The Barriers to Investing in Startups Have Never Been This Low
Why you should start thinking about investing in early-stage companies if you are a young broke person like me.
The process of starting a company changed forever in the late 1990s and 2000s, and the idea of two buddies running a startup from their garage inevitably shaped the way we think about entrepreneurship.
In recent years, with the explosion of startups around the world, in terms of capital invested, general consumer adoption and their role in attracting talent, a more robust startup ecosystem has thrived globally, allowing the previously garage-bound entrepreneurs to access startup incubators, accelerators and angel investors, all at our fingertips.
Based on all these changes, one would expect the type of investor to have changed at least as much the startups they are funding, but this might not be entirely the case. While VCs are springing all over and attracting the cool talented youth to their snack-filled open desk offices, the profile of these new VC investors is, for the most part, not that different from your average Investment Banker analyst 10 years ago. There seems to be a mysterious glass fence to the investing world that has kept a more diverse pool of talent from exploring this space*: tide has changed, but the boats in the dock remain pretty much the same ones.
*Note that this is a gross overgeneralization: some organizations like Diversity.vc , AllRaise.org are hard at work to make the space more diverse!
Another major change has been that, as startups grow in size, number and popularity, investors have poured larger shares of their capital into venture capital funds. Most funds in VC have a small number of selected Limited Partners (LPs), thus often limiting the participation in VC funds to an exclusive number of high net worth individuals and institutional investors. So it is both the ones who decide where to invest the money (venture capitalists) and the ones who receive the return from those investments (the limited partners) that haven’t changed that much despite the revolution that has been going on out there.
So, what’s the point of this article? Here’s my idea: the barriers to investing in startups have never been so low. And this is great for people Young Broke Individuals (YBI, if you may) like me, who now have an opportunity to leverage our time, network and experience to invest in great opportunities.
This is also a case of asymmetric risk, one that has great upside while bearing a limited downside, which is what we, as YBIs, want to take a lot of.
There are 3 factors I see playing a role here.
1. Angel Syndicates & Equity Crowdfunding
This point refers to innovations in the structure and processes of the investments.
Angel Syndicates refer to a structure of investing through which a series of investors participate in a round as one single entity in the cap table, and through a Syndicate Lead that manages the relationship with the startup. These syndicates vary in size and number of investors, but are most commonly used in angel rounds.
Equity crowdfunding allows (almost) anyone to become an investor in a startup, with platforms like Seedrs or Republic enabling its users to invest as low as $50 in a startup. Also, schemes like SEIS in the UK are in the works in parliamentes around the world, and can inject more capital and opportunities to de-risk investments into the ecosystem.
These innovations have increased the access to deal flow and lowered the barrier to entry to many investors who can now gather a group of investors to complete a round. This is perhaps the clearest way in which YBIs like me and (maybe) you can get started in this space, if you do have some savings you’d like to put to work.
2. Abundant Capital for Startups
The idea that startups are the future is so established now that many corporates, institutions and individuals are willing to commit large amounts of capital to invest in the most promising opportunities. This is great for the ecosystem in terms of exit opportunities, but also in terms of capital available for fundraising.
There are so.many.people willing to put their money into promising startups who simply can’t find them, and is an incredible opportunity for those who have access to other young, energetic and bright individuals who are involved in these projects. So you can get started by putting together some market research report on a sector you care about, making some assessments about potential investments and offering your opportunities and time to high net worth individuals that might be looking to invest.
3. Sweat Equity
The idea behind sweat equity is that, be it as an advisor, an employee with stock options or as an involved investor, their time and work are increasingly paid with stock (or with beneficial investing conditions for investors), and this is again an opportunity if you have a limited amount of capital to invest or no capital at all.
If you want to invest in a company but cannot meet the minimum capital requirements or cannot bring other investors along, you might want to think about some tangible way in which you might provide value to the startup that might allow you to negotiate the conditions in exchange for your contribution.
Where is this going in the future?
We are far from a world in which people invest in startups and VC funds as easily as they might invest in other types of vehicles, but we are getting there! As other aspects of the investment process such as the legal side (a big, big, barrier to entry in the ecosystem) progress towards more accessible interfaces (check out the work of SeedLegals) or barriers to deal flow (with more and more platforms that give visibility to startups), we’ll approach a more democratic and diverse investing ecosystem.
A call to Action to my fellow Young Broke Individuals
You made it all the way to the end — so here’s my call to action: surround yourself of interesting people working on ambitious projects, find individuals looking to invest their own capital but lack deal flow or knowledge of an industry (angel syndicates), define how your skills can be valuable to a company, and get started: investing small amounts through equity crowdfunding sites or working as an advisor for equity.
The best part about this is that this is also an investment in yourself, by putting yourself in a position to learn by doing. This will also connect you to people in the future, and there is the asymmetry aspect once again. The barriers to investing will continue to lower every year, but if you get started now (before you have much capital to invest), you’ll find opportunities to grow your experience and knowledge exponentially in short amounts of time.
Thoughts? Feel free to share them on Twitter @albertoarenaza or through email (alberto@minerva.kgi.edu)
Images from:
