Investing in seed round

[luisHK]

You want to buy and run businesses yourself? Or you want to find PE funds yourself?

Find PE funds in which to invest, I'm still very confused on what to do with the non equity part of my portfolio, which holds more cash than I wished.
But never got much interest, nor knowledge, in Private Equity , this thread is interesting though, started reading and what I saw so far doesn't look particulary interesting, especially that most reputed firms seem to be closed to retail participants - except the publicly listed ones, about which I'll read further - it's probably easier for the ultra rich, but from accredited or qualified investor to the ultra rich, there can be a very large gap.

Dealmaker, thanks for the link, I'll go through the report.

 

[newwurldmn]

Find PE funds in which to invest, I'm still very confused on what to do with the non equity part of my portfolio, which holds more cash than I wished.
But never got much interest, nor knowledge, in Private Equity , this thread is interesting though, started reading and what I saw so far doesn't look particulary interesting, especially that most reputed firms seem to be closed to retail participants - except the publicly listed ones, about which I'll read further - it's probably easier for the ultra rich, but from accredited or qualified investor to the ultra rich, there can be a very large gap.

Dealmaker, thanks for the link, I'll go through the report.

The quality of the fund you invest in matters a lot. And without a personal connection you probably need to go through a bank. PE is notoriously high fees. There are the standard two and twenty of the carry but there are lots of hidden fees the PE firms extract from the portfolio companies.

However, If you have millions (5-100) in net worth you and apply yourself to the process you can probably find some very unique opportunities that I can tell you about over PM.

 

[gkishot]

Your options are two fold 1) as an accredited investor you can directly invest in an angel or venture fund 2) if you are not accredited, you can join or start a pool that invests in angel or venture funds.
As a small investor only way to invest without an angel/ venture fund is to be related or know the startup founders directly. Hope this helps.

https://www.angelcapitalassociation.org/

Do you mind to name a few 2) pools which accept non-accredited investors?

 

[marketsurfer]

Find PE funds in which to invest, I'm still very confused on what to do with the non equity part of my portfolio, which holds more cash than I wished.
But never got much interest, nor knowledge, in Private Equity , this thread is interesting though, started reading and what I saw so far doesn't look particulary interesting, especially that most reputed firms seem to be closed to retail participants - except the publicly listed ones, about which I'll read further - it's probably easier for the ultra rich, but from accredited or qualified investor to the ultra rich, there can be a very large gap.

Dealmaker, thanks for the link, I'll go through the report.

If you are serious, i am aware of a few up and coming very unique and connected VC's raising seed money -- no need to be ultra rich-- marketsurfer at gmail dot com

surf

 

[ironchef]

But finding DOTM options is another thing ...

Just like venture capitalists (e.g. Kleiner) invest in hundreds of start ups and hope for a few nonlinear payoffs (e.g., Google, Facebook), you buy hundreds of DOTM options and hope for a few nonlinear payoffs.

In practice, it is actually not that easy to hit one DOTM option that gives you 1000x payoff and make the scheme profitable if you do it randomly.

 

[marketsurfer]

We are looking at this right now. There's still a few thousand left for round 1. A close friend is a major investor--

https://entercastle.com/demo/

https://drive.google.com/file/d/0B-mhxL6tuAVPbmdhVTVvMkh6SEE/view

 

[dealmaker]

Do you mind to name a few 2) pools which accept non-accredited investors?

Use at your own risk...

http://invstor.com/

https://angel.co/realcrowd

https://www.kickstarter.com/

https://www.indiegogo.com/how-it-works?gclid=CL_ehoaLwNICFRCZfgodCX8MCg

http://www.investopedia.com/article...unded-investments-nonaccredited-investors.asp

http://www.inc.com/andrew-medal/now...rs-can-place-bets-like-the-ultra-wealthy.html

 

[sle]

I am not involved in VC so my understanding is limited but... There is a big difference between Nth stage VC and seed level investment.

VC is truly about investing, but it's done with illiquid companies. Payoff is fairly linear in most cases and they have various exit strategies besides IPO. Most "investment in startups" happens at this stage and I think that's what this school did.

Seed level investment is about building a portfolio of options for cheap - hopefully a few will work out. To achieve that, most angels are very egregious wrt to valuations, want a lot of control and are very selective yet diversified. The ones who achieve that, like Y Combinator, can sooner or later expect a home run.

 

[Sig]

I've been on the funded side of an angel investment and so perhaps can shed some light on this from the opposite perspective, i.e. the perspective of the company looking for funding. Here are some random thoughts in no particular order:
-If you've got a solid concept that has achieved traction and/or a solid team with previous demonstrated success you can afford to chose who to take money from. In those cases, you choose people who can provide you either direct assistance in the form of advice, indirect assistance in the form of contacts, or in my case a portfolio with complementary businesses where we all benefited from having the same funder. What this means for you if you're not an established angel or VC is that you're probably getting bottom of the barrel deal flow that couldn't get funding anywhere else. Same thing for a new venture fund, the vast majority will fail because they don't get good deal flow. Most of you have this idea that funders have all the power and get to pick and choose who to fund. That's true if you're Kliener, not at all true if you're a new VC or an angel.
-You've got pretty much no info on the company you're investing in. I've been at pitch competitions where there are companies pitching concepts that I happen to know from my own domain expertise are close to fraudulent. Unless you have deep domain expertise in the area you're investing, you won't be able to sort out the too good to be true from the good, and in fact the less impressive sounding investments might be your best. And that's just the underlying technology. You have no idea if the planned uptake is at all realistic, or the delivery schedule, or if the company will be able to scale..... The business plan is worth almost nothing unless some real research was put into somewhat objective things like market size. Things like revenue in year 3 are completely pulled from the entrepreneur's behind and not 1 in 100 startups is doing anything remotely like their business plan 3 years out from their seed round, so the business plan is essentially worthless.
-The term sheet changes everything in an investment. So much so that there are situations where I'd give up 30% of the company for $2M over giving up 10% of the company for $5M based on the non-monetary aspects of the term sheet. If you don't know what you're doing or at least haven't hired an attorney from a VC specialist law firm like Cooley or DLA you're going to get completely screwed on the term sheet to the point that your investment is effectively worthless. Remember, you'll always be a minority owner in a private company with the CEO generally the majority owner or in a position to put together a like minded majority. You have to think about things like dilution, down rounds, drag along rights, pro-rata investments, hurdle rates, conversions....In dilution alone there are a dozen ways for the company to screw you, from issuing a bunch of options or new shares to raising a new round you either can't afford to participate in and/or at a valuation you find unattractive. This only scratches the surface of this topic, so I'll stop here and leave you with this: I can tell you that if I left a startup I had co-founded and owned 10% of the stock, for example, I would mentally immediately write it down to $0 because I'd be almost certain that I'd be crammed down to nothing before any exit happened once I was no longer contributing to the company on a daily basis. That's me as a co-founder, how do you think you as an angel will fare?
-The entire space works because of diversification. This has somewhat been covered in this thread, but essentially as an angel or a small fund you can't afford to invest in enough opportunities to get the diversification necessary to get an acceptable risk adjusted return.
-Academic research into seed level investing shows that it's never provided a good risk adjusted return. Big funds do it as an expense to ensure deal flow. Angels do it because they're either unaware of the research, are buying something to brag about at parties, or the self aware ones genuinely love working with startups and it's a hobby they're essentially spending money on.
-Your money is going to be tied up for several years at a minimum. You have to be investing money that you absolutely know you won't need under any circumstances for some time.

I could go on and on and am happy to answer specific questions. The bottom line is that unless you're investing in a company where you have deep domain specific expertise, with a founding team you personally know very well, and have professionally vetted your term sheet...angel investing or investing as an LP in a new fund is a fool's errand, in my slightly educated opinion.

 

[sle]

I can only mention that there are pure angel investment firms that have done well over the years. Having spoken to a founder of one of them, my sense is that they run it similar to a mutistrat fund.