It’s been over one year since MicroVentures teamed up with Indiegogo to form First Democracy VC (FDVC), a registered funding portal that allows investors like you to support startups. Since then, more than 20 startups have been funded via FDVC in a wide range of industries – from gaming and film to distilleries and restaurants.
That said, startup investing is extremely nuanced and can be very different from other types of investing. Today, we wanted to offer some guidelines for first-time startup investors new to FDVC:
- Learn the lingo.
As we mentioned in our previous investment guide, startup investing will require you to deal with complex financial products and risky investments – you should not invest money you can’t afford to lose. To help you do that, it is best you understand common venture capital terms. Understanding the difference between a primary and secondary investment or common and preferred stock will help you better outline your investment strategy and stick to it. Understanding the many different financial instruments will also influence your decision making, as you may prefer debt instruments to equity instruments – or even a convertible note. If you don’t understand the mechanisms of startup investing, you risk the chance of being disappointed down the line.
- Know where to look.
Once you nail down your investment strategy, deciding which funding portal to invest through is the next step. There are any number of online platforms, like FDVC, that provide investment opportunities. However, not all are created equally. Some may focus on one type of industry, such as renewable energy, entertainment, or real estate. Some have lower investment minimums ($50 to $100). All will have different relationships to founders or other VCs in Silicon Valley and around the world. Keep in mind that crowdfunding intermediaries must register with the Securities and Exchange Commission (SEC) as a broker or as a funding portal and become a member of a national securities association (FINRA). You can view the complete list here.
- Dig into due diligence.
Many investors will have their own way of performing due diligence. Depending on what they prioritize in a startup, some will focus more on the team, some the market and competitors, and some the business model or other factors. Whatever you value, many investors recommend due diligence into cash flows, valuations, founders, exit strategy, product traction, and overall funding needs.
- Ask questions.
Going hand in hand with due diligence is making sure you have two-way communication. Investor updates are one way to stay up to date on the startups in which you invest, but you also want to be able to have all the information you need before you invest. Startups raising through FDVC have a dedicated investor discussion board, where you can dig deeper into financials, business models, the industry, and more with the founders themselves.
- Know how to diversify.
Startup investing is risky. For every successful company, there are many, many others that don’t reach the Unicorn Club (companies with a valuation of at least $1 billion) or make it to the five-year mark. That said, diversification of and within asset classes, particularly alternative assets, can potentially reduce portfolio concentration. Within a given portfolio, an investor can diversify in an attempt to mitigate extreme losses.