Last week I made a venture capital investment in a company I had never heard of until a few days before. I don’t have a massive venture fund and I didn’t invest a large sum of money. I joined with many other investors in a private security offering through MicroVentures.
MicroVentures is a new concept in peer to peer investing. It is a cross between traditional p2p investing (such as Lending Club and Prosper) and venture capital. Here you are not providing loans; you are investing capital into a business. There is no repayment plan; you own stock in the company. The only real exit plan is a sale of the company some time down the track, hopefully for a large multiple return.
The minimum investment of $2,000 is much higher than other p2p investments and you need to be approved as an investor in order to participate. But if you meet their criteria and are interested in being an angel investor you can get started for a fraction of what you would need to invest in an angel fund.
Angel Investing Made Easy
After selling my last business in 2008 I had toyed with the idea of becoming an angel investor. I love the excitement of a startup business but the amount of time and money needed to become a successful angel investor was too much for my taste. MicroVentures solves both the time and money piece for me. With low minimum investments as well as their strict due diligence before taking on a company, MicroVentures makes the entire process easier. While it would be foolish to not perform some due diligence of your own there is some comfort in the fact that MicroVentures has already done a great deal of the legwork.
The way I look at this investment is that it adds to my diversification. I have a large portion of my portfolio in traditional asset classes such as stocks, bonds, commodities, REITs, annuities, and of course cash. I have a small but increasing percentage in p2p lending because I believe it is the best fixed income investment and it is a non-correlated asset class. I have an even smaller percentage in some high risk investments where there is the possibility of high return but I am prepared to lose my entire principal. My MicroVentures investments falls into this latter category.
How Does It Work?
While MicroVentures explains their process here, I can provide a brief synopsis. After careful vetting, MicroVentures places an offering on their site and then notifies potential investors. These investors can then login and view the details of the offering. This includes typically a detailed Private Placement Memorandum and other information ab0ut the company. If an investor decides to invest they just transfer the money from their linked bank account. If the full amount of the offering is not raised then all investor money is returned.
MicroVentures is only in its beginning phase itself with just one offering available right now. When I spoke with CEO Bill Clark last week he mentioned there are more offerings in the pipeline which should please the several hundred investors that have already signed up.
It is too early to tell whether MicroVentures is going to catch on and be the start of a new way for companies to raise capital. I really like the idea of the democratization of venture capital and I certainly hope it becomes a new trend. What I hope to do is build up a small portfolio of companies where I have a couple of thousand dollars invested in each. It would be great if I could get a 10-20 times return on my money for one or two of these investments but I am not counting on it. There is no question this is a very high risk and illiquid investment where the most likely outcome is complete loss of principal. It is a good fit for me, though. I get to invest in some interesting new companies and diversify into the heady world of venture capital.
So, the minimum of $2000 is the minimum you need to start an “account” with Microventures or is it the minimum investment in each “venture”??
Their website seems to suggest that the minimum investment is $250 per venture.
Dan,
We work with the start-up to set the minimum investment and we settled on $2,000 for investors in the first deal. This company had raised capital in the past from a group of investors and was concerned about increasing the investor group by too much so we felt 2,000 was a good amount as it would increase their group by 60-75 at the most. Each company will be different but I think that most will be in the 500 range but we are capable of accepting $250 investment.
Thanks,
Bill Clark
CEO
Microventures.com
bill.clark [at] microventures.com
Sounds interesting Peter. Since you got to see the actual process, I’d like to ask you a few questions.
1. Will we be able to view the start-up’s full business plan?
2. If it is an existing company looking to expand, is there any way to look at their historical cashflow?
3. Will the board be listed? Fact check experience of board members in their respective fields?
4. Limited-liabilty?
5. Will terms be listed in the contract about what to do with profits?
6. Minutes for quarterly meetings?
I should probably stop there for now.
Thanks,
Aaron
Good questions Aaron. I don’t have the answers to all of these, so I am going to see if I can have Bill chime in again. I can tell you this. The Private Placement Memorandum and Investor Deck contains the business plan, unaudited 2010 financials and short bios on the management team and board as well as details of all the risks associated with the investment.
Hmm, sounds pretty interesting. Angel investing is a bit too close to gambling for my tastes though. It’s my understanding (and I might be wrong) that most successful angel investors and venture capitalists are people with a large capital reserve and who are hence able to bet on dozens of different ventures at the same time. The success rate of new business ventures being incredibly low, they then recoup the money lost in the majority of their investments by achieving something like a 1000 – 10,000% return on the occasional venture that succeeds, averaging out to around a 20-30% overall ROI for the long haul.
Thanks for the info Bill
This type of investment should probably represent the very top of the pyramid for most people. The vast majority of these companies will never become profitable, but it is human nature to try and guess who the next Apple will be.
@ Aaron – The information provided will vary slightly from business to business. That is because there are certain items that you need to put in a PPM and then there is additional detail that you can provide. You must outline all the risks but Business Plan doesn’t need to be in there. Without some of those items it makes it hard to make a decision so we try to include as much as possible.
Cash flow in prior years is not listed but we do provide financials for the last 12 months.
Board members are listed and we do criminal background check on everyone as part of our due diligence process.
Unless there is a dividend there no discussion about what the company must do with the profits. In start-ups most of the time they are put back into the business for growth.
No minutes for quarterly meetings since those don’t add much to the decision making process for many although we will review them internally.
@David – You are correct about the risks. You must assume that you are going to lose your investment because many start-ups fail. Even the best Angels can’t pick all winners. At Microventures we give you a chance to invest in a start-up for less capital which let’s you spread your money around. There are successful Angels out there who take the shotgun approach and invest in 20 deals with the hopes that 2 will be really successful and pay for the others. We hope to begin the filtering process for you and then let you make the final decision.
Thanks
Bill
Hey Pete, Great to see this taking off in the US. Question, is the equity in your name or MV’s or some other intermediary? Goes to risk…
Cheers, Pete.
Hi Pete, Great to hear from you on here, old mate. The equity is held by the investor, MV is merely operating as a broker/dealer in the transaction. The deal is not closed, though, unless the full amount of the funding is raised.
I also ant to invest a small amount i think micro investment is a good concept. Thanks for sharing this
2 questions:
1. How do they deal with the “accredited investor” requirement and Rule 506? I’m not an expert, but I thought only 35 non-accredited investors could participate. It sounds like they’re thinking about 60 – 75 or more.
2. If the equity is in the name of investor and not a Microventures fund of some kind, how will VC’s in subsequent rounds view the cap table? My guess is they’ll be a little shy about working with such a large number of previous investors.
Hi Cab,
You are correct about only allowing 35 non-accredited investors in an offering. We cap the total at 30 and then once we have hit that non-accredited investors can’t view the offering anymore.
The equity is in the name of the investor. I can’t tell you how VC’s will view a long list of investors but my guess is that it will be low on the list of items. I think they would be looking more at the business in general and what they are trying to solve and how they will make money more than the number of investors.
Bill Clark
Hello Bill, do you care to provide us with an update of your experience with Microventures?
Thanks!