pool together a group of investors for an investment in a single company. The syndicate lead normally negotiates an allocation with the founder of a company and if the syndicate can pull together enough investment interest, then the deal is completed. The syndicate lead explains what they typically invest in, what they've already invested in (their track record), how much they typically invest per deal, and how much in carried interest they will charge on a successful exit. Carry, or carried interest, is defined as the share of profits that go to the fund manager or the syndicate lead. When investing in a syndicate, you will be participating in a SPV, or special purpose vehicle, which is a legal entity set up for the specific purpose of an investment in one single company. Founders love syndicates because they can leverage an established angel investor to round up dozens of smaller investors for them. They also love syndicates because they exist as only one entity on their cap table (the SPV is listed, not the individual investors). The syndicate lead legally represents all of the other investors in the group and is the only one from whom a signature is needed if one is needed by the company. New syndicate members love syndicates because they can invest in startups that more established angels have gained access to and vetted.
Syndicates generally exist to invest in specific companies. They can have dozens or hundreds of investors who pool their resources to make low-six-figure investments (the average check size is $200,000 to $350,000 per deal). The minimum individual investment varies.
Be aware that single deals are by definition not diversified, so if you’re looking to build a customized angel portfolio, you’ll need to invest in a dozen or more individual deals across multiple market segments.
VC Funds: Venture capitalists typically charge their own investors, or limited partners (LPs), both a management fee and carried interest. They typically charge 2 and 20 meaning a 2% management fee and a 20% carry fee. The management fee is money paid to the fund by the LPs in order to cover overhead such as salaries, office space, accounting fees, legal fees, etc. Venture capital firms invest larger sums of money in a smaller number of startups than angels. A venture capitalist typically invests millions of dollars in each deal and might invest in only a few deals a year and join each company's board of directors. Generally speaking, VC firms invest funds in larger amounts and at later stages in private companies although this can vary as there are specific VC firms that specialize in investing in particular stages of a private company.
If you are ready and want to take the next step and be a part of this with us, please reach out to me directly and we can discuss further and answer any questions or concerns that you may have.
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