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How to Invest in Startups

The equity crowdfunding platforms and knowledge you need to start investing today!

Lately we’ve been talking about investing in startups, how angel investors, so investors in similar types of investments, are making an average 27% annual return and what I used to look for working as a venture capital analyst.

But I know just getting started in this kind of alternative investment , in equity crowdfunding, can be intimidating so I wanted to do one last video on making your first investment.

In this video, we’ll go step-by-step to finding your way around an equity crowdfunding platform. I’ll show you how to find startup investments, what to look for and how it works.

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Complete Guide to Investing in Startups

If you haven’t seen the first two videos in the series, make sure you check those out. We shared research showing historic early-stage investments have returned an average 27% a year along with diversification from the ups-and-downs of the market. And while these are angel investors rather than crowdfunding, they’re that similar early-stage type of investment in startup companies. In the second video, I revealed the process I use to analyze startup investments to make sure you only put your money in the very best.

The series is in partnership with the Republic platform on how to invest in startups. Republic is part of the crowdfunding revolution, enabling anyone to become an angel investor.

Equity Crowdfunding Investing on Republic
Equity Crowdfunding Investing on Republic

What I like about Republic is their venture capital-approach to researching companies. I spent a good part of my professional career as a venture capital analyst and love getting back into this idea of looking at early-stage companies, analyzing the business model and market to find those startup investments with that high return potential.

Republic has one of the lowest acceptance rates for projects, when compared to similar securities crowdfunding portals, around 1% of submitted deals are approved to be listed for the crowd to consider investing in.

Check out the investments available on Republic right now!

How to Use an Equity Crowdfunding Site to Invest

So first I want to show you how to find your way around Republic and then we’ll look at two historical investment opportunities on the platform .

Clicking through to Republic, you can click here on invest to find how to invest, how it works as well as links to the different types of investments like startups and real estate.

It’s totally free to invest. The startups raising money pay a fee depending on how much they raise. In fact, along with your investment in the company, most give out perks like product discounts and recognition.

And again, why I like Republic is because it has that screening process in place to vet companies listed on the site. Analysts are going to use a lot of the criteria we talked about in that second video. They look at the founding team and the product. Then they put the startup through a due diligence analysis, reviewing the business model, the market and these other criteria.

Most equity crowdfunding platforms have some level of due diligence, reviewing projects before they get put in front of investors, but this is definitely a higher level of analysis on Republic’s part.

We’ll look at those two historical startup examples next but when you’re ready to invest, you just create an investor profile and answer a few questions about yourself as an investor.

After you’ve found a startup, you make a commitment to how much you want to invest, usually anywhere from $100 and up for a lot of the projects.

If the startup reaches its minimum funding goal, your investment will be made and the paperwork will be generated for you. Each deal comes with a refund policy as well, cancel anytime before the last 48 hours of a closing and you’ll get a full refund.

What’s really cool about Republic, and I haven’t seen this on any other platforms, is you can now invest in new video game companies as well. With the Fig acquisition, the platform connects game developers and companies with investors.

Equity Crowdfunding Examples

Now I want to talk you through a couple of historical startup investments on the site, show you how to read a campaign page and where to find the information we talked about in that second video.

Both of these startups raised money on Republic but I had to wait until they closed their campaigns to do the video. Because of rules on equity crowdfunding platforms by the SEC, since the video is sponsored by Republic, it can’t appear to promote a project offering securities.

You can check out investments by scrolling down on the homepage, and you can change the sorting here to see them laid out differently. I was watching this Pure Green Franchise while it was raising so we’ll click through here.

Equity Crowdfunding Example
Equity Crowdfunding Example

The first thing you’ll see is how much has been raised, by how many investors and the time left in the campaign.

These deal terms are very important. The valuation cap is the maximum value your investment will convert into shares or cash.

So I know the lingo can be a little confusing. Most companies will raise using an instrument called the Crowd SAFE, which is an acronym for Simple Agreement for Future Equity. Now this doesn’t mean that it’s a “safe” investment. Just like all early-stage investments, you have a chance at making a return in the form of equity or a cash payout – if the company gets acquired, issues shares in an IPO or sells all of its assets.

So this valuation cap is the maximum value of the company at which your investment will convert into equity or shadow shares. When a trigger event occurs – for example an acquisition or IPO – investors receive equity shares at the valuation cap price. For example, if the company gets bought out for a value of $30 million but the valuation cap on your investment is $12 million here, it means you bought into the company at that $12 million and your return will be affected by that difference.

Next here is the Discount and this is like a special kicker for investors. The discount is a special provision that can protect investors in the event that a future financing round is below the valuation cap. Otherwise it’s an incentive for future rounds or an exit if the SAFE is uncapped – meaning there’s no valuation cap.

You also see here the minimum investment, type of security, the campaign goals, maximum amount of funding they hope to raise and deadline to invest.

Just as important and we’ll look at this more in a minute, is going to be this documents section. This is where you’ll find clickable links directly to the Form C, which contains all the disclosures required by the SEC as well as links to a copy of the Crowd SAFE or whatever security instrument is being used.

While Republic does a lot of that due diligence on each startup, it is absolutely critical that you do your own analysis, use that process we talked about in the second video.

Here on the Form C, you’re going to find the company’s business plan, management’s analysis of the market and competition, how they plan on using the crowdfunding proceeds to grow the company and the filed financial statements.

I know it can seem confusing but it’s easier to understand with an example. So let’s say XYZ Inc is raising money on Republic at a $5 million valuation cap and a 20% discount and you go ahead and invest $100 in the deal.

Now imagine that XYZ has a future equity financing round at $10 million pre-money valuation at $1 per share.

Based on the valuation cap, your $100 Crowd SAFE would convert to approximately 200 shares. Essentially the price per share for you is $0.50 compared to the $1 new investors are paying.

On the other hand, based on the discount, your $100 Crowd SAFE would convert to 125 shares – instead of paying $1 per share the discount would enable you to receive shares at the rate of $0.80 per share because of that 20% discount.

If there’s a valuation cap and a discount on the deal, your SAFE will convert to shares at whichever price is more favorable to SAFE holders. In this case, that would mean the conversion price was determined by the value cap.

That doesn’t cover every possible situation here, but this should give you an idea of how the value cap and discount affect the value of your investment if your SAFE is converted to shares at the time of an equity financing.

We’ll come back to that Form C but I want to point out a few more things on the crowdfunding page.

Next here on the right, you’ll see the perks the company is offering to investors. These are in addition to your investment, so you’ll see that each level stipulates that you get that amount in a Crowd SAFE investment, but a lot of times management just wants to give you a little more incentive.

As an example, most campaigns will offer a personal thank you from the founder. You might get listed as an early-stage investor, higher investment amounts will usually get you some kind of a discount on the product. Here at the $1,000 investor level, you get a $100 gift card and an entry to have the company’s next smoothie named after you.

Some of these perks can be pretty cool. I’ve seen private dinners with founders and trips offered for big money investors. Understand though, these can be nice add-ons but they shouldn’t be something that’s going to convince you to invest in a bad company. Do that analysis first, decide if it has that potential and you want to invest before you start looking at what perks you’re going to get.

Now I’m scrolling past some really great information on the left here and if we were analyzing the investment, we’d definitely want to read through this because it includes a lot of the market research and analysis we talked about in that second video.

Here I want to point out some of the things we haven’t covered yet, what to look for in an equity crowdfunding campaign.

Hugely important here, the section highlighting the company founders and team. Like we talked about in that analysis video, this is probably the single most important key to a startup’s success and like I pointed out, I’m looking for a few key things here. I want to see that managers have some experience in the industry. I want to see some experience in finance or accounting and just generally a deep bench of skills.

Next is going to be some press highlights, FAQ and risks but you definitely want to scroll down and read through the Discussion section. This is where potential investors can ask a question and get an answer directly from management.

I cannot stress how important this section is, especially if you don’t have much experience analyzing startup investments. Even with my experience in venture capital, I read through these and always find information I missed or something I didn’t even think about.

Just as important though is you want to make sure management is receptive to questions and open about the investment. Read through management’s responses, make sure they’re actually answering the questions. Not on this platform but more than once, I’ve found equity crowdfunding campaigns where it was obvious management was trying to hide information and just kind of talking around the questions instead of answering them.

We’ll look at another campaign but I wanted to highlight something to show you how easy this is, how accessible to everyone. I did the calculation on a few campaigns and it’s pretty close to the same. Look at this one million seventy-thousand raised and if you divided by the 5,020 investors, you see an average investment of $213.

I’m not saying how much you should invest, we saw the minimum on this one was $100, but how cool is that? The average investor here is able to get in on an early-stage startup company with just over $200 invested.

Nation, that’s a big difference from how this used to work in the past. When I was working in venture capital, before the JOBS Act when only rich people with over a million dollars net worth could invest, you were looking at a minimum of usually ten or fifty thousand to invest in startups.

I want to walk you through one more campaign, again just to give you a feel for how these are laid out and where to find the information you need.

This one is Sparkle, a company making natural sanitary pads for women. The company has raised over $150,000 from 628 investors and at the time I’m recording this, they had 55 hours left in the campaign.

This one has a valuation cap of $6 million so, again, if the company is acquired or issues shares or some other trigger event occurs for investors, you’re going to get that company for that valuation or lower.

This one is offering a discount of 15% if your investment is converted to shares. It’s a $100 minimum investment for a Crowd SAFE campaign.

Just like the first campaign, here you can download the documents filed with the platform or the SEC.

Perks include a thank you, t-shirts and other merchandise and a one-on-one call with the founders.

While you’re reading through these crowd campaigns, you’re not just looking for the information for your analysis. You’re also making sure that management has a good grasp of the market themselves. For example, the campaign here includes a really well thought-out description of the competition and what they believe are their competitive advantages. It’s clear they know the industry, their market and are ready to compete.

Again we scroll down to the team and seeing just the two co-founders listed here, something I’d definitely want to look for in the business plan provided in that downloadable Form C is their plans on adding management and a team to the company.

Get started investing in early-stage companies on Republic!

Look for that link to Republic above to explore the startup investments available now and let me know in the comments below if you’d like to see analysis into equity crowdfunding deals.

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