acr30's Profile
Expert
77
points

Questions
10

Answers
28

  • Expert Asked on September 7, 2015 in Due Diligence.

    Let’s take a look at 8 key aspects of the “ideal” startup. Most startups will not meet all 8 criteria, but they should at least fulfill half of them, if not more, to be considered a sound investment.

    • Consumer Need: The most important aspect of any startup is whether a resulting product or service will sell or solve a particular problem.  A slick business plan and charismatic founders will help, but the bottom line is that if the product does not sell and generate revenue, it is useless to you as an investor. Of course no product or service is a sure thing, but what is certain is that only those which fulfill a consumer need have any chance of making it. Does the startup offer something people genuinely want? Will it solve some need which is not already being met? If the answer is yes, then there is a chance that such a startup could prove successful when finally launched.
    • Exit Strategy: Does a startup have a clear exit strategy in place? In other words, does the business have a definitive timetable or pathway towards returning an investor’s money alongside an agreed portion of generated revenue? It’s important that you as an investor know how you are going to make your money back with a suggested timetable in place. Without this there is little point providing financing because there is no direction or plan to help you generate returns.
    • Clear Ownership: As an investor you must have a comprehensive understanding of who owns the startup and all of its intellectual properties. If there is any question regarding patents, copyright, or ownership of assets then investment should be withheld until those issues are legally settled. If they are not then your investment could prove worthless.
    • Management: Depending on how “hands-on” you wish to be as an investor, having a reliable and astute management team in place to oversee a startup is essential. Without this, such a project cannot thrive, operate efficiently, or meet its goals on time. In some cases a new management team can be brought in as part of an investment deal, but founders often prefer to keep their existing talented team in place. Some startup founders have great ideas and big dreams, but if they lack the administrative talents to make them happen, you as an investor could pay a hefty price.
    • Sustainability: Some startups by their very nature may be “flash-in-the-pan.”  In some circumstances this might still prove to be a solid investment should there be a swift exit strategy in place, but ideally a startup should be able to demonstrate that it can be sustainable; a brand which will generate profits for many years. If the startup cannot demonstrate sustainability, then there won’t be many investors willing to purchase that equity from you, at least not in a way which will maximize profits. Alternatively, if the startup is sustainable, then it could act as a consistent source of revenue for you throughout the years.
    • Standout: Unless uniquely innovative, the chances are a startup will have competitors. These could already be operating or trying to launch into a new niche at the same time. A startup must therefore demonstrate why it stands out from the crowd; showing why it will dominate other similar companies within that niche. If the startup cannot separate themselves, then it may not be wise to invest in such a project.
    • Relationship: Startup founders must be willing to work with investors and be communicative at all times. A project might have a great idea at its heart, but any working or financial relationship which may become fiery, destructive, or stressful, may not be worth investing in. There has to be a mutual respect between founders and investors, each knowing their role in the startup and willing to build constructive relationships throughout.
    • Expertise: If a startup is the product of an accelerator program, incubator group, or can access the advice of market experts, it is on sound footing. This knowledge can be used as a safety net, providing peace of mind for investors knowing that advisers with the relevant expertise and skill-set are available to help steer the startup in the right direction.

    As stated above, most startups won’t possess all of these facets,, but a strong combination of a few of them can produce an excellent investment opportunity.

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  • Expert Asked on September 7, 2015 in Equity Crowdfunding.

    If you are looking for an investment opportunity which will generate consistent revenue and sale value, the perceived wisdom is often to invest in property. While property itself can provide healthy returns, it is in startup investment where even greater profits could be found. Furthermore, alongside outmatching property investment in terms of potential financial gains, startups provide a range of other advantages rarely found when purchasing property.

    • Startup Investment Vs Property Investment: 5 Key Points

    • Robust Investment Portfolio: While property investors only operate within the limited scope of commercial, industrial, and residential assets; a startup investor can add any marketplace, niche, or industry to their business portfolio. A startup investor may invest capital in a tech company, a media producer, or a clothes designer – startups come in all shapes and sizes across all industries. This robustness within an investment portfolio cannot exist to the same degree when operating exclusively within the property sector. When a dip or a housing crash hits the property market it affects every property an investor controls; but when investing in startups, this risk can be avoided. If one industry hits a rough patch then the investor can be protected from losses across all assets by having invested in other unaffected areas.
    • Credit Availability: After the global economic crisis of 2008, banks and other lenders have been much more stringent when offering credit facilities to potential debtors. This has had a significant impact on the property market with people finding it difficult to secure the funds to purchase a home or other property types due to strict criteria. The startup investment market has, however, benefited from this trend. Startup founders have found it difficult to secure financial facilities and so have had to increase their offers to potential investors which includes more input and often an increased portion of the business for a reduced amount.
    • No Financial Hurdles: When investing in property there are a number of financial hoops which must be jumped through. This includes securing a mortgage, paying out exorbitant agent and legal fees, and having to submit to local planning/housing legislation. These issues are substantially reduced or even avoided altogether when investing in a startup. Yes there may be some legal fees during due diligence, but there is no need for extensive arrangements with creditors or other third parties which can make the entire process quicker, cheaper, and less stressful.
    • Adaptable: Recent studies have shown that startups launched during difficult economic times are much more likely to succeed than pre-existing businesses, including property ventures. The key word here is “adaptability”. Startups show a 7% increase in profits during fluctuating markets which makes them a much stabler investment than most other areas, able to adapt to the economic weather more effectively. Furthermore, startup owners tend to be more positive and optimistic about how their projects will perform in the future versus standard business owners. This highlights how much stronger the startup investment market really is, even during more trying times.
    1. Government Incentives: A recent program in Canada reveals the lucrative incentives which are often available for startup investors around the world. Governments want to attract businesses into their economies in order to maintain healthy growth and generate more domestic wealth. One way most countries do this is to offer startups, especially those in the tech industry, huge tax rebates. In the aforementioned program, some startups were able to claim back a massive 80% of their taxes. This gives startups a marked advantage over property investment. Usually the only incentives in the property market are for first time buyers, while the startup industry offers a continual stream of financial sweeteners aimed at attracting investors to their respective economies.
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  • Expert Asked on September 7, 2015 in Deal Sourcing.

    Using IRA/Roth funds for startup investments

    Startup investments done through an IRA/Roth account requires a custodian that is not only willing to hold non-traded assets, but also has expertise in IRS regulations to maintain tax-advantaged status. Because alternative assets require special knowledge and handling, many people don’t offer that option, but we do through our partnerships.

    Tax advantages of using IRA/Roth funds

    Alternative asset investments held in an IRA/Roth benefit from the same tax advantages as publicly traded stocks, bonds and other assets. Tax on any capital gains generated by the investment is deferred until withdrawal from the account. An operating company held within an IRA is subject to annual UBIT tax on the net income generated. If it’s a Roth IRA, growth is generally tax-free.

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  • Expert Asked on September 7, 2015 in Other.

    Pooling funds as hybrid super angel-venture capital funds

    Geographically; by gravitating to startup hubs and fertile environments for new ventures such as Silicon Valley, New York, Austin, Miami, and even SW Florida.

    By attending investor pitch events at coworking spaces, conferences, and even on TV

    Local social gatherings providing angel financing to local entrepreneurs, like Miami Soup

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  • Expert Asked on September 7, 2015 in Deal Terms.

    This stipulation also protects the investor. Should shares be sold or investment secured for equity from another party at a later date, the original investor’s share in the business does not become diluted. There are two forms of anti-dilution which need to be understood:

    Full Ratchet: In this scenario only the founders of the company dilute their share when securing future investment. If a third party agrees to invest money, the original investor’s stake remains the same in terms of value and control, while the founders have to dilute theirs in order to offer equity to the new investor(s).

    Weighted: Here, dilution of the original investor’s stake does occur, but it is calculated against the number of shares offered to a new investor. Legal expertise is usually required in order to agree on how much dilution takes place.

    Anti-dilution agreements are offered under some circumstances, but can in some cases be seen as a hindrance to the entrepreneurial process.

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  • Expert Asked on September 7, 2015 in Deal Terms.

    In some cases an investor may request a presence on a company’s board of directors, if it has one. This can take the form of a representative or the investor themselves. While not every startup will have a board of directors, in places such as Europe a board can be created as part of the investment agreement. This is a good option for investors who want to maintain an influence on the running of a company and be more hands on. A board of directors typically has to approve spending strategies and so an investor with representation on a board will have more control over how money is spent within the company. It should be noted that this does not mean complete control unless an investor has influence over the majority of board members.

    Startup founders tend to want to maintain majority control as without it they could find themselves locked out of the decision making process. A good compromise in terms of influence is normally agreed upon in advance.

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  • Expert Asked on September 7, 2015 in Deal Terms.

    In this scenario, also known as a “lock-up”, an investor must give their consent to a business if those running it wish to sell their shares at a later date. Startup investment often requires that the founders who came up with the idea stay in place, giving their passion and dedication to the project.  A lock-up stipulation protects the investor from a startup entrepreneur selling up, after acquiring investment, to a third party who may not be what the investor is looking for.

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  • Expert Asked on September 7, 2015 in Deal Terms.

    Other investors and startup founders who agree to this stipulation must offer to sell their shares to the original investor first. If they decline, then they are free to sell their shares to the highest bidder. This offers an investor some control over who owns equity in a company.

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  • Expert Asked on September 7, 2015 in Deal Terms.

    Also referred to as “tag-along rights”, this agreement stipulates that if a founder decides to sell their shares to a potential buyer,  the original investor can demand that their shares are offered to the buyer for the same amount. If the buyer is unable or unwilling to purchase both founder and investor shares for the same price, then the founder cannot sell their stake. Again, this provides an element of control where an investor can put a halt on a sale or ensure that they receive a return on their investment when a founder sells up.

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  • Expert Asked on September 7, 2015 in Other.

    As an investor you want to make a profit; it’s that simple. In order to do this effectively there are two broad approaches: revenue and sale.  A revenue model is one which generates finances which are then split up amongst investors on a regular basis. A simple example of this would be to buy a house and then let that house out to a tenant. There may be a substantial investment at first, but each month that property generates income, over time recouping the cost of the investment. While investing in a startup which generates regular revenue is beneficial, more substantial profits usually lie in the selling of the business. Furthermore, if the value of a startup starts to dip an investor could lose a substantial amount of their initial investment.

    By having an exit strategy an investor is able to maximize their profits, selling their share of a business when it is either at its most valuable, or in order to stop any further losses. A successful investor always plans ahead, and with such a plan in place can quickly react to new eventualities which might require a swift exit.

    • 458 views
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