A "Mutual Fund" For Start-Ups

By Matthew Milner, on Wednesday, September 18, 2013

Here’s a quick experiment.

What comes to mind when you see the words, “Mutual funds”?

Diversification? Stocks? Portfolios?

That’s what comes to my mind. Oh, and I’d add one more:

Boring. Yes, boring. Mutual funds are a time-tested way to enjoy the benefits of diversification, but compared to the excitement and potential returns of early-stage private companies, they’re just plain dull.

But what if you could get the thrill of start-up investing with the diversification of mutual funds?

You can. And today we’re going to show you how.

The Odds

Venture Capitalists — or “VCs,” as they’re informally known — are similar to managers of mutual funds, but instead of investing in publicly-traded companies, they invest in private start-ups.

VCs can make quite a living. When their investments include companies like Google, Facebook or Tumblr, they can earn hundreds of millions of dollars.

But guess how often successful VCs pick a winner…

Who guessed north of 50%? Makes sense, right? I mean, we’re talking about professionals. People whose sole job is to invest in promising start-ups.

Actually, the number is lower. How much lower? Check this out:

In a portfolio of, say, ten investments, a successful venture capitalist will have 7 failures that return zero dollars; 2 companies that break even or earn a few bucks; and 1 company that earns a massive return.

And amazingly, even though world-class VCs only pick 1 to 3 winners out of 10, they can still earn hundreds of millions of dollars.

I’ll have what they’re having. You should, too.

Your Options

Now that you know the odds of venture investing, you might agree that diversification needs to be a key component of your plan.

Given this new knowledge, you have 3 options:

1) Ignore the information. Put all your chips on the first or most exciting company you can find. (Not a good option.)

2) Over time, invest in a number of high-quality start-ups. (Good option.)

3) Invest in bundles of companies that have been vetted, and will be managed, by professionals. (Maybe an easier good option.)

To get the benefits of Option #3, you could invest in a bundle of companies chosen by a venture capitalist. Unfortunately, that’s a big-ticket item: the cost to become a limited partner in a top-tier venture fund can run anywhere from $500,000 to many millions.

But recently, although very few people are aware of it, a new option has surfaced. It’s a way to get some of the same benefits as a venture fund, but at a far lower entry-point. Let’s take a look at why this option exists, why you might want to explore it, and where you can find it.

A “Mutual Fund” For Start-Ups

In a post last month, we described a type of company called a technology accelerator. Accelerators are hands-on mentoring programs for start-ups. After accepting only a tiny fraction of the companies that apply, the programs put start-ups through three or so months of “boot-camp,” preparing them to raise money from investors and then blast off to success.

One of the accelerators we mentioned is TechStars. In the last 5 years, 234 companies have graduated from their program, and 22 of them have already been acquired. (The fact that they’ve nearly hit the “1 to 3 winners out of 10” rule in only five years is impressive: companies that fail will typically fail quickly; companies that succeed generally take more time.) The program runs in seven cities including Boston, New York and Austin, Texas.

In our deal email two days ago, you might have noticed the below opportunity from TechStars. It’s being hosted by one of our preferred crowdfunding platforms, Angel List.

In brief, the opportunity is to invest in all ten of the companies in Techstars’ Austin program. One investment, one check, ten companies. Angel List provides some of the administration, and TechStars provides vetting and ongoing management. Think of it as a mini mutual fund for start-ups.

The Details

The ten companies in the Austin program have many of the signs of promising start-ups that we write about at Crowdability.

Some of them feature Founder/CEOs who have prior experience starting and selling a start-up. Several have predictable, recurring revenue. One company, Ube, has already sold $500,000 of their product in a pre-sales phase, and will be getting distribution through Amazon.com. Ube has an app that allows you to control your lights and appliances from your smartphone.

Click here for more information on all ten companies.

Over the next few months, the companies will be mentored by world-class venture capitalists like Fred Wilson of Union Square Ventures, and by top-notch technology executives like Dick Costolo, the CEO of Twitter.

The valuations of the companies will be set in the future, by professionals, but the average valuation will be capped at $3.2 million. ($3.2 million is reasonable; the average valuation of companies listed on Angel List since 2010 is $3.8 million.)

What’s the Catch?

Does this sound too good to be true?

Only you can be the judge. Here’s some of the fine print:

  • TechStars and Angel List will keep 10% of the upside (so if there’s a $1 profit, they will keep 10 cents of it). In exchange, they’ll govern the investments and provide continuing “value-add” to the companies — strategic advice, help with fundraising efforts, etc.
  • TechStars reserves the right to reject any investor.
  • The minimum investment is $2,500.
  • And of course, both TechStars and Angel List will remind you that early-stage investing is risky and comes with no guarantees.

Keep in mind: ten start-ups isn’t adequate, statistically, to have a diversified portfolio. Fifty is a better target. But ten is a good start — especially when they’ve been vetted by a smart bunch of people. Best of all, you can invest in all ten with one click.

(Please note: Crowdability has no official relationship with Angel List or TechStars, and zero financial interest in either them or the start-ups they work with. We just think that: 1) Angel List and TechStars are good companies run by smart people; and 2) Diversification is one of the most important rules of early-stage investing!)

Click here to learn more

P.S. If you’re curious about the full track record of TechStars’ companies, you can see their success (and failure) statistics here!

Best Regards,
Matthew Milner

Founder
Crowdability.com

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Tags: Diversification Mutual Fund Mutual Fund For Startups Techstars Wefunder Ycombinator

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