Angel Investing is all about getting in early.
Startup funding isn’t a linear process; it’s milestone-based. That means a company can jump in value, or fall behind, seemingly overnight.
The key to getting the maximum payout on our investments is to get in on deals before they’ve gained too much traction. A crowded playing field is a profit-killer.
There are multiple funding stages at which we can invest… but a good rule of thumb is, “the earlier, the better.”
Since each round – or “raise” – is larger than the last, your $1,000 investment will buy more equity in the first round than it will in the third.
In the very beginning, a startup is worth much less than an established company.
Consider this example: you find a startup with a great idea and a winning team.
You decide to get in really early – before the company has any revenue. That company is worth fifty thousand dollars; it has assets and potential, but not much of a track record.
Your thousand bucks equates to a two percent stake in that company. That number may get diluted a bit in later rounds, but that’s okay. Maybe you come out at the end around one percent.
But if you waited and got in on a later round – say, when the company was worth $5 million… your thousand dollars would be worth much, much less – 0.0002 percent, before dilution.
Same investment amount… 5,000 times less equity.
Suffice it to say that timing is key here.
That’s why you’ll want to familiarize yourself with the different stages of startup funding.
Here’s an example of a typical timeline, from “founded” to “funded.”
Let’s dig a little deeper into what happens during each funding round.
1. Idea Stage
- When a startup is first founded, it’s really just an idea. There is no product yet; nor are there customers or investors. Founders spend their own money or open lines of personal credit in order to build a prototype, do market research, and bring on any help they might need. Typically, founders put in around $50,000 at this stage.
2. Friends and Family Round
- It’s exactly what it sounds like. Friends, family, and other personal contacts contribute anywhere from a few thousand dollars to $100,000 to develop a minimum viable product (MVP). At this stage, it’s unwise for founders to give up equity; so, most of the time, these contributions are simple loans with interest.
3. Seed Round
- Also known as the angel round, this stage marks the first (and biggest) opportunity for investors to buy a stake in the company. Startups usually have some revenue by this point. Investment amounts vary wildly, but a typical seed round falls near the $150,000 mark.
4. Series A
- Startups that make it to Series A have already achieved product/market fit. That means they have an established customer base, well-documented growth, a few years of good financial statements, and a valuation around $10 million. Angel investors, angel groups, and venture capital firms step in at this stage to raise around $2 million to grow the company.
5. Series B, C, D, etc.
- A very small percentage of businesses make it to these rounds of funding. Valuation is north of $50 million, and rapid growth is the goal. This is when companies go global, expand offerings, and make huge profits. Series B and beyond are funded by venture capital funds. This is around the time most acquisitions take place, too.
6. Initial Public Offering (IPO)
- By this time, valuation is a billion dollars or more. Businesses that end up on the stock exchange are well-established industry leaders. Equity holders can sell their shares after any applicable lock-up periods (usually one year). Stock is now available to the public for purchase.
On average, it takes about 10 years for a company to make it to the final stage – but fewer than 1 percent of startups ever get that far. Acquisitions, mergers, and failures can happen at any time.
Some investments take much longer than ten years to pan out. American Express was in business for 127 years before it went public!
At the other extreme is Netscape, which had its multibillion-dollar IPO in 1995, just 16 months after its conception.
Pretty much any scenario is possible, but the average time to exit is three and a half years.
The earlier you invest, the higher your returns are likely to be.
The vast majority of your investments will take place during the seed round, but some startups do seek angel investments in other phases.
Any time you consider making a deal, take note of where your money will fall on the timeline.
It could mean the difference between a decent return… and an eye-popping, life-changing, epic win.
Until next time,
P.S. My team put together this top-level table for you – print it out, hang it on your monitor, whatever you need to do. But keep it handy!
41 responses to “Where Your Money Falls on the Startup Timeline”
May 02 2019