Chapter 3 - Start Up Fundraising
IN THIS LESSON
Venture Investing Time Horizons
While talking to investors about what “betting on you” means for their money—now and in the future—you will reach a point where you will have to set expectations about the time horizon, both for your sake and theirs. Now, you don’t have to be a unicorn to get VC investment, but you will need it for the top tier VCs.
For the lower tier and smaller VC funds, they have the opposite goal of you hitting an IPO. They want you to get acquired because the chances are that they don’t have access to the “best deal flow” straight out of Silicon Valley, but they are nevertheless willing to bet that you will drive enough value to be acquired by Amazon, for example.
An investment “time horizon” refers to the time an investor will hold an investment. It is often linked to how much risk the investor is willing to accept. Time horizons can range from the short term (just a few days) to long term (decades), and they vary across different investments.
Difference Between Crowdfunding and Crowd investing
There is an important distinction to be made between crowdfunding and crowd investing. Unhappy Kickstarter customers can complain when they don’t receive their product and, subsequently, ask for an immediate resolution—usually as early as the same day the product shipment was promised, which is on average six months out for most companies. Unlike these short-term-minded Kickstarter customers who are crowdfunding, participants in crowd investing must view the transaction as a long-term commitment.
Specifically, a long-term investment with the potential for some or no profitable returns. There is no promise of a new product or service a few months down the road. Instead, they’re in it for the long haul.
Note you will have to explain every part of your offering terms. One key term you must drive home is the expected time horizon. Your investor may have watched Shark Tank but may find it hard to calculate how their $500 investment turns into an equity stake—if that is what you are offering. Establishing an investment horizon is one of the first steps to be taken. Most importantly, be clear on how investment returns will be potentially generated and on what timeline.
For many investors, that means waiting for 5, 7, or even 10 years until a return is realized. They are putting their faith in your ability to execute on the idea, and to have a good investment relationship with you and your company, they must be willing to part with their money, at least for some time. When an investor has a longer investment time horizon, they can accept more risk and allow the ups and downs to stabilize and recover in positive ways.
Positive Trend Among Millennials
But there is good news on this front. According to CNBC, many millennial investors are already attuned to looking ahead in the long run. Contrary to popular belief, many are already saving for retirement, out of fear that government social safety nets may not have the resources to take care of them as they get older. This is a notable trend for companies who seek investors who have a little money to give and can see the bigger picture over the long term.