If you wanna start investing in startups, you’ve come to the right place.
Only, I’m not a finance guy. I’m not a lawyer, accountant, or venture capitalist.
Think of it as an equity crowdfunding bootcamp, where you’re learning how to invest in startups online.
You don’t need to be an accredited investor to invest in startups. Under regulation crowdfunding, anyone can invest on WeFunder or other equity crowdfunding websites.
However, there are some major pitfalls that you need to steer clear of. Otherwise, you might end up losing your shirt!
If you want to learn how to invest in startups, you need to learn the vocabulary of crowdfunding, investing, and early-stage finance.
These tips are designed to get you up to speed quickly, without all of that annoying jargon that fancy finance professionals use. Enjoy!
Also – if you’d like to download a checklist that you can use to go through this list, you can download it over here – it’s killer and makes everything easier.
1. Choose the Right Investment Contract
I know, I know, most people start with talking about the hot startups on WeFunder, but I’m going to take a different approach.
You need to first become familiar with the investment contracts that you can use to invest in these startups on WeFunder.
Well…. wouldn’t you want to know the difference between a stock and a bond?
How about the difference between a REIT and a stock option?
Exactly… if you just throw money at a company, without understanding the contract, there’s no way of knowing whether or not you got a good deal.
You might even have picked the right company, but if you invested using the wrong contract, it’s not going to pan out for you.
Think of Facebook’s early days. Would you rather own equity in Facebook, or a bond that the company issued? Obviously, equity. If you choose the bond, you would only get fixed payments, without appreciation.
This is a simple example of how you can pick the right company, but the wrong contract to invest under. Does that make sense?
These are the contracts that most companies are investing on WeFunder:
Crowd SAFE (Simple Agreement for Future Equity) – The right to get equity (aka shares) in a company upon a future priced financing round. Your stock will convert at the valuation of the company, or the valuation cap, whichever is lower. It’s not a loan.
Convertible Note – Technically an unsecured loan that will be converted into equity upon future financing round, or at a future date in time. This loan is usually not repaid but instead converts into equity at a certain share price.
Preferred Stock – This is a priced round. Preferred stock has “special” terms that come with it, such as liquidation preferences (how much they get, minimum when the company is sold or experiences a liquidation event). Others might be anti-dilution provisions. It’s better than common stock.
WeFunder Revenue Share – You will share in the gross or net revenue of the business in the form of cash installments over a period of time. There will be a maximum repayment amount. It’s not in perpetuity. It is technically a lending document.
WeFunder Promissory note – The revenue share is technically a promissory note, but there is another that functions more like a bond, and maybe secured by property of the business, or a personal guarantee.
As an investor, you should think about the types of contracts that you would like to participate in, and those you’re not interested in.
Do you want to own debt, or have the potential for future shares in a business?
Based on the financials of the business, which contract will earn you the most profit in the long run?
Making this decision will help you to screen out certain types of companies that might seem attractive but are offering a horrible deal.
2. Learn About the Lead Investor
Most equity crowdfunding offerings on WeFunder are done with a lead investor who directs the voting power of all the other investors.
The lead investor is also familiar with the company and invests a significant amount on the same terms as the other investors. This investor also helps the founder with mentorship and connections.
I can also help you with this.
It’s important to research the lead investor so that you can understand their relationship with the founders, why they decided to invest in the company, and how they can help out in the future.
If you stumble across a WeFunder offering, but the lead investor doesn’t look like they made an intelligent decision, it would be a bad idea to follow them.
This lead investor could be compensated in the form of carried interest if appointed as a portfolio manager of the SPV in a future Regulation D round.
In addition, if there is evidence the lead investor is not acting in the best interest of the other investors, they can be removed by WeFunder after a vote of the investors.
Thus, the more that you can learn about the lead investor early on, the better it will be because you don’t have to worry about that part of the deal.
3. Examine Future ROI Potential
The ROI examination phase will vary depending on which contract you invested under.
For example, if you’re doing a revenue share agreement, you may care more that the company has the potential to be profitable instead of being sold or doing an IPO.
For your specific contract, you need to think about when you’ll see an ROI on the money you’ve put into the deal.
(By the way – you can find some great deals here).
Let’s for example say that you’ve invested in the startup using a Crowd SAFE contract, where you expect to have equity in the startup upon a future financing round.
So… in this case, you’ll want to think about when that round might occur.
Would it be in a year or two years?
What would drive the valuation of the startup?
In the case of a Crowd SAFE contract, thinking about these topics will make it so that you don’t wind up investing in a startup that never raises money again. Otherwise, you’d never get any shares in the company.
In another case, you might be investing in a startup under a promissory loan note that gets paid back at regular intervals regardless of the revenue of the company. In this example, you’ll definitely want to look at the financial health of the company.
A company in poor financial health might not be able to pay back your loan.
You would also likely consider whether or not the loan is secured by company property. Or, maybe the loan has a personal guarantee, in which case the personal financial situation of that individual would matter more.
4. Examine Company Metrics
I’m referring to the business metrics that underlie its growth. These are a few types of metrics that I’d like you to pay attention to.
- Financial Metrics: These are the accounting numbers that the business has provided for WeFunder investors. Gross revenue, operating profit, etc. Examine the Income Statement, Balance Sheet, and Statement of Cashflows to better understand the makeup of the company.
If you want a great book on this topic, I would recommend this book: Accounting for Non-Accountants: Financial Accounting Made Simple for Beginners
- Growth Metrics: These are the numbers that underscore it’s user growth, customer base growth, or growth in other forms other than financial. Is the startup just really an idea, do they have product market fit, where are they experiencing most of their growth?
- HR Metrics: A lot of the times, this many not be provided directly, but you can do some digging to find out information, such as when people joined the company. Is the company hiring people? Are they growing the team?
The best way to get started with analyzing some of these metrics is to create an excel spreadsheet that records this information, with different tabs for different metrics.
This might seem like a lot of work, but I’m really writing this for the serious investor who wants to spend time analyzing the company from a fundamentals perspective.
Also, if you don’t want to create this table yourself, I’ve included that in my investor checklist and Google Sheet/Excel tables.
You can also invest in a WeFunder company from more of a speculative view, in the same way, you might invest in a stock because “the industry is growing.”
5. Examine the Management Team
Don’t be fooled by fancy marketing, or nice pages. I’ll be honest… I’m a marketer. I know what I’m talking about.
In fact, if you ever want to do a raise on WeFunder, you can talk to me and I may consider working with you.
Anyway, the management team is the actual people who are going to execute the company’s big goals.
That’s all a company is… it’s just a collection of people.
Even if a company makes a great app, they need a developer to maintain that app, improve it, and help them improve monetization of the user base.
The companies that make the most money are usually the ones that can afford to hire the smartest, most driven people.
Also, the founders who are charismatic, talented, smart, and hard-working are the ones who naturally attract a high caliber of talent.
A killer startup idea in the hands of dumb, lazy, or incompetent people will never go anywhere. The founder may not be the smartest person, but they sure as heck have to be able to attract smart people around them.
In addition, if it’s a team that will be making milestones happen, then you should learn who those individuals are and how their skills complement each other. There are certain skills that are critical for success and vary from person to person.
Does that make sense? I talk a lot about this in equity crowdfunding explained.
6. Consider Market Trends
This is the time to begin to do a little research on the market the startup is going after. What’s the industry like? Is it growing?
You might have become interested in this startup because you are working in the industry. In that case, you might be able to skip this step, but I’d still at least do a cursory google search.
Take some time to consider whether or not the entire industry is going to grow over time.
There’s a saying that the current lifts all boats.
If you have a business in a growing industry, it’s a heck of a lot easier to be successful!
There are many easy statistics tools out there that you can use to measure demand.
Here are just a few of them:
An average company in a growing market may give it the push it needs to be considered an exceptional investment.
This deep dive into industry trends is important in general as an investor. The more you can become educated about an industry, the easier it will be for you to “spot” good deals in the future.
7. Assess Product/Solution and Product/Market Fit
This is when you should really think about the problem-solution and product-market fit behind a product.
The startup is a company, yes, but it makes money with its products, services, or software services.
Take time to score how well it does this. What are the alternative products in the industry? What other services exist in the neighborhood?
In addition, you need to consider:
- What size of market experiences this problem?
- To what degree do they financially value solutions?
- Will this problem exist in the future, or grow?
If the solution to the problem is 10x better than anything else on the market, it will be a leap forward of innovation. Otherwise, it’s just incremental progress and it’s harder to have a grand-slam home run!
After you’ve scored these metrics, then you’ll wanna turn your head to the product/market fit of the product. Specifically, you’ll want to put this company through a quasi Lean Startup Analysis to see whether or not they got some hotcakes on their hands.
Let’s say that from your discussions with the company, they are experiencing a lot of user growth, but a less than ideal turnover rate. This company might have good marketing, but the user experience of the product might not yet be there.
Your bet, in this case, would be that over time, the product can live up to its marketing!
8. Invest with Passion
Sometimes, we feel bad for investing in a startup when it may not be the best financial decision.
Elon Musk said it best… “Creating a rocket company has to be one of the dumbest and hardest ways to ‘make money’.”
Investing in a startup is about passion, man.
It’s about declaring how you want to impact the world.
Which stories do you want to change our planet?
Which stories do you want your kids to experience?
What kind of world do you want to leave them in?
If you are genuinely passionate about your investments, you will be more likely to become an active crowdfunding investor!
You’ll help to spread the word about the company, tell your friends, and support new things that it’s doing online. It’s kind of like your baby.
Investing in startups is one of the easiest ways to experience the joys of being a startup founder, without doing all that hard work.
You’re already going to be taking a risk when investing in a startup, so why not make it fun!?
Invest in the companies that you want to see exist in the world.
9. Read Through Updates, Questions, Details and What People Say.
Pour yourself a nice cup of coffee, and let those details sink in…
If nothing else, I would recommend taking a look at the questions and what people say on WeFunder. This will at least clue you on to any warning signs.
You can also go through my checklist here on investment warning signs.
Anyway – if you really want a full picture of what you’re getting into, then you should also read more into the updates and details of the startup.
The updates will be a clue as to how they do investor communication in the future. It may also tell you about their general enthusiasm about the company.
The details of the startup (aka the financials) are presented in a friendly way with emojis. I think this appeals more to the general investor.
But, you’re not the general investor ;). You want a better deal.
Read through the management’s discussion and analysis of the financial condition of the company. Read through the risks, debts, management team, and use of funds.
Again – you gotta check out the book, Accounting for Non-Accountants: Financial Accounting Made Simple for Beginners
You can also take a look at the company’s financials through the EDGAR Form C website. WeFunder also provides a version at the bottom of the page.
Take some notes using the documents that I provide in the crowdfunding investing cheat sheet.
10. Follow a Crowdfunding Investing System
You can spend your time creating these tools, or just steal these from me.
It’s freakin’ hard to remember to go through all of these points, resources, and decision criteria. Instead, just automate it by following my system.
You’ll get access to:
- Beware Red Flags – Checklist
- Investment Consideration Prompts – Fillable Forms
- Company Metric Analysis Tables
- Supercharge Your Investing Toolkit
- Ultimate Investment Process
You will go through this system any time that you want to seriously consider an investment of any kind of WeFunder. This will help you to stay consistent with your startup decision-making.
I am not, in any way, promising investment performance or returns.
This is a simple workflow management system that you can use to support your efforts as an investor. You can check it out here.
I hope you enjoyed this article, and if you’d like to learn more, check me out on YouTube or book a coaching call.
There are so many great campaigns that are killing it on WeFunder.
If you want to find about some good opportunities, you gotta check out this site with killer deals.
The post 10 Tips for Investing on WeFunder appeared first on CrowdCrux: Crowdfunding Demystified.
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