The world of startup investing is expectedly different from investing in the public market, and there is one question I get regularly from new angel investors who want to diversify their portfolio. While most startups won’t achieve Facebook or Dropbox returns (62,000% and 39,000% ROI, respectively), a long-term investment of 5-8 years in the right startup could produce higher returns than any other asset. Arguably, one of the most attractive components about buying equity in early-stage startups is the uncorrelated attribute it provides, which is what financial advisors often emphasize- the importance of diversification and uncorrelated returns in a well-balanced portfolio.
With emerging equity crowdfunding platforms that make it easy for curious investors to review available startup deals, there is an interesting learning curve that needs to be addressed among new startup investors, which is my main motivation for writing this piece. Daily, new investors joining RockThePost most commonly ask one question: What ROI can I expect from my investments? This is a rational question, but not one that can be answered simply for a number of reasons. Rather, it’s best to be well-versed on the implications of angel investing in order to formulate an educated set of expectations. With that in mind, here are 3 key points I emphasize when investors ask about the expected ROI of startup investments.
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To date, crowdfunding has been downplayed in Wall Street's Concrete Canyon. But that may be about to change.
Interest in crowdfunding from traditional finance players like private equity’s Bain Capital is growing, even though skeptics have downplayed crowdfunding in serious corporate finance.
RockThePost, a crowdfunding platform that seeks money for startups, holds monthly "Demo Days," where startups pitch ideas to wealthy investors, angel investors, family office investors and institutional investors.
The latest Demo Day hosted pitches from five companies seeking crowdfunding. Representatives of Bain Capital, along with venture capital firms like Emerald Stage2 Ventures and Fresh Track Capital, attended.
Companies selected to pitch include those that are trending on RockThePost’s crowdfunding platform, which has raised $23.5 million for its startups since its March 2013 launch. Each startup has ten minutes to make its case before investors rate them publicly and later send feedback.
In the startup world, venture capital funding from a big firm has become the Holy Grail. But, of course, there are other ways to launch a successful business. Bootstrapping, borrowing money from friends and family, using funds from an existing business or leveraging personal assets are all certainly options.
Below are five reasons you may want to seek another way to start your business without big VC money.
Very Few Companies Receive Venture Capital Funding
Believe it or not, for all the talk, venture capital funding is actually a rare thing. In fact, Forbes.com reports that currently VCs fund only about one to two startups out of every 100 business plans they see. And only about 300 of the 600,000 businesses started in the U.S. every year receive venture capital. Simply put, 99.5% of entrepreneurs will not get VC funding, at least not at the startup level.
So, if venture capital funding is so rare, isn’t it practical to seek an alternative for your business? Here are five reasons venture capital funding may not be right for your business.
Your Idea May Not Be Big Enough
You’ve heard how successful small businesses or startups should look to small niche markets. However, VC investors are generally looking for an idea that can pay off in the billions. Venture capitalists are in the business of making money, of course. But just how much money may surprise you.
Even medium-sized VCs will look only at businesses targeting a market in the $1 billion range, says Mark Peter Davis, founder of Interplay Ventures and a venture partner at High Peaks Venture Partners. Larger VCs will want businesses with a potential $5 to $10 billion market. Unless you’re launching a startup with this kind of potential, venture capital funding probably isn’t for you.
As consumers wise up, it could mean the end of high fees.
Anake Goodall's insight:
i became more aware of these issues after reading Jack Bogle's book Enough!
it is fascinating that the funds management industry is subjected to so little rigorous scrutiny on these matters by investors given the high stakes and the significant impact of cost structues on long run investment returns
i now reserve a corner for low cost index funds in portfolios that i am responsible for ...
Tam Hunt outlines the diversifying investment options in clean energy.
The renewable energy industry is well past its training-wheels phase and now offers many ways to invest in all types of assets. I’ve been an investor in renewables off and on for the last couple of decades, and I offer in this column a little nonprofessional advice about how best to get into this field as an investor.
Please note that I am not a professional investment advisor and this column should not be considered legal or professional investment advice in any manner. Where I have a financial interest in my recommendations, I will indicate as much.
As with all investments, the two key things to consider are your risk tolerance and your investment horizon. I’ll start with the least risky investments that feature the longest time horizon, and then move toward more risky investments with shorter time horizons.
I started following P2P lending as a Forrester Research analyst when Zopa was created in the UK.
P2P lending was a buoyant small space. But financial scandals, the resulting economic crisis and a favorable US regulation (the Jumpstart Our Business Startups (JOBS) Act) are making crowdfunding and the notion of by-passing traditional lenders more and more popular. If you're interested in this topic I recommend you follow Matthew Paulson and Peter Renton from http://www.p2plendingnews.com/ and http://www.sociallending.net/.
Written by Pete Kennedy on Wednesday, April 9, 2008
1. To prove that you’re serious about your business. A formal business plan is necessary to show all interested parties -- employees, investors, partners and yourself -- that you are committed to building the business.
2. To establish business milestones. The business plan should clearly lay out the long-term milestones that are most important to the success of your business. To paraphrase Guy Kawasaki, a milestone is something significant enough to come home and tell your spouse about (without boring him or her to death). Would you tell your spouse that you tweaked the company brochure? Probably not. But you'd certainly share the news that you launched your new website or reached $1M in annual revenues.
3. To better understand your competition. Creating the business plan forces you to analyze the competition. All companies have competition in the form of either direct or indirect competitors, and it is critical to understand your company's competitive advantages.
4. To better understand your customer. Why do they buy when they buy? Why don’t they when they don't? An in-depth customer analysis is essential to an effective business plan and to a successful business.
5. To enunciate previously unstated assumptions. The process of actually writing the business plan helps to bring previously "hidden" assumptions to the foreground. By writing them down and assessing them, you can test them and analyze their validity.
6. To assess the feasibility of your venture. How good is this opportunity? The business plan process involves researching your target market, as well as the competitive landscape, and serves as a feasibility study for the success of your venture.
7. To document your revenue model. How exactly will your business make money? This is a critical question to answer in writing, for yourself and your investors. Documenting the revenue model helps to address challenges and assumptions associated with the model.
8. To determine your financial needs. Does your business need to raise capital? How much? The business plan creation process helps you to determine exactly how much capital you need and what you will use it for. This process is essential for raising capital for business and for effectively employing the capital.
9. To attract investors. A formal business plan is the basis for financing proposals. The business plan answers investors' questions such as: Is there a need for this product/service? What are the financial projections? What is the company's exit strategy?
10. To reduce the risk of pursuing the wrong opportunity. The process of creating the business plan helps to minimize opportunity costs. Writing the business plan helps you assess the attractiveness of this particular opportunity, versus other opportunities.
11. To force you to research and really know your market. What are the most important trends in your industry? What are the greatest threats to your industry? Is the market growing or shrinking? What is the size of the target market for your product/service? Creating the business plan will help you to gain a wider, deeper, and more nuanced understanding of your marketplace.
12. To attract employees and a management team. To attract and retain top quality talent, a business plan is necessary. The business plan inspires employees and management that the idea is sound and that the business is poised to achieve its strategic goals.
13. To plot your course and focus your efforts. The business plan provides a roadmap from which to operate, and to look to for direction in times of doubt. Without a business plan, you may shift your short-term strategies constantly without a view to your long-term milestones.
14. To attract partners. Partners also want to see a business plan, in order to determine whether it is worth partnering with your business. Establishing partnerships often requires time and capital, and companies will be more likely to partner with your venture if they can read a detailed explanation of your company.
15. To position your brand. Creating the business plan helps to define your company's role in the marketplace. This definition allows you to succinctly describe the business and position the brand to customers, investors, and partners.
16. To judge the success of your business. A formal business plan allows you to compare actual operational results versus the business plan itself. In this way, it allows you to clearly see whether you have achieved your strategic, financing, and operational goals (and why you have or have not).
17. To reposition your business to deal with changing conditions. For example, during difficult economic conditions, if your current sales and operational models aren’t working, you can rewrite your business plan to define, try, and validate new ideas and strategies.
18. To document your marketing plan. How are you going to reach your customers? How will you retain them? What is your advertising budget? What price will you charge? A well-documented marketing plan is essential to the growth of a business.
19. To understand and forecast your company’s staffing needs. After completing your business plan, you will not be surprised when you are suddenly short-handed. Rather, your business plan provides a roadmap for your staffing needs, and thus helps to ensure smoother expansion.
20. To uncover new opportunities. Through the process of brainstorming, white-boarding and creative interviewing, you will likely see your business in a different light. As a result, you will often come up with new ideas for marketing your product/service and running your business.
Since 1999, Growthink's business plan experts have assisted more than 1,500 clients in launching and growing their businesses, and raising more than $2 billion in growth financing.
Need help with your business plan?
Speak with a professional business plan writer today.
Or, if you're creating your own PPM, you can save time and money with Growthink's new private placement memorandum template.
Dj Baker says
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Thanks for this article. It is indeed a great eye opener for me. Didn't realise there's so much a business plan can reveal about any enterprise.Posted at 1:49 pmMohammed Ajmal says
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Just found this post. What a great list of reasons to write a business plan. I particularly like: 13. To plot your course and focus your efforts. All too often I meet entrepreneurs who have been running their business for years without a business plan, and their business shows it. Writing a business plan creates the INTENTIONS and structure for success. Thank you, SuzannePosted at 11:41 amprivate placement memorandum says
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