Your Basic Guide to Startup Investing
When Snap went public last week, we saw investors cash out nearly $1 billion.
So it’s not surprising that people’s interest to invest in startups has risen in recent years. Investors from different backgrounds have all looked into the market, but very few understand the different invest types available. This quick guide will help investors better understand each investment type and identify which one they’re suited for.
Angel investing is perhaps one of the best-known types of startup investment. An angel investor is an individual or small group of individuals who write personal checks. Angel investing is how a lot of new investors start off, which isn’t always the best-case scenario. With this type of investment, there is a lot of responsibility held by the investor. Searching for quality startups, conducting market analysis, going through due diligence, negotiating terms and overseeing the investment until a liquidity event is a grueling process. Angel investing is best suited for those that are extremely knowledgeable about the startups’ industry. For example, if you’re a real estate developer and you come across an app to help tenants and landlords communicate, an angel investment may be your best option. You’re well-educated in the space, and you provide more value than just money. It’s also important to note, that unless you’re an accredited investor, most angel deals won’t be made available to you. A few startups are now looking to equity crowdfunding that accepts non-accredited investors. Reg A+ non-accredited investors can invest a maximum of 10% of their annual income or 10% of their net worth per year (whichever is greater). Angels by far take on the riskiest form of startup investing.
Co-investing isn’t as popular in venture capital, but it still a solid option for a certain type of investor. Co-investing opportunities may come in the form of joining a membership fee-based investment network or fund. This type of investment takes out the hassle of finding startups, conducting basic due diligence, and in some cases, negotiating terms. This is the best for family offices and larger companies who have a smaller appetite for risk, but still want to be presented with deals. For example, a family office in the medical industry that comes across a new medical device or service can get in early, make an educated investment, and like proper angel investing, provide a larger value proposition to the startup than just cash. Co-investing works best when it’s supplementing an already established portfolio. This is the mid-tier level of risk.
Fund investing has been the old bread and butter for larger investors. This form of investing is likely the best way for new investors to get into startups while spreading risk. Funds have two major shareholders, limited partners (LPs) and general partners (GPs). Those that write checks to the fund are LPs and those that manage the investments are GPs. Once an investor gives a fund a check, the GPs have full investment autonomy on making investment decisions and seeing them through. While most larger funds won’t accept checks of less than $10 million, a new category of funds, known as micro-funds, has emerged in popularity in the last few years. Micro-funds normally have a very specific thesis, talented first-time GPs, and smaller accredited investors. That’s what I’m trying to do with my fund, ACE Venture Capital. It’s a new micro-fund that specializes in investing in young entrepreneurs. I am an experienced 19-year-old GP that focuses on leveraging relationships for the best deal flow. This type of fund looks for accredited investors writing $500,000 to $5 million checks.
– Aaron Easaw is the founder and general partner at ACE Venture Capital