Review of 2015 Startup Funding Platforms
Besides Peer to Peer Lending and Crowdfunding, another group of fundraising platforms that bring investors and those in need of funds together are the startup funding platforms. These platforms are populated in part by Venture Capitalists and Angel Investors, but also by accredited investors who are considered to be smaller and who want an opportunity to participate in the high risk-high reward businesses that have discovered and funded the deals and offers from the likes of Facebook, Twitter, and Yelp. It is this hope that you may get in on the ground floor of the next Facebook outfit waiting in the wings for the right funding that motivates investors to seek out and participate in these startup funding platforms.
What Are Startup Funding Platforms?
Startup funding platforms are companies and websites that serve a variety of needs for new startup businesses. The first service they provide is to put investors together with business startup founders so that they can make deals in exchange for equity stakes in these purveyors of new ideas, goods, or services. Many of the platforms also deliver such services as help with business plan writing, talent and management recruiting, and business presentation polishing. All of these services help to accelerate the growth path and trajectory of the new startup ventures, which is why many of these startup funding platforms call themselves startup accelerators. These startup funding platforms bring together the three types of funders in this particular space of the funding business, Venture Capitalists, Angel Investors, and crowdfunding smaller accredited investors.
Who Are the Major Players in the Startup Funding Industry?
AngelList is the original no-frills but extremely effective first player in this startup funding industry. EquityNet calls itself the first equity crowdfunding startup platform and is a powerful rival in the field of the startup funders. Crowdfunder, OneVest, and SeedInvest are other significant operators in this space as well.
How Startup Funding Works
Startup funding is less clearly defined and more difficult to typify than straight crowdfunding and Peer to Peer Lending. In general, the investors get in on the capital funding of these startups at the seed stage of startup companies. Many of these businesses do not yet have a product, or at least have no proven product. If they possess customers and a product, they generally lack much in the way of significant revenues. This makes it impossible for startup funding investors to offer loans and ask for steady repayment with interest.
Instead, founders and their startup businesses are offering equity stakes or warrants in the future of their companies in exchange for funding here and now. Funding deals that the parties strike via these platforms are often highly individual and specifically tailored. In many cases, some or all of the steps in the making of the terms, signing of the papers, and funding transfers are handled off-platform and -site. This does not make them any less effective than the other types of funding platforms. Some of these startup funding sites are raising millions of dollars for single startups and founders.
The risk is understandably higher with the startup ventures on these platforms. This is why only accredited investors are allowed to participate. These individuals can usually boast a minimum net worth in excess of a million dollars, or demonstrate a $200,000 or higher individual income or combined family income of at least $300,000.
This type of investing often involves a group of investors in association with an angel funder called an angel syndicate. An angel backs this syndicate with a major dollar amount investment that is typically a million dollars or more, then seeks to attract other smaller investors to help share the expenses in the form of carried interest, or a percentage of any profits that they realize from the deal. Thanks to the SEC regulations, no more than 99 accredited investors may take part in any syndicated deal or syndication.
Comparison of the Top 10 Startup Funding Platforms
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Which Investors Are These Startup Funding Companies Ideal For?
The only investors allowed to participate for now in these startup funding platforms are the accredited investors who are able to demonstrate high net worths of at least $1 million and/or incomes of minimally $200,000 individually or $300,000 with a spouse. Though the rules are changing now thanks to the JOBS Act Title IV that finally became law in October of 2015, these companies may choose to still limit the numbers of non-accredited investors that they allow to participate in deal funding startup companies.
What to Look for in Startup Funding Platforms as An Investor
You have a number of different things to think about when contemplating with which startup funding platforms and companies to invest your money.
- Risk versus Returns – Risk is a major part of the startup funding world of investing. Many of these companies will simply never see the phenomenal success of a Facebok or Twitter, no matter how viable and creative their idea or product may actually be. Part of your risk versus return consideration needs to factor in the reality that a certain number of ventures that you back will fail completely or never reach the stage where you can profitably exit from your equity stakes. Diversification as always is the single most important line of defense that you can erect with this type of highly speculative investing. These are not secured investments backed up by anything more concrete than faith and trust that the founders will be able to deliver on their business plans with the capital that you help them to raise.
- Timeframe of Investments – It is important to have a conversation with either the platform or the founder regarding the expected amount of time that the investment will need to succeed and pay off. These Venture Capital and Angel Investing types of deals easily take seven years on average to reach exit stage. Some of the startup funding platforms only take on ventures with a concrete plan of action to reach an exit stage in one to three years.
- Cost to Investors – Look out for any hidden fees that startup funding platforms may charge. This space does not typically collect management fees, as they are not generally managing any investments for you. Ones that do manage your investments may charge a nominal fee.
- Better Business Bureau Ratings – Most of the startup funding companies count an A- to A+ rating with the BBB, so treat the ones that do not have a rating or profile at the BBB with greater caution, especially as this is already a more speculative field of investing by nature.
Startup funding, as with Angel Investing, is aimed at companies that are startups or are recently founded. Most of these have not yet reached the stage where they can plan through all of the facets of developing and funding their business. This is why these platforms are so necessary and effective for the startups and small businesses that require fast access to funding capital.
The beauty of this type of investing is it gives a lower-cost option to many startups that are hungry for founding money, or to newer small businesses that are eager to secure more growth capital. Venture Capitalists and Angel Investors can work through these startup funding platforms in order to syndicate fund a great number of the founders and startups and their deal offers. You can make simply staggering returns if you find the next Twitter, Facebook, or Yelp at the same time as you can lose all or a large part of your investment if the company is unable to deliver on its plan. This is why due diligence on any founders and startups is key here, as is only committing high risk capital that you can afford to tie up for a number of years.