Articles by David S. Rose

What are the advantages of stationing your startup in New York City opposed to Silicon Valley / SF?

  • The world’s fastest growing tech startup ecosystem
  • A much more tightly knit startup community, compared to the larger but more diffuse West Coast community
  • Access to many, many more world market centers (advertising, finance, fashion, media, food, etc.)
  • A city that from the Mayor on down is devoted to helping the tech startup community expand exponentially
  • The world’s largest Tech Meetup (not to mention Meetup.com itself)
  • Significantly easier access to European and South American startup centers
  • Many more world-class universities
  • Believe it or not, more organized angel groups (although not individual angels)
  • Seasons

and most importantly…

The uniquely available joy and delight of living in the most amazing, energetic, global epicenter in the world. A 24-hour melting pot of culture, theater, music, night life, sports, business, leisure activities and more, all within walking distance (or just a couple of stops away on the subway.) What’s not to love??

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

How long does it take for investors to approve the idea and to grant the necessary investment?

The question is based on a misunderstanding of how venture capital investment works.

First of all, VC funds do not invest in ideas. What VCs invest in are operating  companies that are ready (or almost ready) to scale. There are many wonderful ideas, all of which are not fundable. Only companies get funded.

Next, VCs don’t have an unlimited amount of money that is given to companies as long as they deserve it. As such, its not like applying for a loan at a bank. Instead, they have a limited amount of money entrusted to them by limited partners, and they invest in a very, very few companies each year.

In fact the odds are 400:1 against a company getting funded, as that’s how many companies a VC looks at before deciding on which one to invest in.

Now, with that as background, it will typically take one to three months to negotiate and diligence a venture investment, if the company manages to get one at all.

There seems to be a lack of long-term investment in startups. Why is the 3-5 year exit strategy more desirable than a 10-20+ year timeframe?

Precisely because seed stage investments in private startup companies are NOT Warren Buffet’s types of investments. Early venture and angel investments are much, much riskier than Buffett’s, with more than half of them typically failing completely and losing the entire investment. As such, the returns on an early stage portfolio typically come from only one or two investments out of every ten.

If an early stage fund therefore targets, say, a 20% annualized gross return (to compensate for the risk and for the GP’s carried interest), that means every individual company in the portfolio needs to be at least theoretically able to return that entire amount for the whole portfolio.

Play out the math, that means each investment needs to be able to generate 200% of the initial investment each year (of course, nine out of the ten won’t get there, but the fund hopes like hell that one will.)

Because that 200% is an annualized return, that means if the investor is going to hold for four years before an exit (taking the midpoint between your 3-5), the company needs to be able to generate 2x2x2x2 at exit, or a 16x return.

If, on the other hand, the money must patiently wait for its payoff for fifteen years (taking the midpoint between your 10-20), the math goes:

2x2x2x2x2x2x2x2x2x2x2x2x2x2x2 at exit, or 32,768x. Which means that a $1 million investment today in a “long-term play” has to pay off with a future value of over $32 billion…and that’s just the VC’s share, and assuming no other investment into the company during those 15 years. If the VC fund took the typical 20% interest, that sets the IPO value of the company around $160 billion, or roughly eight times the value at which Google went public.

NB: The math is very rough, and is estimated off the top of my head, but is intended primarily to illustrate to underlying challenge of very long term, risky investments.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Of the private companies trading on secondary markets, how much (percentage) of those companies’ stock is available through the secondary market?

On average…none.

The secondary market for private company stock is brand new, and so nascent that it is virtually nonexistent.

For a very brief time, when Facebook, LinkedIn, Groupon and Zynga were still private, there was a quick flurry of private secondary sales through platforms like SecondMarket and SharesPost. But there was much, much, much more smoke than fire, and I would be extremely surprised if even 1% of those four companies changed hands in the secondary market.

Down the road I believe that we will begin to see a viable private secondary market emerge, but that is unquestionably years away.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

 

What tools can I use to manage relationships with investors?

Gust.com is the most widely used tool platform for both sides, with hundreds of thousands of companies and tens of thousands of investors using it to track and manage their relations with the other. It’s the official collaboration tool of the Angel Capital Association (and the equivalent national angel investor federations in 20 other countries.) It’s also used by over 300 venture capital funds. For a longer discussion of its utility for entrepreneurs from pitch to exit, see my answer to: While raising money, what tool are you currently using to manage your relationship with investors?

…and for a discussion of the investor-side tools, see my answer to: What are some ways you keep track of startups you are evaluating/diligencing/investing in?

(Needless to say, the author of this post is completely biased, as I am the Founder & CEO of Gust :-) )

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Can a private company take investment money from anyone?

Unfortunately, a private company in the US may not take investment money from “anyone”. The only people who are legally eligible to purchase an equity interest in a private company without a great deal of special paperwork are, as you noted,Accredited Investors. These are defined as a person with net assets of over $1 million (not including the value of his or her primary residence), or an income of $200,000 (not $250,000) annually for the past two years and a reasonable expectation of that for the next year. (In the case of a married couple, the amount is $300,000 together.) This is an absolute rule. There is no except for “friends”, “family”, “another guy” or anything else. It’s binary: you either are, or are not, an Accredited Investor.

Note, however, the weasel words above: “without a great deal of special paperwork”. That means a company can take an investment from people who are not Accredited Investors, however it adds so many requirements and potential issues to the arrangement, that most corporate lawyers will strongly urge you to not do it if at all possible. Among the considerations you need to take into account if you go this route are: (1) the rules for this differ from state to state, and every state needs to be handled separately; (2) there is a very limited number of such investors in total from whom you can accept an investment (the number varies by state); (3) you are required to prepare and file a Private Placement Memorandum, which is almost the same thing you would file for a public offering, extensively listing absolutely everything about the business, including pages and pages of warnings about all the things that could go wrong, and why it is a risky investment; (4) professional investors such as angels and venture capitalists are often allergic to having any non-Accredited Investors with an ownership interest; and (5) several other things.

The section of the JOBS Act of 2012 that modifies this part of the law is known asTitle III. The problems are that (a) it is not close to becoming available yet for companies because the SEC has not yet written rules for it (and shows no inclination to do so any time soon), and (b) when the rules are eventually written, they will be very, very specific about exactly what both the company and the investor need to do.

So if your goal is to take in money from “just guys”, you will likely need to wait until the Title III regulations are adopted, likely in 2013.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

As a new independent angel investor, how will I find new companies to invest in?

The two sites you mentioned are both secondary listing services, for later stage companies. For a new angel investor, by far the best thing to do is to join a local angel investor group that belongs to the Angel Capital Association. There are hundreds of them, with at least one in every state. Major metropolitan areas typically have more than one.

Some groups specialize, investing primarily in life sciences or tech companies or women-led ventures or other areas. Some are wide open, investing in everything from real estate to films. Most are somewhere in between, focusing primarily on early-stage, high-growth companies with scalable business models. These are typically Internet-enabled, or consumer products, or medical devices.

But regardless of the specifics, what they all have in common is bringing together a group of active Accredited Investors interested in supporting young startups. Benefits of joining a group include pooling deal flow, capital, domain expertise, and investing experience. Most groups run regular education sessions for new members, and provide mentoring for less experienced investors by those with many deals under their belt.

The typical US angel group will receive a dozen or more funding applications from startups each month; the most active ones, such as New York Angels will receive over 100. Groups also often “syndicate” investments, working cooperatively to fund larger rounds that are bigger than one group can easily handle alone.

As a very rough idea of what these groups are like, the typical member invests in one or two companies each year, putting in $25,000 to $100,000 in each one.

To find one or more local angel groups near you, use the industry’s official investment group search engine at http://gust.com/find-investors.

And for a more in-depth view of angel investing, check out Angel Investors: If I want to invest $5,000 as a new angel investor, what chances do I have of making a profit in 5 years?.

 

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *