Investments & jobs in the San Francisco Bay Area startup economy
Angel investors are high net worth individuals who invest a portion of their assets in high-risk, high-return investments. According to the SEC, these individuals must have investable moniesexceeding $1 million. The Angels typically provide funds in the pre-seed, seed, or start up stage. They also provide support to the enterprise through actively advising and assisting with other activities such as the recruitment of management personnel (Linde and Prasad).
Angel Investors Clubs
These are groups of active angel investors who utilize their combined efforts to source, screen, investigate, negotiate, invest in and manage emerging enterprise investments. Typically, one member sponsors the deal and then engages his/ her peers to conduct due diligence. In these clubs, admission is by invitation only, and members are required to bring different skills to the group and value to the entrepreneurs. Members are only required to invest on a deal-by-deal basis, with some groups making more than 20 investments a year. Members are customarily not remunerated for their work, although they may receive warrants in consideration for extra work or pay for part-time or full-time administrative assistance (Linde and Prasad, p. 61).
Crowdfunding is essentially a tool designed to tap into a large, dispersed audience (the crowd) for small funds to achieve a target previously established by the entrepreneur. The exercise is typically empowered through the use of social media communication, the internet, or by contacting people with shared interests via various devices such as user-generated content that acts a guide to investors (Lehner).
This may either be a business, a fund or a natural person. In the case of a natural person, it relates to personswithsingular net worth, or in conjunction with their spouse, of more than $1 million at the time of the purchase. This networthomits the value of the primary residence of such persons. It may also mean a natural person with income that exceeds $200,000 in each of the two most recent years. In the case of a joint income with a spouse, the value should exceed $300,000 the two preceding years apiece and a reasonable expectation of the same income level in the current year.
The JOBS Act
It is an Actthat was signed into law by Barack Obama on April 5, 2012. It requires the SEC to write rules and issue studies on disclosures, capital formation, and registration requirements.
JOBS Act Provisions on Crowdfunding
Title III creates an exemption under the securities law enabling crowdfunding to be easily used in the offering and selling of securities. It also establishes a foundation for a regulatory structure permitting securities-based crowdfunding. The securities structure allows entities to use this type of funding as well as directing the SEC to write rules implementing the exemption. The JOBS Act also created a funding portal that allows Internet-based platforms or intermediaries to facilitate the offering and sale of securities devoid of the need to register as brokers with the SEC. Transactions, however, have to go through a SEC- registered intermediary, a funding portal, or a broker-dealer. The Act also necessitates corporations that want to conduct a crowdfunding offering to file certain information with the SEC and avail it to investors. In the Act, securities purchased in a crowdfunding transaction cannot be resold until a period of one year has elapsed.
JOBS Act Provisions on Angel Investing
The JOBS Act has no explicit provisions regarding angel investing but contains other provisions that may affect the profile of angel investing. These rules include the elimination of the prohibition against general solicitation and advertising in Rule 506 offerings. Another relates to changes to the existing Regulation A exemption to permit offerings of up to $50 million; and a review of the accredited investor definition mandated by the Dodd-Frank Act. These provisions increase the sources of funds for businesses meaning that angel investors will have to compete with other sources to acquire the business of corporations. The limitations on investors so that they cannot purchase more than 10 percent of the greater of the investor’s annual income, or net worth may also be deemed as a pro or con for angel investors.
Portfolio of Investing Opportunities using Crowdfunding
Using my seed money of $20,000, I would make an investment in a crowdfunding platform due to invest in the following corporations: Barnana; San Franola; Plae; Marine Layer; Westward Learning; Krove; Rhythm Superfoods; Health Warrior; Zola; and Kevita. The $20,000 would be split equally among the ten enterprises in a bid to reduce risk. The reasoning for investing in the companies above is that they are in the consumer goods market and have been accredited by two serial investors; Brad Barnhorn and Patt Finn. Fin, who has extensive knowledge of the multiple high-growth consumer goods markets, has already invested in five of these companies. Brad has also spent 25 years working with leading growth stage corporations in the consumer products market and also holds board positions in the other five companies listed. Investing in businesses that are already performing but in need of additional capital would ensure that I reduce the risk of investing in firms that are failing. With expected revenues in the Bay Area for consumer goods enterprises expected at 25%, this would earn me a return of $5,000 assuming no economic downturns.
Risks and Opportunities in Crowdfunding
There are many risks that can arise from crowdsourcing, chief among them being that the enterprise may fail. Usually, the ventures funded by crowdsourcing fail within five years, presenting the risk of losing money. Moreover, in crowdsourcing the investors are far removed from company operations and it is thus hard to secure data on which to base the investment decision. Investors are also susceptible to fraud or incompetence by the entrepreneurs. With the current SEC regulations, it will also be impossible to sell off the investment in the first year of purchase. The stakes cannot also be sold in any public marketplace and thus if the venture fails, the money also fails.
The benefit of crowdfunding is that one can invest the little cash they have in anenterprise. Previously, investing was the preserve of affluent individuals and corporations. The investor is also removed from company operations which means that one can invest and get returns without having to dedicate time and effort to the investment.
Portfolio of Investing: Angel Investing
While investing in five enterprises in the San Francisco Bay area, I would split the $100,000 into five, spending $20,000 on each company. The investments would also be in companies in various sectors in order to diversify my portfolio. These include Illuminate Ventures, which offers cloud and Mobile VC solutions to early stage enterprises and Eucl3D that enables game developers generate revenues through 3D printing. I would also invest in WiredIn, which delivers sales intelligence and CRM for startup founders and SMB owners through a Google Apps add-on. Included in this list is Cult Collection, a fashion discovery site, and Yellow Seed that connects people, products, and information to streamline conscious trade of cacao beans. The reason for investing in these companies is that they are all aimed at solving problems for other entrepreneurs. The corporations are in various sectors, and thus the projected returns are anticipated to differ. However, as with all angel investors, I would enter into an agreement on the amount of returns to be received per period. With my estimation, this would roughly be 20% of my investment
Risks and Opportunities of Angel Investing
Out of every ten deals angel investors enter into, only one or two avail positive ROI. Furthermore, returning a profit or even breaking even might take several years. Understanding the business one is investing in, or its associated risks is also a challenge. In angel investing, one also investsconsiderable sums of money, which means that business failure will result in increased losses for the investor. Moreover, it is easier to get carried away when investing and do so in corporations with a business plan offered in a style that makes it appear extremely profitable while in essence it is not. These risks make angel investing a very high-risk, high-return endeavor.
Some of the opportunities available to the angel investor include getting to invest in a business where one is not required to participate in management. With large sums of money, one can also diversify the risk and ensure that they earn a positive return. Angel investing is also important when one wants to learn about a particular market or industry. Moreover, since one does not need to market themselves to entrepreneurs, angel investing offers more privacy and quiet. One may also make lots of money by noticing sudden changes in business conditions and investing in a corporation bound to generate huge returns.
Ten Startups to Work for
Some of the startup companies in San Francisco that I would consider working for or applying for jobs in include Boost Media; Proven; Yobongo; Munchery; Cinemagram; Vungle; Saygenty; Mixpanel; EDEO; and Trigger.io.
Cons of working for a startup
One of the risks is that one may have to fill in for others or perform duties not even close to their normal responsibilities. This can be very frustrating especially where the duties are foreign. One may also find that the salary is lower than is typical for the industry or functional area one is working in. In some cases, one may also be paid in stock or where salaries are available, they may be continually late. One also risks having to work longer hours and frequently even on weekends. In most cases, the extra times come with no supplementary compensation. Since the data on startups show that most do not survive past five years, there is also the risk of one finding himself/ herself without a job. Another major drawback of working for a startup is the inadequacy of resources such as personnel, machinery, and office equipment (White).
Benefits of Working for a Startup
Despite the risks above, working for a startup can also avail numerous opportunities. One benefit of these is the gigantic financial returns accrued when the company becomes successful. If as an employee one holds stock and the company becomes profitable or is acquired by another corporation, the financial incentives can be enormous. One also gets a wealth of experience due to the multifunctional nature of working in such an enterprise. Startups also do not have a core of clients, vendors, and strategic partners. In a bid to acquire these, one continually meets and networks with people who may become significant business contacts in future (White).
Lehner, Othmar M. “Crowdfunding social ventures: a model and research agenda.” Venture Capital 15.4 (2013): 289-311. Document. 15 May 2015. <http://www.tandfonline.com/doi/abs/10.1080/13691066.2013.782624>.
Linde, Lucinda and Alok Prasad. Venture Support Systems Project: Angel Investors. Discussion Paper. MIT Entrepreneurship Center. Cambridge, MA: Venture Support Center, 2000. Document. 15 May 2015. <http://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/35%20Research_VentureSupportProject.pdf>.
White, Sarah. “Pros and Cons of Working for a Startup Company.” 14 October 2014. monster.com. Document. 15 May 2015. <http://www.monster.com/technology/a/pros-and-cons-of-working-for-a-startup-company>.