Creating Your Startup Investment Portfolio Using Crowdfunding



Investing in early-stage companies can be highly risky and equally rewarding. I recently began investing in startups as well and even shared the philosophy of how entrepreneurs should pay it forward in this article. Despite being fairly new to the startup-investing world, I have spent considerable time learning about the same, by putting my money where my mouth is. I have now made well over 20 investments and even seen some of my portfolio companies raise follow on financing rounds at high multiples, within just 4 months of embracing angel investing. With this post, I hope to share what I have learned about angel investing using crowdfunding.

First, let’s understand when and why a startup raises capital. Mentioned below is how I see startup fundraising efforts from private investors. May differ from how others see the same.

  • Concept stage – The money that flows into a startup, when it is just an idea. Most investments at this stage are made based on just a pitch deck or a landing page. Yet given the execution risks, no product, no proof of concept, no customers and no revenues, this is the riskiest stage to invest. Yet it also has the potential to reap the highest rewards. Getting access to such deal flow is purely a function of your network and how well connected you are. Even crowdfunding platforms do not entertain startups at this stage, because it is very challenging to create a story around growth prospects without any execution. The biggest beneficiaries of startups at this stage are startup incubators, who provide the startups with about $25,000 in funding in exchange for mentorship, office space and access to investors. The startups in turn part away with about 6% equity that the incubator receives. Capital at this stage is used to build a product so the startup may be able to provide product demos and acquire users/customers. Typical valuations seen at the concept stage vary from $250K to $5M, depending on a number of factors such as team’s past experience, industry knowledge, opportunity size, etc.
  • Seed stage – Capital that flows into a startup when it has a prototype ready, but limited to no traction. Most startups that graduate from incubators and accelerators are now ready with a product and have decent traction to back their product-market fit. They seek to raise capital for purposes of hiring, product expansion, and customer acquisition. Successful demo days will have gotten the startup the exposure it deserves. Also, at this stage accelerators like Motive and MetaProp NYC will begin syndicating the previously incubated startups or angel and venture capital investors such as Jason Calacanis will syndicate on crowdfunding sites. Valuations range from $3M to $20M. Typically Y-Combinator graduated companies are valued at the higher end of that spectrum. A new technique for fundraising at this stage is that of SAFE Agreements. Increasingly, a number of seed stage companies that are unsure about pricing themselves and who do not want to be burdened by the deadlines of convertible debt, are embracing this new tool available to startups for fundraising. Under a SAFE agreement, there is no equity or debt issued to the investor. Instead the issuance of priced equity is deferred to the next priced round, with a valuation cap and discount rate to act as sweeteners.
  • Growth capital – Capital raised to keep up with demand, to scale operations, expand the team and make acquisitions for growth. This is the phase in a startup’s lifecycle when it has the potential to run away with its valuation, of course on being merited by traction. Series A, B and C type rounds are all part of raising growth capital. Many startups themselves get acquired when in this phase, as they have demonstrated a stable business model that can scale. Companies that reach this phase in their evolution cycle have overcome the execution risks. Gil Penchina does an excellent job of syndicating investment opportunities in growth stage companies, on AngelList.
  • Pre-IPO liquidity capital – This isn’t necessarily capital raised by the company. It is often employees with stock options and sweat equity who may want to cash out partially/completely prior to an expected major liquidity event in the next 12-18 months, such as an IPO. There could be a number of reasons for this, which are mostly never disclosed, but investors then get the option to buy in at the last priced round valuation, which typically is at least a 20% discount to the current valuation estimates. Many such opportunities can be explored on sites like MicroVentures.

Using crowdfunding for making startup investments

Startup investing used to be for very wealthy individuals with strong networks. With the passing of the JOBS Act, you only need to be accredited and have access to the Internet to get access to investing in what could be the next Instacart or Uber. Entrepreneurs can now openly solicit investors for funding—through ways as simple and direct as tweets and status updates—and potential backers can easily find information about cash-hungry startups on the Web.

Investors can also join online syndicates, which usually aren’t as exclusive as real-world angel groups. So, fledgling angels can pool their cash with other investors and make much smaller bets on companies, sometimes as little as $1,000.

With the advent of crowdfunding, a lot more individuals are getting the opportunity to participate in startup growth via angel investing.

Benefits of investing via crowdfunding

  • Access to proprietary deal flow
  • Opportunity to invest at an early stage in the company’s lifecycle, where the valuations are still modest
  • Lower minimums ranging from $1,000 to $5,000 in most cases
  • Diversification opportunities by having the ability to invest in seed as well as mature companies across all sectors
  • Pre-vetted deal flow (in most cases)
  • Co-investment opportunities alongside top angel and venture capital investors
  • Same investment terms as leading industry investors
  • Webinar and podcast participation opportunities where the entrepreneurs and syndicate leads pitch the opportunity to you, and allow you to have your questions answered in a public forum for sake of complete transparency.

Once you decide to explore investing in startups via crowdfunding, you will realize that there are more investment opportunities being pitched to you, than you have the appetite for. This can initially be overwhelming where you are not sure what startup to back. All pitches seem like legit. So how do you filter the best from the rest?

Subscribe to the right syndicates on AngelList

Arena Ventures has been THE BEST syndicate I have subscribed to. With a mission to create 10,000 angels in the next few years, they lead by example by putting their money where their mouth is. I say this due to the following reasons:

  • Interaction: Paige Craig, founder of Arena Ventures spends considerable time with the entrepreneurs he decides to back, before he syndicates a round for their startup.
  • Founder: He backs entrepreneurs, not just ideas. I have seen him explain in his pitch, why he is backing a company, despite it being pre-product and pre-revenue. The reason most often is the entrepreneur and his execution ability. I believe it takes great skill to identify such talent and have the conviction to back it.
  • Lead’s investment: Arena Ventures’s typical investment per deal that they syndicate on AngelList is $200,000. This is 200x the minimum investment they request from any of the other syndicate investors.
  • Seed stage opportunities: Per my observation, Arena Ventures does a fantastic job of getting investors an opportunity to invest at the seed stage before company valuations shoot up. Typical valuations are in the $3M – $7M range.
  • Webinars: For every deal that Arena Ventures syndicates, there is a 60 minute Q&A with the entrepreneur, hosted on Crowdcast. This is as transparent as syndication can get.

Please let it be noted that I have no affiliation to any of the individuals mentioned in this article. Any references are purely based on merit.

Some other syndicates on AngelList that I highly recommend backing are ones led by:

  • Semil Shah
  • Jason Calacanis
  • Tim Ferris
  • Gil Penchina
  • Phil Nadel

Lastly, do yourself a favor and read this case-study on Angel List published by Harvard Business School. If you are an entrepreneur/investor in the crowdfunding or peer-to-peer lending industry, this is a must-read.

Reprinted by permission.

Image credit: CC by Satish Krishnamurthy

About the author: Sohin Shah

Sohin Shah is an entrepreneur and one of the early adopters of crowdfunding. He successfully crowdfunded Valuation App from 57 backers in 2012 and went on to start iFunding which is now one of the leading real estate crowdfunding platforms in the world. He is extremely passionate about entrepreneurship and loves discussing new ideas.

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