The Secret To Sane Investing

By Matthew Milner, on Wednesday, July 30, 2014

Keeping score in the stock market is easy:

Oh, you bought Facebook last summer at $35 a share?

Hang on a second, let me pull up the online chart…

Wow, it’s trading at $70. Nice “double”!

Keeping score with start-ups isn’t quite so simple:

The typical journey for a successful start-up takes 5 to 7 years…

On average, that’s how long it takes to go from wrapping up a first round of financing to being acquired or going public.

Meanwhile, for the start-up’s investors, there are no price quotes, and no public filings to dig through in search of clues.

Sure, one of your “winners” might give you a big payday a few years from now – Instagram, for instance, was acquired for $1 billion just 2 years after inception.

But how do you measure a start-up’s progress in the meantime?

And how do you stay sane while you’re waiting?

Today we’ll show you exactly how.

Keeping Score

One of the best ways to measure progress and “keep score” for early-stage investments is also one of the simplest:

See if they raise additional rounds of capital.

You see, the “seed round” a start-up raises from investors like you is just their first milestone…

They use that money to build their product and figure out if there’s demand for it.

But as a start-up makes progress, it generally needs more capital.

This additional capital – which can amount to tens of millions of dollars – comes from the professional investors known as venture capitalists, or “VCs” for short.

Each time the start-up raises more capital, its “valuation” – the private-company equivalent of a public company’s “market cap” – goes up.

Let’s look at Facebook’s progress over the years to see what I mean:

  • In summer ‘04, Facebook raised $500,000 at a valuation of $4.9 million.
  • Less than one year later, Facebook’s valuation had increased by 20x: VCs invested $12.7 million at a $100 million valuation.
  • And less than one year after that, its value had increased by another 5x: Facebook raised $25 million at a $500 million valuation.

These capital infusions – and increases in value – kept up until 2012, when Facebook went public at a valuation of nearly $100 billion.

Along the way, Facebook’s earliest investors could measure the start-up’s progress – and the value of their investment – by keeping an eye on these financings.

How Does This Affect You?

Maybe you’re curious about the start-ups you see on Crowdability…

After all, these are the early-stage investments you have access to.

Will they be able to raise capital from VCs?

Will you be able to measure their progress just like Facebook’s investors did?

Funny you should ask…

Let’s Shed Some Light

FundersClub is one of the funding platforms that we cover here at Crowdability.

Last week, as part of their two-year anniversary, they published some statistics that shed some light on our questions. In particular they gave us a look behind the scenes to show us how they measure their progress… and help their investors stay sane.

If you’ve invested in any of the FundersClub deals we’ve featured on Crowdability, you’ll be very pleased by these numbers:

  • As of July 2014, they’ve helped 82 companies raise $19 million.
  • Today those companies have a cumulative value of more than $1.5 billion.
  • Their companies have gone to raise more than $300 million from VCs.

To show just a few examples:

1. Spoon Rocket

In August ’13, a start-up called Spoon Rocket raised money on FundersClub.

In May ’14, they raised $11 million from VCs.

2. Coinbase

In December ‘12, Coinbase raised its seed round on FundersClub.

In May ‘13, they raised $5 million from VCs.

And in December ’13, they raised an additional $25 million.

3. Instacart

In April ‘13, Instacart raised its seed round on FundersClub.

In Jul ’13, they raised $8.5 million from VCs.

And in June ’14, they raised an additional $44 million.

The Numbers Will Keep You Sane

Those are some impressive statistics.

And just in case you’re wondering if those “winners” are the exceptions…

According to FundersClub, if you’d invested equally across all their start-ups, you’d have earned an unrealized 47.9% annual return since July of 2012.

That means – on paper, anyway, due to the increasing valuations – you’d have nearly doubled your money in just two years.

Not bad…

Those are the kind of numbers that can keep an early-stage investor sane.

In The Money

If you’re used to measuring your investment success by looking at real-time stock quotes, being an early-stage investor will require a slight tweak in your thinking.

To evaluate early-stage progress, see if VCs are providing funding for start-ups you already invested in…

If so, you’re “in the money”!

(Please note: Crowdability has no financial relationship with FundersClub. And if you decide to invest in start-ups, invest in many of them. Rule #1 is diversification.)

Happy Investing!

Best Regards,
Matthew Milner
Matthew Milner


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Tags: Facebook Venture Capital Follow-on Investing FundersClub Instagram Instacart Coinbase

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