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There is no shortage of places to invest your money: stock, bonds, cryptocurrencies, mutual funds, you name it—so what sets the private market investment opportunities on FrontFundr apart? As the risk-return tradeoff explains, higher risk comes with the potential for higher returns.
The top quartile of Venture Capital funds returned 15-27% over the past 10 years, compared to a roughly 10% return from the S&P 500. Why bring up VC funds? Well, when you invest in a FrontFundr deal you have the same type of investment opportunity as a venture capitalist, accepting higher risk for the chance of a higher than average return on investment.
How do these top investors choose what to invest in and what can you learn from them? We partnered with Blossom to find out.
Blossom is a social network for investors where you can see the portfolios and trades of top investors and friends and discover new investment ideas from the community, backed up by verified performance and trades from linked brokerage accounts. While the platform is more focused on the stock market, many of its top users invest in venture deals as well.
From product-market fit to capable leadership teams, here’s what they look for before investing:*
Management: In venture deals, I need a management team who is willing to grind day in and day out to build the company. Nothing happens organically. The most successful companies are those with focused, tenacious management. Track records are one of the most accurate indicators of this.
Share structure: I need to see exactly who owns what. Especially with lower-priced shares (seed rounds, performance warrants etc.). Companies can be notorious for printing excessive amounts of shares to themselves for free. Investors can't compete in markets plagued by cheap shares. A detailed cap table should clearly show how many shares are issued at what price, and the associated lock-up/escrow/hold periods for each level.
Macro factors: Sector is really important. You might have the best prospective gold company in the world but, if the gold price is depressed, and other sectors like Crypto/Lithium are running, no one will want your gold deal. Sometimes being invested in the right sector is more profitable than being invested in a company with sound fundamentals. If you can match hot sector with sound fundamentals, then we're really cooking.
Product-market fit: What is the problem and how big is it? What is the solution? Is there a strong demand for the solution that people are willing to pay for? As an early-stage investor, I want to know that a startup’s product holds value in the customer’s eyes and that over time, more and more customers will recognize that value.
Macro factors: Where is the world going? You will be an extremely successful early-stage investor if you are able to pick up on trends and predict what the future will look like. Create your vision of the next five years and use it to guide your investments.
Differentiation & Business plan: Let’s say you’re looking to invest in a new early-stage music streaming app startup. How does this new app compare to a market leader like Spotify? Why would anyone use this new app instead of Spotify? Once you do identify a key differentiator, ask yourself: how will the team execute the vision? Is there a solid business plan in place? Remember, most startups will fail. If the startup you’re considering investing in hasn’t properly mapped out its path to market and path to profitability, you probably should think twice about investing.
Management: When you’re investing in early-stage startups, above all else you’re investing in the people building them. If I can’t picture the founder leading the charge internally, then I will not trust them to manage my money. Here are five of the most crucial things a founder must have for me to consider investing: ● A Clear Vision ● Genuine Passion ● Balance of Humility and Confidence ● Strong Mindset and Persistence ● Ability to Listen to Feedback
Macro forces: Before anything else, I try to get a better understanding of the industry overall. Who are the company’s competitors, what is the threat of new entrants, how much power do suppliers have over the company/pricing, etc. Even a great company/team in a tough industry will struggle.
Business case: Next I look to understand the company’s business case. How are they planning to grow? Is this growth sustainable? Do they have realistic steps to get there?
Management: Finally, I’ll dig into the management. What kind of experience do they have? What kind of funding have they been able to secure? Have used it effectively? Depending on the stage of the company, I’ll review and analyze their financial statements as well. Here, I really hone into the money coming in from any loans, creditors, preferred shares and exactly what expenses the company has chosen to take on.
Skin in the Game: The #1 factor for me is skin in the game, i.e. how much capital have the founders injected and how many of their friends and family have invested into the deal? If they have serious skin in the game and have “burned the boats,” you know you’re investing in a committed team.
Tangible Progress: I also look for continuous tangible progress. If it's been two weeks since I last heard from them and there's a new software update or a new customer signed, that's a positive. I find this especially true on longer discussion cycles where the founding team isn’t raising capital yet. If we see a rapid pace of tangible product development or sales, it's clear the team is operating with urgency. For FrontFundr deals, if the deal has many days left before closing, this is a good opportunity to watch and wait, and see what the team is able to accomplish in that time period before deciding whether to invest.
Business model: The first thing I consider when making an investment is to ensure I understand how the business works and how it makes money. It is much easier for me to hold onto a losing investment if I am confident in the long-term vision of the company.
Management: Second, I like to invest in companies that have strong management teams and CEOs / founders. Most of my individual holdings are in companies where I believe the CEO is a visionary and someone who will be able to innovate / pivot when necessary.
Financials: Beyond that, I look for companies with strong financial ratios. In particular, I like return on equity and low debt. I like return on equity because it means that a business is effectively investing its own resources and I like companies with low debt because it is difficult for a company with no debt to fail.
Overall, don’t skip doing your own research and know that you don’t have to go at it alone. Being part of a community of investors like on Blossom can be a great way to get different perspectives and investment ideas! To join its investment discussions, download Blossom on the App Store or Google Play!
We hope these considerations help you feel better equipped to evaluate the next investment opportunity that catches your eye on FrontFundr.
*This blog post is meant to share information about how experienced investors evaluate deals. FrontFundr does not offer investment advice and does not endorse any specific investment opportunity.
Giving everyone access to early-stage startup investing.
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