September 20, 2019

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Five New Ways for Louisville to Invest and/or Raise Startup Capital

by Alan Grosheider

Did you know that almost all investment returns are now private?

If you don’t invest early, you don’t make any money. If you’re going to invest in a tech company like Uber, you MUST invest while the company is still private or long before the company is sold.

A few years ago, Andreessen Horowitz, one of the world’s leading venture capital (VC) firms, produced a study and noted that “ALMOST ALL THE RETURNS ARE NOW PRIVATE.” The chart above shows that you used to be able to invest in a company like Apple or Amazon after they completed an initial public offering (IPO) and actually make money. These days, it just doesn’t work out that way. Why?

Venture capital and private equity are waiting longer to IPO.

Venture capital and private equity firms have lots of cash. Since they have lots of cash, they are squeezing every bit of upside out of their investments as they can. They keep a company private as long as possible, providing all the investment capital needed for the companies to grow. Then, when the company completes their IPO, the VCs and private equity firms cash out all of their profits and move on.

Where does that leave the individual investor?

These days, when fast growth tech companies sell or become a public company, allowing individuals to invest, the profits already have been squeezed out. Recent IPOs like Uber are a great example. Uber’s IPO stock price was $45 per share and immediately dropped to $40. As of the writing of this post, it trades at $30.93 per share. So, if you invested post-IPO, you have LOST over 30% of your investment.

Guess how much the early angel investors in Uber made? They returned 18,500 times their investment!

How can the individual invest?

Today, the big VC firms and private equity firms still have things pretty locked up. However, that is slowly but surely changing. The 2012 Jobs Act included SEC changes that allow companies to raise early capital publicly and allow individuals to get in BEFORE the VCs and private equity firms. Eventually, as investors become more familiar and comfortable with these mechanisms, many companies will avoid VC and private equity investments altogether.

In fact, this type of investing is now essential to get startups started. VC firms and even large angel investors are waiting to put larger amounts of capital into startups at a later stage. So, even though the VCs have more money than ever, they’re waiting to invest, leaving early stage startups to fend for themselves. This problem is even more prominent in the “flyover” states and cities like Louisville. Investors are conservative, so it’s very difficult for a startup to raise early stage funding.

By using equity crowdfunding, we can level the playing field. A great example of how this process works is a company called Knightscope.

Knightscope is a company that is building robotic security guards. The company got started by raising $20 million on SeedInvest from 5,757 investors using the Regulation A+ crowdfunding exemption. Since then, they have raised over $40 million through equity crowdfunding and are planning an IPO in the next 12 to 24 months. This is a fantastic example of how lots of small investors can make the profits instead of huge VC firms!

So how do you invest safely?

Multiple angel investors studies have shown that angel investing can be safe and VERY profitable. In fact, the AVERAGE angel investor in the United States makes a return on investment of 27%! However, in order to make those kinds of returns, the average angel investor invests in 12 startups over a 5-year period. You can download our angel investing workbook here: https://metrostart.org/littleangels-bigprofits/

So, the best way to make that happen is to invest in at least 2 or 3 startups every year. If you can invest $1,000 to $10,000 (or more, if you can afford it) in 2 to 3 startups every year, you eventually will begin to produce returns of 27% with 1 out of 10 investments producing 85% of your returns.

5 New Ways for Louisville to Invest and/or Raise Startup Capital

To help local investors make 27% returns and to help local startups raise capital, MetroStart soon will begin monthly meetings to encourage and educate local investors on how to invest in startups. We’ll also will be providing mechanisms to make it REALLY EASY. Here are a few:

1. We are working to educate and help startups accept direct investments using the new SEC laws.

For example, you can invest as little as $1,000 right now in Knightscope here: https://www.startengine.com/knightscope

You also can invest as little as $1,000 right now a local company, Blue222, that is building a global app to “Uberize” the business of real estate inspections: https://mailchi.mp/b008c614aab9/interested-in-investing-in-blue222

2. We’re working with the Sheltowee Business Network to promote the formation of a new angel investor group, anticipated to meet on Sept. 23. (To participate, you must contact Founder Alex Day of the Sheltowee Business Network.)  You can learn more here:
https://www.sheltowee.com/Resources/Blog/Post/3633/New-Angel-Investor-Group-to-Start-in-Louisville

3. MetroStart is partnering with a company called Paystr that is building multiple Paystr Jumpstart funds. These funds will allow you in invest as little as $10,000 in a fund that will be investing in 10 startups each. They will be curating and structuring the deals and ...   continue reading    

UPCOMING EVENTS
Sept. 22, University of Louisville’s Family Business Center Harvest Picnic. Noon to 4 PM. Huber’s Winery. 19816 Huber Road. Starlight, IN 47106. For members and non-members alike. Current owners, next generation leaders, non-family executives, and even the grandkids are invited. There will be wine tastings and vineyard tours for the grown-ups, while the kids can enjoy the Family Fun Park and hay rides. A home-style chicken supper will be served for everyone. Cost: Free.
Sept. 28-29, Maker Faire Louisville.  Maker Faire is a gathering of fascinating, curious people who enjoy learning and who love sharing what they can do. From engineers to artists to scientists to crafters, Maker Faire is a venue for these "makers" to show hobbies, experiments, projects. https://louisville.makerfaire.com/
Oct. 17, Louisville Sheltowee Business Network Node Meeting iHub Coworking Space, 204 South Floyd Street, Louisville, KY 40202, 3:00 PM to 5:00 PM (EDT). Free. Membership after 2 meetups is encouraged.
Oct. 30, Louisville LEAP & Techstars Founders Series, Building Great Corporate Partnerships, Featured: Dave Drach, VP Corporate Strategy at Techstars. 6 to 7:30 PM. Story Louisville, 900 E. Main St., Louisville. Free.
Register for SBN events at www.sheltowee.com/events
Submit Partner Events at www.sheltowee.com/eventform

Investors Are the Catalyst

By Eric Dobson

After 15 years in the entrepreneurship/angel investing world, here is what I have learned.  Investors are the catalyst for change.  Many of you won’t like what I am about to say.  If you want to change your community’s startup ecosystem, you have to create investors first.  Creating entrepreneurs without investors to support them is a fool’s errand.

I am a recovering scientist turned into a recovering entrepreneur turned into an active angel investor.  I spent the first decade of my professional life essentially as a data scientist.  Then, I founded 4 companies raising over twelve million dollars in investor capital.  Some of those companies were successful, and some were not.  I have assisted in the founding and launch of six more companies.  Some of them were successful, and some were not.  And, now I have lead investments in 25 early stage private equity companies.  Most of them are still going strong.  I have lived on both sides of the table as an entrepreneur and an investor.  And, I have seen a large number of success and failure modes from the inside.  I say this for one reason, to establish that I have put in my requisite 10,000 Gladwell hours on both sides of the industry built on a data scientist’s evidence-based discipline.  To shameless steal a term from sports, I am a student of the game.  And, it is one I love.  Returns are the measuring stick for success in this industry, but I get out of bed in the morning for a simple reason.  There is no greater thrill than helping lift an outstanding team with an innovative idea into a successful company.  Helping others reach their potential and being able to share in their success (strategically and emotionally) is its own reward.  And, it can be very lucrative if you do it correctly.

I now have 15 years in the angel industry.  For the first 11 years of that period I was an entrepreneur.  For the last 4 years, I have been an investor.  I spent the first two years spending 90% of my time with companies seeking capital believing that if I found the most compelling companies, I would attract the best investors.  I was wrong.  Creating great opportunities for angel investors does not generate excitement at the level I expected (creating exits does, but that can take years to precipitate).  I now spend 90% of my time working with and creating more and better investors because I realized that without the investor, the industry collapses.  I work to create high performing angel groups because they are the catalyst for changing communities and our entire economic outlook.  Simply stated, angel investors cultivate companies that create value, wealth, and jobs.

Startups require investment.  There is no way around that.  Traditional economic development thinking, or a “Moneyball” approach, is the more at-bats with the right player the higher the success rate.  Applied to entrepreneurship, this translates to the more companies that are founded, the more likely you are to create a success/exit. 

This is what we assume:

But, this is reality:

(Courtesy of CB Insights, The Venture Capital Power Law – Analyzing the Largest 100 US VC-Backed Tech Exits, March 7, 2014)

So, communities create incubators, accelerators, and coworking spaces to drive at-bats.  Why do they do this?  Simple.  They focus on starting companies in the hopes of attracting investors to grow the ecosystem.  And, it is politically incorrect to talk about making people of means more successful.  Capitalism seems to be a dirty word these days, which makes me sick to my stomach.  If my thesis is correct, we have a mismatch in what we want, our reasons for our actions, and clarity of required actions.  One thing is sure.  Without capital, startups that form will die-on-the-vine for lack of resources or leave the area to find the resources they need.

Obviously, my thesis is not 100% correct or we would not see bootstrapped companies arise, be successful, and grow to exit, which clearly happens.  Some startups will never seek capital because they are funded by the founders.  Some will find grants.  But, these companies are rare and I believe these are the exceptions that prove the rule.  And, these companies would be successful anywhere with or without the community’s assistance.

So, let’s dig deeper.  The vast majority of startups seek capital.  They do so because they have to do so.  No rational human would go through the rigors (there are many better words to use, but this is a family oriented blog) of...   continue reading    

For the Entrepreneur:  Maybe It’s Not Just About the Money!

 

By Alex Day

 

Startups spend an inordinate amount of time chasing money.  In many cases this can become an all-consuming effort.  I know that I have found myself suffering from the "if I only had the money to do x".  Parting investors from their money can be very difficult (as it should be).  But I like to challenge startups with what can you do with what you have?  We often think that money is a cure all.  Trust me, as someone with significant experience, it is not.  In some cases the worst thing that could happen to a startup is that they easily get the funding they are seeking.

Below is a video I like to show.  This is someone who got the money.  He had the funds he needed to get his concept off the ground.  The money was not what he needed.  What he needed was someone with experience to help him get his project off the ground.  Often times startups crash and burn.  You often hear that it was because they were "underfunded", but I believe that this is the easiest excuse to come up with.  I have used it myself.  I believe that more often than not it is because they are "under experienced". 

It was Will Rogers that said, "Good judgment comes with experience and experience comes from bad judgment".  This is so true.  I like to reference the Navy Fighter Weapons School (Top Gun school).  It was established because it became apparent during the Vietnam war that the survival rate for fighter pilots went up dramatically after their first five missions.  They then became "experienced" pilots and had a much better chance of survival.  The Top Gun school was established to try to provide those first five missions in a highly realistic training scenario as opposed to a true combat mission.  This indeed worked.  Why did it work?  There was the simulation and getting those mistakes behind them, but there was also the instructors who had been there and done it.  These instructors were the key to the success of the Top Gun school.  They used their experience (past bad judgment) to help new pilots gain experience. 

Now let's think of the capital that you need for your startup as the jet and fuel that is required to get you through a combat mission.  Once you get that you can easily fly into trouble.  And this is on what most startups are focused.  I want to encourage you to seek out something that is harder to find than money, but is much more valuable.  Find a good mentor.  Find that person who has been through those five combat missions and can help you steer your startup in the right direction. 

Why it Is Harder to Find a Mentor Than to Find Cash

It is one thing to ask someone to invest $250,000 in your business and another thing to ask someone to invest their time.  Remember that time is the great equalizer.  Whether you have $100 in the bank, or whether you have a billion dollars in the bank, we all get roughly the same amount of time on this planet.  So when you ask someone for their time, you may be asking for much more than the amount of cash you are seeking.  But the time you can get from an experienced entrepreneur  could be much, much more valuable to you than the cash for which you are seeking.

Improvisation

The other thing I want you to consider is to improvise.  What can you do with the limited funds you have.  And don't say I don't have ANY money for my startup.  Do you have subscription television service?  Then you have money you could spend on your startup.  Cancel cable and now you have at least $50 per month to spend on your startup.  With the tools that are available today, it is amazing what you can accomplish with very little money.  You can look like a fortune 500 company and only spend a few hundred dollars. 

Learn How to Use Equity to Your Benefit

There are many who would disagree, but one thing that you can use early on instead of cash is equity.  Form your LLC, and use the equity in the LLC to get...   continue reading    

Valuations and Other Mysteries:  Top Five Factors in Valuing a Startup

By Alex Day

You have your company formed and you are ready to raise the money.  So how much is that new company worth?  This is about as easy to answer as how many angels can dance on the head of a pin.  There are many, many factors that go into this.  But the ultimate answer is that your company is worth, what you can get someone to pay you for it. 

Below are the five top factors that will influence the valuation of your company.

1. You - How much experience do you have?

2. Your team - How much experience does your team have?

3. Your idea - Does it really meet a market need?

4. Market potential - What is the size of the market and how much of the market can you capture?

5. How much money and how much time do you need to get to cash flow positive?

 

Some of the factors that an investor will look at include whether or not you have started a business before.  If this is your first time, then there will be a discount factored into that.  If you have had a business that had moderate success or even failed, you will get a bump in value for that experience.  If you have had a successful exit, then you will get a much higher valuation.  Some of the other factors include: what the market potential is; whether there is IP (intellectual property) with the company and at what stage the IP is;  whether you have a prototype, or need to build one;  and whether you have sales.  If you have existing sales then this could put you way ahead of the game. 

Some of the other issues include how much money you are seeking and how much money you anticipate it will take to fully commercialize the product.  If it can be commercialized for thousands of dollars as opposed to millions of dollars, this will have an impact.  The size of the potential market is also a major consideration for what your value will be. 

The amount of money you raise is going to determine how much of the company you are going to have to give up.  If you need to raise $2 million to get started, and the investors only value your company at a $1 million pre-money valuation, then you will be giving up control of the company to get your $2 million (click here to learn more about pre-money, versus post-money valuations).  This is a major issue between the "idea guy" and the investor.  The investor is always worried that the idea guy is crazy (and he/she often is).  The Idea Guy is worried that the Investor will take the company in a direction that will destroy their vision (and he/she often will).  So there is a tight balance between the give and take between the investor and the inventor. 

I often suggest that you look at raising the smallest amount of money you can.  You set realistic goals for this money, you accomplish these goals and now you have increased the value of your company.  It is likely you will have to raise more money, but if you have set the proper expectations with your investors and met or exceeded those expectations, you are likely going to be...   continue reading