Invest in Startups is becoming a real option for the U.S. “crowd”. We can consider the path in its half way. But for its own nature, a startup is hard to succeed. Why? Because, as in the words of Paul Graham (YC), “a startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup“. As he says, millions of companies are started every year in the US and only a small fraction are startups. “Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. A barbershop isn’t designed to grow fast. Whereas a search engine, for example, is“.
Market problems, poor management team, business model failures, running out of cash represent just some of the reasons. As in the words of Dave McClure (500 Startups), at the beginning “a startup is a company that is confused about 1) what its product is, 2) who its customers are, and 3) how to make money. As soon as it figures out all 3 things, it ceases to be a startup and then becomes a real business. Except most times, that doesn’t happen“.
The JOBS Act, which came into effect in September 2013, kept it into account. It has changed the way companies can raise money and who they can raise it from. But Title II of the law only allows companies to use general solicitation and to market private placements broadly as long as they sell equity to accredited investors (people with an individual annual income exceeding $200k in each of the two most recent years or a joint annual income with a spouse exceeding $300k for the same years, with expectations of the same income level in the current year; people having an individual net worth or joint net worth with a spouse that exceeds $1m at the time of the investment excluding the value of their primary residence).
Title III, the crowdfunding section of the JOBS Act, which will allow businesses to raise funding from anyone, including non-accredited investors, via online funding portals, in the same way it already happens in the U.K. and the Netherlands, has still to wait (2014) to come into effect. Companies will be allowed to raise up to $1m every 12 months (read about the proposed rules here).
Anyways, a new class of investors is being created.
Good news? It can be. But, of course, it requires knowledge and preparation. Once, I asked a venture capitalist how he decided to make an investment. He told me that he asked startup entrepreneurs to provide him with the first ten incoices. In that way, he could understand how well they were doing.
Given the above, as a professional vc does, you need to analyze something before making an investment. But how to move the first steps? Of course, start with the business plan and docs. Create a personal report could be a good idea.
Look at the company by trying to verify any single source (searching press releases and articles about it). In particular, you need to know something about people: the management, the board, advisors, how many employees (use LinkedIN) work within it.
You also should search for previous funding rounds, articles, interviews, and press releases. Examine products, test them by yourself, the stage they are (development, closed or open beta, already in the market with some revenue), search for competitors, technology and commercial partners, verify traction, reach users and customers, ask them if they are satisfied.
Yes, of course, there’s some work to do! Let’s start(up)!