If a new business – anything from online Vegas casinos to food trucks to high tech enterprises – is listed on an online debt or equity crowdfunding portal (which must have been cleared by the Financial Industry Regulatory Authority and the Securities and Exchange Commission) it can accept investment capital.
Getting in on the ground floor of a new business sounds like a good idea. But how do you identify the businesses that show the most promise to deliver a return – plus profit – on your investment? And how do you go about investing in a start-up?
What is a Start-Up?
A startup is a young company that is just beginning to develop. Most start-ups start out small and receive their initial funding from the founder or a small group of people. The identifying marker of a start up is that it offers a service or a product that is either not currently available elsewhere in the market or available but at an inferior quality,
Some notable 2017 start-ups include
– Zero Mass Water – A solar-powered system that uses super absorbant material to pull drinkable water from the air.
– SkyCool Systems – applied to a building’s air conditioning system it beams heat into space, reducing cooling costs by up to 70 percent
– Zero 1 – a football helmet, produced by Vicus, that has the soft part on the outside and the hard part on the inside. Over 100 NFL players are now wearing this helmet.
– Blue River Technology – produces farming machines that can determine exactly where herbicides should be sprayed. Farmers focus only on the plants that are being attacked by insects, thereby reducing fertilizer usage by up to 90 percent.
How Do Start Ups Traditional Get Funding?
Traditionally, start-ups had limited opportunities to secure funds to produce their prototype product or service, market and start producing on a large scale.
– seek a bank loan or a credit-card line of credit;
– negotiate an advance from a customer or partner
– solicit venture-capital investors
– find a local angel investor
– join a startup accelerator or incubator
In recent years, starting a crowdfunding campaign online has added to start-up founders’ options for securing funds.
So, let’s say that you’re interested in casino games and you’ve identified a gaming development start-up that creates great casino games. How will you turn your shared interest into cash that the company can use to grow the business as you anticipate a return on your investment?
If you aren’t a registered venture-capital investor – one who invests institutional money into a start-up or part of an angel-investor group that syndicates funds to qualified start-ups, you may want to invest via a crowdfunding campaign. These campaigns have been made possible by the JOBS act, allowing people to make online pledges to a start-up during a campaign where they donate funds, pre-buy the product for later delivery.
The JOBS Act refers to Jumpstart Our Business Startups Act. The law was passed by Congress in April 2012 as a way to encourage funding for small businesses.
The goal of the JOBS Act was to ease the regulations that were stymying small businesses’ ability to grow. This law, also known as the Crowdfund Act, creates a path by which companies – including start-ups – can use crowdfunding to raise capital and issue securities.
The Securities and Exchange Commission was charged with developing rules by which this law could be put into effect. The rules were finalized in May of 2016 to allow American capital markets to open to emerging growth companies, including private investors.
If you’re prepared to put at least $2000 into a crowdfunding investment you can identify your target start-up from multiple crowdfunding sites. Regulated crowdfunding sites are available can be found at the Financial Industry Regulating Authority site. Some of the popular choices involve:
Next Seed – Next Seed allows you to make loans to start-ups through its debt financing crowdfunding. Your loan doesn’t give you a share in the company but it does fund new enterprises and give you guaranteed returns.
Seed Invest – through Seed Invest you can give equity funding to start-ups. Seed Invest does its own vetting of the start ups to help investors identify start ups that are most likely to succeed.
We Funder – We Funder is a large funding portal. Critics claim that they do very little vetting of the companies that they feature.
Observers note that investments in a start-up have the most chance of success when the company representative – usually the founder – maintains contact with the backer throughout the process. The rep needs to communicate to the investor(s) to explain the concept of the company and the company’s plans for growth and future development.
Investors should also be prepared to keep open lines of communication in order to give advice and suggestions. The connectedness keeps both parties engaged in a dialog that’s meant to benefit the business. Investors should demonstrate that they care about the company above and beyond the cash.
Ultimately, regardless of whether you’re investing in ecological technology or online Vegas casinosm the goal of an investment involves seeing profits from your financing venture. If you invest in a startup that goes public or gets bought you could multiply your cash over just a few years.
As with any financial investment, you have to be cautious when you invest in a start up. Half of all start ups don’t stay in business past the first four years and most start-ups fail. Even if the company is a success, you can’t know when you’ll see a return on your investment since start up profits are returned to the company to fuel growth.
If your goal is to at least get your original investment back, consider a platform – such as Next Seed – that allows you to make a loan to the start-up. In that case you’ll recoup your investment as the company repays the loan, plus you’ll receive interest payments. If the company defaults, of course, you lose the loan money.
As with all financial ventures, nothing is certain. But if you’re willing to put some of your cash into a shared dream, investing in a start-up could be the way to go.