Investing in start-ups?

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sabhen
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Investing in start-ups?

Post by sabhen » Thu Mar 21, 2019 9:09 pm

I have been approached by some start-ups for investing in their ventures. I am widely diversified and tends to use index funds for the vast majority of my investments. These are very risky investments. However, I am thinking a very small percentage <5%) could be used as a learning opportunity about start-ups (a sort of tuition) in case of downside with the potential for an upside.

What are your thoughts and can you share some of your experiences?
Last edited by sabhen on Thu Mar 21, 2019 9:36 pm, edited 3 times in total.

Grt2bOutdoors
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Re: Investing in start-ups?

Post by Grt2bOutdoors » Thu Mar 21, 2019 9:15 pm

Are you an angel investor? What sort of preference are those doing the approaching offering you?
This seems to be a question you should ask on a Venture Capitalist forum, I'd think that most Bogleheads would steer clear of what could very well be a black-hole. Why pay tuition if you don't need to?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Wiggums
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Re: Investing in start-ups?

Post by Wiggums » Thu Mar 21, 2019 9:17 pm

How much would you invest and for what percent of the company?

What Is the asserted dollar value of the startup?

What compensation will you receive?

What is your net worth?
Last edited by Wiggums on Thu Mar 21, 2019 9:23 pm, edited 1 time in total.

ThankYouJack
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Re: Investing in start-ups?

Post by ThankYouJack » Thu Mar 21, 2019 9:21 pm

I would first make sure you're dealing with absolutely rock star founders. Super bright, super passionate and a very solid business plan. If not, I would walk away.

I used to do some consulting for "wantepreneurs". Most would want me to sign on with a good amount of sweat equity but I'm glad I always stayed on as a 1099 contractor. One founder went on to raise millions in funding but the company was never cash flow positive

megabad
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Re: Investing in start-ups?

Post by megabad » Thu Mar 21, 2019 9:27 pm

sabhen wrote:
Thu Mar 21, 2019 9:09 pm
I have been approached by some start-ups for investing in their ventures. I am widely diversified and tend to use index funds for the vast majority of my investment. These are very risky investments. However, I am thinking a very small percentage <5%) devoted to start-ups could be used more as a learning opportunity about start-ups (a sort of tuition) in case of downside with the potential for an upside.

What are your thoughts and can you share some of your experiences?
I think 5% is a good number for fun money. The last “financial advisor” that tried to sell me a private equity investment told me the minimum started at $1 mil. So, if you went by the 5% rule, I suspect you would need a good sized portfolio. But if you are a Qualified Investor with a large portfolio, I don’t see anything wrong with devoting a small portion to this with the understanding that all the funds are likely to be lost in most of these investments.

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Taylor Larimore
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Re: Investing in start-ups?

Post by Taylor Larimore » Thu Mar 21, 2019 9:29 pm

sabhen wrote:
Thu Mar 21, 2019 9:09 pm
I have been approached by some start-ups for investing in their ventures. I am widely diversified and tend to use index funds for the vast majority of my investment. These are very risky investments. However, I am thinking a very small percentage <5%) devoted to start-ups could be used more as a learning opportunity about start-ups (a sort of tuition) in case of downside with the potential for an upside.

What are your thoughts and can you share some of your experiences?
sabhen:

According to the Small Business Administration (where I worked), 50% of new businesses fail during their first five years.

https://www.lendingtree.com/business/sm ... lure-rate/

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Wiggums
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Re: Investing in start-ups?

Post by Wiggums » Thu Mar 21, 2019 9:31 pm

Taylor Larimore wrote:
Thu Mar 21, 2019 9:29 pm
sabhen wrote:
Thu Mar 21, 2019 9:09 pm
I have been approached by some start-ups for investing in their ventures. I am widely diversified and tend to use index funds for the vast majority of my investment. These are very risky investments. However, I am thinking a very small percentage <5%) devoted to start-ups could be used more as a learning opportunity about start-ups (a sort of tuition) in case of downside with the potential for an upside.

What are your thoughts and can you share some of your experiences?
sabhen:

According to the Small Business Administration (where I worked), 50% of new businesses fail during their first five years.

https://www.lendingtree.com/business/sm ... lure-rate/

Best wishes.
Taylor
Wow...

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jabberwockOG
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Re: Investing in start-ups?

Post by jabberwockOG » Thu Mar 21, 2019 9:38 pm

Way more than %50 of tech companies fail or just barely limp along in the first 5 years, more like 9 out of 10. The only way to make a profit in venture capital business is to have adequate capital to be able to invest (and take significant equity positions) in at least 20-30 startups at a time with the hopes that 2-3 are very successful and go public to make up for the remaining 20+ duds or complete business fails.

I personally know a couple of folks who have lost multiple hundreds of thousands investing in startups that involved a family member.

drk
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Re: Investing in start-ups?

Post by drk » Thu Mar 21, 2019 9:45 pm

Are you an accredited investor? If not, spend some time researching that first.

No offense, but unless you have a track record any start-up that approaches you is probably not a good investment.

DB2
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Re: Investing in start-ups?

Post by DB2 » Thu Mar 21, 2019 10:16 pm

I would take my chances on a small cap index fund instead. :wink:

Skiandswim
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Re: Investing in start-ups?

Post by Skiandswim » Fri Mar 22, 2019 5:28 am

Angel investing is not necessarily similar to the VC / PE investment processes. There are much higher risks that an exit will not occur for target firms. Angel groups often require considerable personal time to develop a pipeline and screen deals. Then you need to be able to invest in multiple firms to spread risk. Oh and then make follow-on "survivor" investments to counter dilution in a subsequent VC/PE led rounds.

The document link below does provide some data on deal success rates; under 15% of firms survive in funds with more than 50+ investments (page13). Worse for smaller funds. Buyer beware!

https://www.angelcapitalassociation.org ... f?rev=DB68

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TomatoTomahto
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Re: Investing in start-ups?

Post by TomatoTomahto » Fri Mar 22, 2019 5:46 am

Just watch Shark Tank for 5% of your time instead (time is money, right?).

Keep the 5% invested in Total World index.

ETA: I spent $10k on tuition decades ago, which my wife reminds me of annually when we prepare our taxes.
Okay, I get it; I won't be political or controversial. The Earth is flat.

imoldfella
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Re: Investing in start-ups?

Post by imoldfella » Fri Mar 22, 2019 8:28 am

I have invested as an angel. I look at it more as a donation with some accountability rather than an investment.

1. I want to see kids with good ideas that would benefit society get off the ground.
2. My personal experience with non-profits is mostly bad. Its no sure fire way to help the world, lets say that.

Against that, I cannot file my income tax right now because the businesses I have invested in have not generated their K1's. It turns out you have to pay "your share" of the $100 of interest they collect from their startup stake sitting in the bank. Its a meaningless amount of money, but the paperwork is non-trivial. No good deed goes unpunished.

ERguy101
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Re: Investing in start-ups?

Post by ERguy101 » Fri Mar 22, 2019 9:42 am

ThankYouJack wrote:
Thu Mar 21, 2019 9:21 pm
I would first make sure you're dealing with absolutely rock star founders. Super bright, super passionate and a very solid business plan. If not, I would walk away.

I used to do some consulting for "wantepreneurs". Most would want me to sign on with a good amount of sweat equity but I'm glad I always stayed on as a 1099 contractor. One founder went on to raise millions in funding but the company was never cash flow positive
That always amazes me on Shark Tank or The Profit, a company can pull in, for example, 8 million a year, but they are still losing money, and the owner can't even take a measly salary. That blows my mind.

inbox788
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Re: Investing in start-ups?

Post by inbox788 » Fri Mar 22, 2019 2:51 pm

sabhen wrote:
Thu Mar 21, 2019 9:09 pm
I have been approached by some start-ups for investing in their ventures.
What do you mean by "approached"? And how many is "some"? I've avoided going through the "accredited investor" hoops so I am NOT approached about these opportunities. Are you meeting personal contacts? Principals?

IMO, the best opportunities don't need to be sold that hard. If these folks that are "approaching" you are constantly seeking investors, they're peddling something other than good opportunities. Some may pan out, but they're going to be risky and probably not worth it. Imaging investing $1000 in every venture that you encounter. Will you make money over the long run? Will you beat the SP500? And if you don't invest in them all, how do you know the ones you pick are better than the ones you pass on? It might be entertaining, but like the lottery, consider the risks, expectations and probability of failure.

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