How to Fund Your Startup — With VCs, Angels and Crowdinvesting

BY Victoria Silchenko, Ph.D.

“Every one of my books had killed me a little more,” – this profound and highly personal quote by American author Norman Mailer has become one of my favorites since I started writing about startups funding. For with each new article, the more I would dig deep into research, the more I would realize how imbalanced the existing funding system is.

On the bright side, whether working with clients via my company Metropole Capital Group or teaching the Entrepreneurial Finance course I recently created for MBAs or producing my upcoming Alternative Funding Forum here in LA, one thing has become clear to me – we live in times where start-ups have a wide range of funding options like never before.

What VCs are really looking for

Related: Event

Alternative Funding Forum 
November 21 th, 2014, Century Plaza Hotel
Los Angeles, CA
 
Meet world-class investors and leading financiers at one of the most anticipated business events of the year.

The key thing to remember is that VCs are financiers, who expect a return of at least 30% per year over the life of their funds within a sizable total addressable market (TAM) – a market that can generate $1 billion or more in revenues. VC funding is heavily concentrated in just a few industries with their favorites in software (over 30%), high-tech and biotechnology. VCs like to see the value of exit to be two to four times sales and most VCs will not consider an investment unless the potential exit price is $200M – $300M or more.

The ideal assumption for VCs is that your venture will grow fast enough to take first place in the market but most favorable or “fundable” VC projects are those that actually create their own market (aka “blue ocean”), are on at least a second/series B-round of financing, intend to grow to not less than hundred million dollars in revenue and have a clear exit strategy (think Apple Inc., Jet Blue, Home Depot or eBay).

Discouraged? Don’t be. Stay with me…

Angel investors: “And I will always fund you”

Angel investors in the US are accredited investors who qualify under the criteria imposed by law – that is having an individual annual income of $200,000 or a liquid net worth of at least $1 million. A lot of them like to assemble in local angel investing groups that occasionally have “pitch calls,” aka meetings, with entrepreneurs depending on in which city they are formed.

They generally aim to take a 20 to 50 percent ownership stake and they like to build a portfolio of projects where they typically realize about 85 percent of their total portfolio returns from 15 percent of their portfolio companies since most of them are investing in extremely risky seed stage/series A financing round. Keep in mind that for startups raising their first round of capital (seed/series A financing) the failure rate is at least 90%, while for more mature and developed startups raising a second round of capital (series B financing) the failure rate drops to a 50%. There were only120 seed stage companies backed by VCs in 2013 vs 32,000 deals backed by angel investors.

These days angel investor groups look for less than $3 million pre-money valuation and as low as $100,000 of an investment. The main catch – unless you present them with a potential revenue plan that would prove you are fully capable to bring at least $50 million in at least 5 years, then you might hear from an angel investor the “Shark Tank” show’s most terrifying phrase: “I’m out!”

Equity based crowdfunding and JOBS act – the train has left the station – sort of

I am fully convinced that the main reason for the JOBS act’s rules not being finalized is its Title III which has become the most controversial – a part which would allow a general solicitation of up to $1 million annually in equity from everyday “mom-and-pop” investors, regardless of their level of income or financial position. I’ve been a great supporter and an advocate of this fresh approach (see my previous articles), however when I learned that apparently the SEC is looking to update the accreditation standards towards increasing the income threshold, I suddenly remembered the eminent Niebuhr’s mantra “Grant me the serenity to accept things I can not change”.

As a serial entrepreneur, the founder of Rock.com and OfficialMerchandise.com, Steve Newman, noted, “What we have now is completely absurd. Individuals who are not accredited can only fund rewards-based campaigns, which guarantee no return, while accredited individuals have an opportunity to invest in early stage companies for high returns. In essence, companies get funded and show proof of concept on the backs of the unaccredited investors, only to turn over those high returns to the accredited equity investors. In a regulatory scheme like that, one has to ask who is really being protected and who is really being benefited?”

I echo Steve’s statement and would like to remind you about the story of Oculus Rift, a company that had been crowdfunded by KickStarter’s backers who donated a striking $2 million. Right after that, Facebook acquired Oculus Rift for $2 Billion – naturally leaving the backers out of benefiting from the exit event. End of story.

The good news is that the JOBS act still has managed to trigger and bring at least two refreshing changes.

An important change to remember is that now startups are allowed to solicit money from accredited investors publicly – via advertising and social media.

Another thing – raising equity from angel investors has become much easier thanks to a rapidly growing number of equity based crowdfunding (or crowdinvesting) platforms which means that now you can submit your project online having great exposure to the accredited investors community. The most active platforms in the US include AngelListEarlySharesCircleUpEquityNetCrowdfunderRockThePost andInvestedIn and there are quite a few emerging equity funding platforms, such asFlashfunders, that strengthen its market position by working in collaboration with a highly respected securities law firm, Stubbs Alderton & Markiles, LLP.

My closing words – stay tuned and get educated. As poker players like to say – if you don’t know who at the table is the fool, it might be you.

Victoria Silchenko, Ph.D. is the founder of Metropole Capital Group and the creator and producer of the Alternative Funding Forum, Los Angeles, November 21, 2014. Learn more at www.metropoleglobal.com, @metropoleglobal

source with author permissions

http://www.huffingtonpost.com/victoria-silchenko/how-to-fund-your-startup-_b_6097734.html

Tags: , , , ,

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

ForbesHow This Millennial Built A 7-Figure Business Using Equity CrowdfundingForbesWhen he asked them to help fund his company's crowdfunding campaign, they delivered—exceeding his initial goal fourfold and ranking it one of the fastest and most successfully funded companies on R [...]

The GuardianWorboys' victims launch crowdfunding appeal against releaseThe GuardianThe women are aiming to raise £10,000 to pay for a judicial review that would initially force the Parole Board to reveal its reasons for releasing the 60-year-old, who has served 10 years in jail. [...]

Crowdfunding campaign aims to help Terrell Co. foster childrenWALB-TVAn Albany woman is hoping to help foster children in Terrell County by providing them with things people often take for granted. Kaley Hart has launched a crowdfunding campaign on TogetherWeRise.org. She hopes to rai [...]

LifesiteFacebook blocks crowdfunding site for new movie on how abortion ...Lifesite'Given Facebook's claims to be a neutral, open forum...I regard this as scandalous and I call on Facebook to cease and desist.'and more » [...]

Bristol PostBristol man crowdfunding for YouTube comedian after 'racist' millionaire landlord sues himBristol PostBristol man crowdfunding for YouTube comedian after 'racist' millionaire landlord sues him. Multimillionaire Fergus Wilson has vowed to "bankrupt [...]

Entrepreneur3 Crowdfunding Tips Every Company Forgets From a Brand That Raised $800000 and Got AcquiredEntrepreneurCrowdfunding takes a lot of planning, whether you're gearing up for a launch, a ship date or thinking about the next source of funding you'll pursue. But it [...]

The Good Men Project (blog)EPIC HAWAIIAN OPEN WORLD ACTION-RPG 'NIGHTMARCHERS' IS ON GAMER CROWDFUNDING PLATFORM FIG!The Good Men Project (blog)Wyrmbyte, makers of MOBA short-session social gaming hit Dragons and Titans (1 million + players worldwide) announced it's int [...]

XinhuaUN Palestinian refugee agency launches crowdfunding campaign following US aid cutXinhuaA Palestinian refugee child is seen at al-Shati refugee camp in Gaza City, on Jan. 17, 2018. The United Nations Relief and Works Agency for Palestine Refugees (UNRWA) said Wednesday that it ha [...]

Prescott eNewsCrowdfunding Campaign for Downtown Coworking Space UnderwayPrescott eNewsWhy work alone, when you can co-work? For those who identify as a freelancer, entrepreneur, remote worker, small business owner, micro-business, non-profit, or startup – the coworking concept helps [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

CrowdFund Beat Media

2018 Fintech World Conference & Workshop, Announcement:Game Changer” Fintech World Media, PR & Marketing Group Proudly Presents: lnkd.in/gqdCrTr

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |