Venture Capital: The "fuel" that drives Silicon Valley
What that means for developing and cultivating Black entrepreneurs, innovation and technology
We’re continuing to part 3 of the investment series.
Venture Capital
Venture capital is both a form of private equity and a financing model for startups and small businesses. Venture capital comes from high-net-worth individuals, investment firms, banks and other financial institutions. The capital is usually allocated to companies with growth potential.
Who determines that potential?
The company and or person you’re pitching your business idea to. If you’ve ever watched an episode of Shark Tank, you may already have a general idea of how entrepreneurs pitch their startup ideas to investors in exchange for equity. It’s a risky investment because you don’t exactly make money right away. If the company goes under, well you don’t exactly see any returns on the investment.
Sourcing Investment Deals
How do investors find deals? The common ways investors find deals is through their networks, investment groups such as “angel syndicates”, accelerator programs which provides support for founders to launch and develop their business ideas and products.
The Process of investing
The startup is essentially borrowing money that has to be repaid at some point in the future, through an acquisition, or investment event, IPO. Angel investing follows a different approach. The money borrowed, or the investment from the investor isn’t considered to be debt. There is no money to be repaid. Instead, the investor receives an equity or ownership share in the company. The amount of equity received varies for every angel investment: The more capital that's provided, the bigger the share may be.
There are various ways angel investors can structure their investments.
Friends and family round: For many founders, friends and family are their biggest supports and first investors. Friends and family can invest in company rounds even if you are not an accredited investor.
Angel groups: This is a group of angel investors who seek opportunities to invest in startups. An example of an online group is AngelList, a network of startups you can invest in with venture investors. You can always create an angel investment group with your friends and family. Example 10 people in your family agree to invest in a company. Each person can agree to invest $2,500 each and take that $25,000 toward a startup company.
Syndication: This is similar to an angel group but in this case, one investor will help raise the funds from the group. Syndicates are groups of experienced angel investors who have access to deals, networks of founders and investors, to receive deal flow or business deals. This type of angel investing structure funds companies at scale.
The person leading the syndication receives a fee, usually 20% only on the success of the business. People like to invest in syndications because these leading investors have experience and success.
I strongly suggest you do your own research to understand the sectors, market, industry, the process of developing startups will also come in handy to help you understand the perspective of building a startup from the founder’s point of view. This helps to set the expectation around opportunities and growth.
Crowdfunding platforms
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Barack Obama. The Act required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. This page provides links to the rulemakings and studies required by the JOBS Act, as well as links to FAQs and other useful information related to each of the JOBS Act titles. (USE THIS INFO FOR CROWDFUNDING)
The Jumpstart Our Business Startups (JOBS) Act created an exemption under the federal securities laws so that crowdfunding can be used to offer and sell securities to the general public. The JOBS Act also established the regulatory structure for raising capital through securities offerings using crowdfunding, including limits on the amount of money companies can raise and investors can invest.
Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people. Companies can use Regulation Crowdfunding to offer and sell securities to the investing public giving the public the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses. Regulation Crowdfunding enables eligible companies to offer and sell securities through crowdfunding. Crowdfunding sites include Indiegogo, Startengine , Kickstarter , Wefunder , Ifundwomen The rules:
· require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal
· permit a company to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period
· limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period and
· require disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering
Legalizing investments
A cap table is the place of record for the equity-based transactions of a company. It includes ownership stakes, types of shares, and option pools. Ownership stake refers to who (founders, investors, or employees) owns what amount of the business. This reflects who has control over the company. Since most startups need a voting agreement among both common and preferred shares, this view shows who needs to sign off on major company decisions (e.g., company sale or reorganization). The capitalization table, or cap table, provides the information you need to get a clear understanding of the company's ownership structure.
The cap table also serves as a document that helps you track the value of equity and debt investments so that you can stay up-to-date on the financial status of your business. A cap table document can help you manage company stock options and how much employees can be granted from the stock pool.
Startup investing is not a “get rich quick” strategy. Most startups take years to grow to the point where investors can make a return on their investment through an exit. It can take seven to 10 years or more. It’s important to invest only money you won’t need to use in the near future, but also money you’re not too scared to lose. The reality is that 90% of startups fail for various reasons.
Thanks in part to the Jumpstart Our Business Startups Act, or JOBS Act, which is intended, to reduce barriers to capital formation, particularly for smaller companies. Investing in startups is not just limited to accredited investors, startups and local businesses can raise investment capital from individuals who meet the SEC’s investor criteria. Investors can invest into pre-IPO companies, purchase shares online through crowdfunding platforms, or work directly with the company in exchange for equity. Stay tuned for part 4 of the startup investment series to learn more!
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Shavaughn
Founder, BYSB STUDIO
https://www.bysbstudio.com/
Resources
Updated Investor Bulletin: Regulation Crowdfunding for Investors
U.S. Securities and Exchange Commission Introduction to Investing
Investors can tell a lot about a startup from its cap table. Here’s what they look for.