China Government and Venture Capital

In emerging nations, governments have greater influence over markets than ever due to regulations and political control. The ubiquity of a government can be seen in every economy through indirect or direct ownership of investment vehicles. China is no different.

The Chinese government started relaxing its grip on the economy during 70’s, which resulted in the escalation of investment and private entities. Since 1979, private and foreign investments have contributed a major role in making China one of the fastest growing economy in the world. Despite that, the country struggled to have standard financing mechanisms for businesses, including the availability of debt finance for smaller firms or presence of efficient equity markets. Although, it gave rise to a number of challenges, yet, it created opportunities for Venture Capital (VC) in China.

Rise of VC firms in China

The VC firms started making their way in the Chinese market during the early 80’s, and the impetus for this development was public policies, because the government still plays a dominant role in the country. The National Research Center of Science and Technology for Development suggested in 1984 that China should set up a VC system to encourage high technology market development. A number of local governments in the country supported and sponsored VC funds so that they could be invested in State Owned Enterprises (SOE) so as to level them up at a global standard in terms of quality and productivity. An example of such organization was China New Technology Venture Investment that was formed in 1985. Some of them were established for years, while others were formed only to make an investment in firms, especially the SOEs.

During 80’s, the primary focus of VC firms was to invest in property and infrastructure as there was an increasing popularity in hotel development and tourism sector. However, many of these investments couldn’t perform well and private equity investors lost interest in such investments. By the end of 1980s, interest in the Chinese market started brewing again. Due to steady economic growth and the government’s interest in such investments, VC was encouraged. But it wasn’t without a conflict as the government wanted to invest in high technology market and private investors wanted to keep their focus on low risk investments.

Evolution of VC in the Chinese Market

There was a lot of investment failure in the beginning as tourism and hotel development business couldn’t produce sufficient return. Moreover, a sudden proliferation of VC also turned out to be a failure, because the government officials and entrepreneurs didn’t have that experience.

As a result of such failures, a new body was formed in 2002, called the China Venture Capital Association, to improve the professionalism in this sector. Since then, the VC ecosystem has not only evolved but also shown tremendous growth.

Current Status of VC in China

While the investors in the developed nations are cutting their stakes in startups and golden age of unicorns is reaching the end, the venture capital fund backed by the Chinese government has brought together the biggest pool of startups in the world. It has reached 10 times the amount invested by VC in startups in 2015 ($32.2 billion).

Beijing Initiative

The country recently announced the formation of a $30 billion state-backed VC fund for encouraging the reform of SOEs and bolstering innovation. The fund is backed by the State Council and China Reform Holdings Corps, and it is established to find out the market-friendly ways to combine state assets and easily channel investments toward specific projects. It can turn out to be an effective move by the government in the long run despite the concerns regarding inefficient distribution and governance of assets. With the help of this initiative, if Beijing successfully upgrades its SOEs through effective investment in promoting high-tech companies, it can be helpful in rebalancing the economy of China by taking its reliance away from investments that focused on consumption based growth.

Other Investments Made by the Local Governments

China is struggling with economic difficulties as a result of ever increasing corporate debt, skyrocketing home price and reducing trend in exports. To combat such issues, local governments in China are also entering the VC sector, investing a total of ¥30 trillion. The purpose of this investment is to trigger the development of high-end manufacturing firms, internet and bio-technology so that it replaces the eroded economic growth of stumbling sectors.

Around 780 local government funds are competing to seed the upcoming multibillion dollar startups, including online emporium Alibaba Group Holding Ltd, Xiaomi, and SZ DJI Technologies Co. (Drone maker company), as China is striving to create at least one Silicon Valley in more than 20 provinces.

If China is able to achieve a desired outcome of such investments, it will not only enable the country to avoid the middle income trap, but also scale the entrepreneurship and innovation at a massive level.

Governments and Venture Capital

Several governments around the world have started equity co-investment programs to bridge the financial gap by injecting Venture Capital (VC) to businesses that do not have sufficient capital but they have high potential. These hybrid (public/private) programs still engage private sector VC firms as a channel through which public support and a large amount of capital is invested.

Hybrid Scheme in the United States

In the U.S., models of the Small Business Investment Companies (SBIC) program, such as, hybrid schemes have been launched. It involves a participation by the state as a public guarantor or a special liability partner (LP) for the large part of the total capital raised for investment. Subsequently, full operational autonomy is entrusted to the general partnership (GP) by the state once the investment eligibility guidelines are agreed upon. This is done to attract investment returns to the investors, i.e., the LPs.

These models have been widely adopted by a large number of governments since the collapse of dot.com bubble that violently shook VC funding raising. Moreover, developing countries have also started showing interest in such models to encourage innovation and new startups.

Hybrid Venture Capital Schemes – The U.K. and Australia

Other developed countries, including the U.K. and Australia, also followed the SBIC models and designed their own Hybrid Venture Capital Schemes (HVCFs). The Enterprise Capital Fund was formed in the U.K., whereas, the Innovation Investment Fund was formed in Australia.

The UK government devised the program to provide growing startups an equity financing of £2 million ceiling. Under the program, the early stage funds, invested in the growing small and medium enterprises (SMEs) and startups, consist of private investment by the private investors with uncapped profit share and loan or equity from the government with capped profit share. A common structure of investment is one where there is an equal distribution of profit between private and public LPs. However, to increase the expected profits of private LPs, HVCF adopts a number of mechanisms where changes are made to the profit distribution, down-side protection, timings of investments, and the payment of operating cost related to the funds.

Although, SBIC wasn’t a complete success, yet, the governments that are in favor of equity enhancement programs followed its design and changed it to match their own requirements and preferences.

Issues Faced by High-Technology Companies

High tech organizations face three major issues when they try to access venture capital. Firstly, they do not have enough information about venture capitalists in the market and there are limited financial channels for technology companies. Secondly, organizations that seek public venture capital causes low demand for other VCs, and thirdly, these organizations need to have creative and dedicated management teams or else they face issues in convincing VCs to provide funds, which further widens the financial gap.

Role of Governments in a Developing Country to Counter the Issues of High-Technology Companies

Governments of different countries have taken measures to address these issues. For example, there is a “triple-helix model” that expresses a relationship between: University – Government – Industry to promote innovation in a society.

Innovation can be brought in industry and university via direct or indirect VC investment, government stock, enactment of laws, formulation of policies, and through the promotion of high-tech SMEs. Government can play its role in different ways, i.e., by having a creative function, through venture investment regulations and tax policies that directly leave an impact on VC market, and by other measures that indirectly affect VC industry, such as regulations and laws that govern the labor market, patent, stock market, pension funds, etc.

For example, there is a city in China called Suzhou where 75 percent of the science parks are backed by municipal public VC. A special institute, which is responsible to the Local Science Committee of the central Chinese government, was developed to administer these parks. The employees of the institute are directly recruited and trained by the government. Therefore, as a developing country progresses in becoming a developed nation, a shift in the role of public VC arises from its direct participation in the market environment to provision of services.

Governments usually provide support to the Venture Capital markets due to perceived market failure or financing gap faced by startups or early stage businesses, and also due to the positive impact it will have to bring innovation and create job opportunities for a prosperous economy.

Angels going back to heaven

The global market is at its all times high and businesses are getting investments in abundance.

Angel investments have also stepped up their game. In the past few years, a number of deals took place where the investments from angel investors flooded in, for example, Reid Hoffman, who made an investment in Facebook and Flickr, whereas, Chris Sacca invested in Instagram and Twitter. You would find so many names behind the companies who made it big in a short period of time, such as Friendster, Yelp, Twitter, etc.

Business Cycles leading the Angel Cycle

Most of the startups in the tech-industry have been backed by contributions made by angel investors, but the question is:

How long will it last?

This question has been brewing for quite some time, and there is a reason behind it.

If you take a look at past three decades, you will find out that angel cycle followed the same pattern as a business cycle. With the boom and bust experienced by the business cycle, angels took exits and departed to safe haven from time to time. There has been a total of five distinct cycles over a period of the last thirty-one years, depicting the rise and fall of silicon valley’s angel investors.

The sine curve that keeps track of fluctuations in the angel cycle typically follows the sine curve that keeps track of ups and down in a wider business cycle. It shows that as angel investing begins to rise up, the remaining startup investment market would be going through a radical shift.

Rise of Angels in Past 5 Years

For the past six years, the size of an average investment made by angels grew almost sixty percent, and pre-money valuation has shown a growth of around twenty percent.

Angels have invested heavily in the valley, wherein, different groups of angels have infused a lot of cash as the rounds got bigger and bigger each time. For example, two years ago in 2014, an investment of more than $24 billion was made by angel investors.

As they were risky investments, they hardly took into account more than 10 percent of an angel’s portfolio. Most of these investment decisions were discretionary; this is the reason why appetite of these investors and available funds got exhausted due to uncertain market conditions.

If the Cycle is about to Mature?

As predicted by Bill Gurley, a venture capitalist in the Silicon Valley, the cycle is about to reach its maturity growth is given more value as compared to making profits. Regardless of whether it is happening, when it eventually happens, angel investors will become more cautious, wherein, some of them would wait for the market to go back to where it was prior to the fall, while others would simply pack up and leave.

History Repeats Itself

If you look back in the past, angel investors flee from the recession that occurred in the beginning of 1980s, only to enter the market again with the introduction of PCs and record high job opportunities coupled with the surge in the real estate market in San Francisco. Another downfall of angel cycle was observed with the economic recession of the 90s, as they made an even dramatic comeback later on with the growth of the dot – com bubble. Right after the bubble was burst in 2000, not only did they leave the tables once again, the investments turned out to be a failure as well.

They made another comeback after that, but escaped to safe havens when the real recession hit the market in 2007. Since then, the industry has experienced bullish trends, but no one knows when it will come to an end. However, the only certainty on the basis of past events is that it will come to an end.

If Time for Startups is Now?

If you have a startup company or planning to raise capital for funding your idea, it is better to raise capital now. Try to attract as much funds today as you can, while the market is experiencing a boom, because when the business cycle takes a shift, angels will take a step back. In times of good market conditions, business cycles are considered perpetual. What businesses tend to forget is, it is a cycle that goes through a series of surges and plunges. The global economy is not immune to the unavoidable macro events, as their occurrence gradually causes the shift in business cycles.

How Smart Angels Invest? – A Guide to Creating Your Investment Strategy

Investing in a startup has become more of a trend recently as it promises to return more than what it’s originally worth if it becomes successful. Some of the startups that made it big include Uber, Facebook, and Twitter. If you believe that you have enough capital to invest in the startups, but don’t know how to begin and what strategic direction to choose, it is better to start by analyzing the strategies of smart and successful angels; the type of investments they have in their portfolio and the course of their invested money over a period of time.

It may take some time to master the skills of these angel investors, but don’t get disheartened by it because it will eventually be brought to fruition as you learn to take the right decision. Even the successful investors made plenty of mistakes before they reached this position. Following are some of the things some of the well-known angel investors believe in when they make seed-stage investments.

Investing in People

One of the most famous angel investors of today is Ron Conway, who has made an investment in a number of successful ideas in the past decade. According to him, the most crucial element to consider when you invest in a startup is its team. He said that the idea of an entrepreneur changes and evolve with the passage of time, therefore, it is important to invest in people.

He follows a common strategy called spray and pray by making a large number of small investments. Not every investment made by him guarantees a successful exit, but he certainly has a huge network with different types of investors who look forward to joining the league of these angels.

Capital Efficient Business Idea

Another successful angel investor, Reid Hoffman, who is also a founder of LinkedIn and has made an investment in Flickr, Facebook, etc., believes in innovative ideas that have a tendency to scale efficiently. Whenever he invests in a company, he looks for a product that is unique, has the potential to attract millions of users, and most of all, it can attract funding as a business grows.

Identify the Products that Appeal Consumers

Chris Sacca, an angel investor who has invested in Instagram and Twitter, looks for a product that will be in demand once it hits the market. An example can be his investment in Turntable.fm, in which he invested a lot of time, because he realized it in the beginning that users would become engaged in this investment.

Team Involved in Materializing the Idea

Another well-known name in the angel investors’ community is Chris Dixon, a co-founder of Hunch. He invested in Skype and Milo. Moreover, in 2010, he was ranked number 1 investor in Businessweek. Although, he is always on a hunt for high-tech startups, yet he believes in diversifying away from the risk, and so also invest in startups that do not fall in the category of high-tech. However, apart from the technology, he focuses on the team involved in bringing an idea to reality, and this, he believes, is a crucial part of his investment. He said that as environmental changes occur, the shortcomings in the original idea start popping up. A good entrepreneur would always adjust to the changing environment, which can only be seen through the passion of the team involved.

Reasonable Compensation

Everyone must’ve heard the word PayPal; its co-founder who also invested in Facebook, Yelp, LinkedIn, and Friendster, Peter Thiel, said that he keeps his focus on what a CEO is paid. If these people are being paid a lot of money in the company, the chances of an investment to run out quickly are very high, but if the CEO is paid less than average, it depicts the alignment of his interest with equity shareholders. Therefore, he sees how reasonable a compensation is in the company when he invests.

Provides Solution to the Problem

A famous celebrity, Ashton Kutcher, has only been on the field for four years, yet, he has made substantial investments in high profile companies, such as, Skype, Zaarly, Flipboard, AirBnB, etc.

According to him, what he looks for in a company is the tendency of its product to solve a problem, and the user it engages who demand that solution.

To summarize, whenever you plan to invest in a company, you can choose one or use a blend of these ideas in order to examine factors that may lead to finding a successful deal. All in all, what they focus on is the entrepreneur; the team he assembles, and the idea he represents that determines whether an investment would be profitable or not.

Venture Capital and Equity CrowdFunding Co-Existence

It’s been more than four years since the Jumpstart Our Business Startups (JOBS) Act has been enacted, and its democratization has already started with a few Regulation A+ CrowdFunding (CF) offerings officially recognized by the Security and Exchange Commission to raise funds.

Given the increasing interest in Equity CF and reward based CrowdFunding, venture capitalists would find it hard to seize startups seeking investment opportunities as they prefer to raise funds via crowdfunding. On one hand, it has ignited the fear in some VC firms as they believe it could disrupt their industry by creating a hindrance to attracting young companies, whereas, other venture capitalists are of the notion that startups looking for both seed and later stage funding can utilize CF and VC funds alongside each other.

This gives rise to an important question

Whether Equity Crowdfunding and Venture Capital Co-exist or Not?

The answer to that is yes.

Despite the apprehensions raised by VCs, both the sources have turned out to be successful for startup businesses, as they offer two unique routes to raise funds. Although Venture Capital makes up a large part of the financing, yet, crowdfunding can add an extra element to it and help companies by allowing them to raise money quickly and in a more cost effective way.

CrowdFunding Provide Real-Time Feedback

Every VC investor seeks strong ideas that have a potential to provide high reward with minimal risk. With equity CrowdFunding, VCs have the advantage to get real time feedback as they observe the public response to see whether a product or service gain traction. According to an article by Deborah Gage on the Wall Street Journal, three out of every four startups (supported by VCs) fail. However, if it is supplemented by Equity CrowdFunding, the number can reduce to a minimum. As David Loucks, CEO of Healthios, rightly said that both the sources of investments complement each other. It can be seen as a sequence, wherein, CrowdFunding plays its part and then Venture Capital plays its role.

He further said that CrowdFunding doesn’t necessarily have to be restricted to the seed stage; in fact, startups can use it at a later stage to help strengthen their deal. He went on to say that instead of going to the capital markets, companies can turn to CrowdFunding in order to arrange funds around a specific initiative, as there is certainly going to be an investor in the market who would seek a partnership with a top buyer.

Challenges of VC and CrowdFunding Partnership

There is always a risk, to VC firms, of getting involved with scores of other equity investors. Loucks said that VCs have to be strict in ensuring the credibility of the sources of funds that a CrowdFunding platform represents.

Lynn said that there can be a situation where companies coming to the Venture Capital round, with thousands of shareholders if they find successful CrowdFunding offering, which complicates the capital structure, especially for Venture Capitalists who want to have a lion’s share in the business.

It also reflects a tough choice on the company’s part that seeks funds through CrowdFunding prior to attracting VC money.

Venture Capitalists Can Bring Their Own Skill Set

When it comes to CF, Venture Capitalists can go with the number of structures that allow them to co-invest in a company in tandem with new crowdfunding methods. For example, VCs might get access to preferred stock when CF investors may only get common stock. Moreover, VCs can also maintain control provisions, including anti-dilution measures so that rights attributed to them are not applicable to CF shares.

These arrangements can be quite fruitful for startups and investors alike, and in many cases, VCs can boost the overall value of an enterprise, while structuring arrangements in a way that meet their business needs. They can bring connections and market exposure to the table. As a result, new companies get to raise capital, Venture Capital firms get validation, and CF investors get the advantage of VC guidance and experience. Therefore, it can be fairly said that with the right strategy and partners, both the VCs and CF investors can co-exist.

Crowdfunding and Venture Capital

If startups manage to get funding from a venture capital firm (VC) or angel investors, they mark it as a successful milestone.

However, in the past few years, another investment vehicle has been introduced in the financial market to fund innovative ideas called CrowdFunding (CF). It has been changing the game ever since its inception and it is a new form of raising money to finance ideas. Unlike other forms of investments, such as, seed funding, angel investing, VCs or bank loans, CrowdFunding actually enables startups and entrepreneurs to invest in their business with a large amount of capital supply. Before going into detail, let’s look at what crowdfunding actually is.

What is CrowdFunding?

In simple words, CrowdFunding is a mean of raising money through a large amount of individuals, who are requested to fund an idea on a CrowdFunding website with a small amount of money. This phenomenon depicts the wisdom of the crowd, wherein, a business gets an opportunity to satisfy the market demand that was previously not exploited. Having this system in place results in creator getting funds to excel in his creativity and crowd getting a new product, which makes it a win-win situation.

CrowdFunding or Venture Capital – A Better Choice?

This can be a topic of solid debate if discussed in detail, because both sources have their upside and downside. In order to get a clear idea of which one of the two is a better choice, some of the key points have been discussed below.

Ease of Access

There is no doubt that it is easier to access funds via CrowdFunding than it is to raise capital via Venture Capital. You can meet your capital requirement with CF without having to build any connections, and instead, leave the decision to a large group of individuals. Sometimes, VC is hard to access. Despite having actual customers and real revenues, companies are considered small by the venture capitalists.

With CrowdFunding platform, it becomes easier to access a wide array of accredited individuals to fulfill initial capital requirements. On the other hand, regardless of how streamlined the venture capital processes are, there will always be more friction in terms of VC making inquiries and spending more time.

Stability

Stability is a key to a successful business, but it isn’t achieved easily. Most of the startups do not show an incredible growth curve in the beginning. It takes time to find the product/market fit and to find out a scalable way to sell a product. It means startups would need extra time for which, there will be extra financing requirements. In case of CrowdFunding, there is no apparent deal with responsibility and resources to fill this gap. This is where venture capital partners can assist a business to maintain their focus on execution by providing enough cash.

However, it should be done based on TRUST where both the founders of a startup and venture capitalists feel that the investment was done fairly.

Venture Capitalists working with CrowdFunding platforms

Ron Miller, a CEO of StartEngine (CrowdFunding platform), venture capitalists are compelled to use CF, because it asks founders for revealing the strength of their teams and values in the marketplace. He further said that it shows that strong teams and concepts are likely to get exposure in the market, which will draw attention of the VCs and other investors to further invest in their ideas.

For Example, Oculus Rift, a virtual reality system. They raise $2.4 million through CrowdFunding, which gave them the opportunity to rise another round led by Andreeseen Horowitz (VC firm) to raise $75 million.

Both sources of funds have their pros and cons. However, some VCs are now turning to crowdfunding websites to get access to new deals. Having strict timelines, they use CrowdFunding to identify if the idea is worth investing time in.

Corporate Venture Capital vs. R&D

According to a venture capital database (CB Insights), the venture capital market invested $74.2 billion across North America in 2015. The Corporate Venture Capital (CVC) groups participated in 17 percent of the deals in that region, making up 24 percent of the total venture investment distributed to startups that have been fueled by VCs.

This definitely reflected a reasonable improvement in CVC activities as their participation was limited to 12 percent in 2011. Significant growth has been observed in this investor type as an alternative source of funding for new businesses, but only a few know what corporate venture capital is.

Corporate Venture Capital (CVC)

CVC is defined as an equity investment by an established company in a startup business. It can be put together as an independent part of a company or an appointed investment team that is off their company’s statement of financial position. The main goal of CVC is to invest in companies showing high growth prospects. Some of the marquee brands having venture presence in the technology and healthcare industry, include Dell Ventures, Google Ventures, Cisco Ventures, Intel Capital and Johnson & Johnson Innovation.

Corporate venture capital has been one of the most critical contributors in the venture capital ecosystem that has matured over time.

Research and Development (R&D) and Corporate Venture Capital

R&D and CVC are two prominent sources of creating new potential.

CVC can be used as a substitute for internal research and development in creating such opportunities or capabilities. In different theories proposed by Dushnitsky and Lenox (2005), Cassiman and Veugelers (2002), and Gompers and Lerner (2001), there was unanimity on the idea that R&D backs the increasing use of CVC, in contrast with CVC to be used as a substitute for internal R&D. However, not much consideration has been given to how different industries might affect the relationship between these two sources.

Preferred Use of Investment

With the rapid changes in the global market, companies have drawn their focus on research and development investment to strive for achieving short term targets, as VCs are considered too quick to get caught up in the latest thing. But it doesn’t have to be this way. A number of opportunities with the great potential to boost innovation already exist, except corporations are not able to make use of it. One of these means is to use corporate venture funds.

Corporate R&D – Slow and Expensive Investment

Research and development investment is mostly focused on perfecting technologies that are already used by the public. The United States has spent billions on gigantic science projects for years, but the commercial returns were not as expected. Cutting back on R&D is not the right choice either, as Kodak ended up filing for bankruptcy when they cut their research funding and focused on film, and Nokia is now being purchased by Microsoft as they tried to keep their focus on low-end phones.

Corporate Venture Capital – Quick and Cheap Investment

CVC, on the other hand, is better at identifying new regions and is quite flexible and cheap as compared to R&D. During the last 20 years, a number of CVC initiatives gave a boost to pharmaceutical companies that were struggling to catch up with new advancements in bioscience.

The large companies in a corporate sector stay cautious of CVC, as they have seen them distributed ineffectively. For a corporate venture to be a successful mode of investment, its goals should be in line with corporate objectives and the approval of funds should be done smoothly with the same compensation levels as offered by independent venture groups. If a company fails to provide a fair incentive, it is likely to face a consistent flow of desertion. Rewards should always be given if people solve a problem or launch a new product in the market, but they do not necessarily have to involve cash. Recognition can also be a significant reward for such efforts.

Traditional R&D are not good at pointing out threats from the competitors. Instead, it keeps its focus on a specific number of projects that results in ignoring innovative advances that happen outside the company. Whereas, CVC quickly responds to change and potential threats, which allows decision makers to withdraw from any investment that doesn’t seem to be generating revenue in the future. It is highly likely that a creation of the CVC fund would prove to be a breakthrough idea that changes everything.

What do Angel Investors Look for in Startups?

Angel investors have to look for a business that worth investing, but it is not easy to differentiate between a startup that has a potential to grow and the one that is unlikely to succeed in the future. Angel investments are the most popular form of injecting funds into a business, especially a startup. According to a research, business owners are of the notion that it is a plan that attracts the investment, but investors seem to have other priorities.

Angels go for the “Ideas and Founders” and not the “Plan”

An online platform, known as Company Check that provides data on the companies in the UK, conducted a poll where 3000 business owners were asked about what they think an investor looks for while making an investment decision. It was revealed that around 38 percent of participants said it is a business plan, whereas, 27 percent of them voted for sales figures, followed by the founder, business idea, and economy. But the owner of Company Check, Alastair Campbell, was surprised with the results. He recently got an investment of $1 million for his startup called Carsnip. He said that at an early stage, it is an idea and a founder of a business that angel investors tend to go for, and then comes the sales figures and plan.

To further confirm the reasons, another poll was initiated where investors were asked the same question. Most of the investors shared the same notion as expressed by Campbell. Rory Curran, an angel investor of StatPro and Ecodesk, said that after his experience of investing in about 15 early stage startups and going through failures over time, he believes the ranking should be a founder, an idea, and then a business plan (especially the technology). And then comes the question of whether it is scalable, or if it will need significant reinvestment at a later stage. Similarly, former head of global markets at KPMG and an angel investor, Neil Austin said that he goes for the idea, then founder and then a business plan.

Another investor, Rajesh Sawhney, who has invested in about 50 startups, including Little Eye Labs (later acquired by Facebook), said that he seeks an exceptional founder with ingenious ideas and profound execution capabilities. He believes that angel investing is basically about recognizing and nurturing a unique talent.

“Experience” Matters

The chairman of Wyldecrest Parks and investor, Alfie Best, said that he considers cash flows to be a key factor, but when it comes to investing in startups, the experience of a founder along with the companies that are willing to purchase their products is what he evaluates.

Another angel investor from Silicon Valley, John Rampton, said that for a founder to make an impression, it is important to show that a team is backed by experience and credibility, because he believes it is a team that is going to make an impact and not merely the idea.

High-growth Business is a Potential Investment

Angel investors tend to go for startups with high growth prospects as compared to the ones that are likely to grow at a slow pace with modest profits. They hold their expectations high and seek a higher return than they can possibly get from a stock market. Allan Riding, an expert on angel investing and a professor at Carleton University, said, ““For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years.”

An entity is likely to win an investment if it builds a business with sound future prospects. According to AngelBlog, angel investors are more likely to invest at pre-money valuations between $1 million and $3 million. By this point, it is probable that a startup has succeeded in establishing itself as something, having a real customer-base, fair valuation, and real revenues. Moreover, at the time of making an investment, they also look for an exit strategy to take a smooth exit.

Scalability

Another key factor that every investor looks for is the scalability of a business. They prefer to invest in startups that require a minimum viable product to get to the market and can scale quickly. For example, the largest taxi company in the world, Uber, does not own any motor vehicles. Similarly, a well-known retailer, Alibaba, holds no inventory. These companies scaled very quickly as soon as they entered the market.

It is important for entrepreneurs and startup owners to value the motivation and concerns of angel investors, because these investors take a significant risk when they invest in businesses.

Is Funding Your Startup with Venture Capital Always the Right Choice?

With the rapidly growing tech-world, it has become quite common for startups to fuel their ideas with funds injected by venture capitalists (VCs). Whenever you pick up a business newspaper now, there is mostly something written about VCs or the early stage businesses that were funded by these investors.

But is it always the right choice?

In today’s fast pace environment, everyone wants to make huge profits as soon as they possibly can. However, as the old saying goes, “haste makes waste.” This is also true for businesses.

Although, venture capital investment may be a good choice for some businesses, yet, it comes at a cost of coping with high expectations held by these investors, which also results in many startups to fail. The fact is, new ventures do not need such investments all the time. Besides, simply because you are a tech-company, doesn’t necessarily means that you have to have your office in the Silicon Valley. There are many companies in the world of technology that grew organically and made it big. Though, the progress was slow, it was steady and made them even stronger as they made it to where they are today. One such success story is of the MailChimp. Started as a design consulting firm, providing email service as a side project, the company touched a revenue of $280 million last year in 2015.

Dan Kurzius and Ben Chestnut started the company in 2000. Some of their clients were demanding a solution to engage their customers by email, so they tweaked some old codes that were used for an unsuccessful online greeting card business. For the next few years, this project was run parallel to their main business. In 2006, however, they started having reservations. Having the entrepreneurial family background, both the founders were passionate about helping small businesses grow. Despite being in a critical state of its growth, they knew MailChimp was a low cost marketing channel for small scale business firms. So, in 2007, they packed up their web design business and shifted their entire focus to email service. So, what made it such a huge success?

Valuing What Your Customer Needs

Even when the company was fully focused on providing email marketing service to its clients, they faced a host of larger and better funded competitors, including Constant Contact.

What kept MailChimp retain its clients?

It was the trust their customers had placed in them. Chestnut said that it was their close connection with the customers that their rivals didn’t have. They knew what their customers wanted. They offered affordable services, which also allowed greater customization to cater the customers’ needs.
Learning to Make Money is More Rewarding than Spending it as a Startup

Co-founder of Basecamp, Jason Fried, said that you learn bad habits from raising money, for example, if you have some cash in your bank account, it makes you good at spending it. But on the other hand, if you have to earn it yourself, it makes you good at making it, which is a good habit for an entrepreneur to learn sooner than later in running a business so as to survive without relying on other people’s money. For MailChimp, learning to make money instead of spending it were just the essentials to keep their business running.
Understanding A Small Business is the Key

Although, MailChimp was approached by many potential investors from time to time, but Chestnut says that every time they had rendezvoused with investors, they failed to understand the gist of small business. They wanted to see the company at an enterprise level with a large number of employees
Chestnut further said that they were often told that they were sitting on a gold mine, but something about this idea never felt right to them. For the founders of MailChimp, it was all about proving to small businesses that they can do it just like Chestnut and Kurzius made it happen. Being a small business itself, this mail service company could understand the requirements of other small businesses fairly well. Despite the high level of uncertainty that persists in the tech-world, both of them feel that the company will run better if they control it rather than the outside investor.

Therefore, a startup doesn’t always have to let venture capitalists control them by fueling their ideas with a large amount of debt. Instead, they can be the pirate of their own ship and sail it through highs and lows the way they desire.

How to Invest Smarter?

Angel investors and venture capitalists provide funds to early stage or emerging startups in exchange for equity and aiming to make huge profits. The trend of such investments has been increasing and there are a number of startups that became successful as a result of such investments, including WhatsApp, Uber, and Facebook.

It is very important to invest in a promising startup that has a potential to attain a unicorn status, yet, it is not easy to be an investor. Choosing the right start up is as important for an angel investor as it is for an entrepreneur, but does it determine an investor’s success? To understand how one can invest smarter, let’s look at a few tips by different investors.

Focus on Team and Market

The investor in Famo.us, TouchOfModern, and Airseed, Siqi Chen, said that when you make an investment in a startup, it is usually a very early product. Therefore, it is crucial for an investor to calculate and assess the opportunities accordingly and should keep the focus on the team and the overall market.

Ask Yourself – “Would I Join this Start-up?”

Another angel investor, Mike Greenfield, who invested in Hullabalu and Pocket shared some important insights on taking an investment decision. He said that in the beginning, he used to ask himself if the startup would yield a positive outcome on an investment, but it changed over time, and now he usually asks if he could see himself joining that company when he was 24? If the answer to the latter is affirmative, it shows that the founder of a particular start-up is working a problem that isn’t structurally flawed and has a good chance of winning big.

He further said that such companies have a potential to convince a geeky person like him as they work on something that is important and also ace the integrity test. He added that if a startup satisfies all those things, it makes him feel like he’s doing something right as an investor, regardless of whether he makes money out of it or not.

Read the Herd Correctly

There is this common phenomenon in a stock market, whereby, investors can make a lot of money simply by reading the herd correctly. The same was observed by Christopher Schroeder, investor in Vox Media and Skift, when he began angel investing a few years ago. He said that when he presented a deal to bright and successful friends, the first question they asked was “who is in?” even before the question about a team and its concept popped up. Therefore, one has to read his herd correctly before taking any decision.

Identify the Scale of Assistance Required by a Startup

Jeff Miller, another investor in the world of angel investing, said that when an angel provides a feedback on a product, founder usually appreciate it. But the clutch actions are quite rare than anticipated by him. Such actions can affect a company’s future. However, if you look at it from the perspective of successful companies, they look for a minimal assistance from their investors. So, it is important to identify the scale of assistance required by a startup for its future growth.

Choose a Company with a Good Working Product

It is of vital importance to invest in a company that has a good working product. Having a good team of individuals in any startup is not enough if they don’t have a product that solves a problem. A product has to show a “product-market fit.”

Double Down the Investment Once a Potential Unicorn is Spotted

Once you identify a potential winner, you should “double down”, as it represents almost 20 percent of the initial pool of investment.

However, patience is the key, and individuals in early stage startups usually have to wait for 3 to 10 years before they start earning profits from their investment.

Although, there is a lot of risks involved in investing in a new startup, yet the trend for angel investing is rapidly increasing. In order to invest smarter, an investor has to always welcome different ideas, because great ideas are born every day.

But only a few of them, with the right investor (and investment) turns out to be a complete success.