Stepping into the Venture Capital Market
The stock market has been so boring lately! According to the Wall Street Journal, the last 30 days have been the “least volatile of any 30-day period in more than two decades.” But luckily stocks aren’t the only type of investments out there. 😀 Remember earlier this month I wrote about how to make money in private businesses? Well, one thing lead to another and now I am the proud owner of some equity in a growing business. It’s a small online company based out of California. It needs funding to grow and I’m looking for investment returns, so here we are. 🙂
Goodness gracious me. This means I’m officially an angel investor now! *plays heavenly music*
In today’s post I’ll talk about my new business investment, my decision making process, the due diligence involved, how much money I put in, and potential risks. But unlike a publicly traded stock, I cannot discuss details about this company’s financial situation since certain information isn’t publicly available.
Note: To keep things simple, all $ figures in today’s post will refer to U.S. dollars unless otherwise stated.
Tune into the Music
Private equity can come in the form of investing in a local bakery, buying an established franchise, or equity crowdfunding via an online broker. I went with the crowdfunding method because it’s quick and easy, haha. 😀
Once I decided to put some money into venture capital I looked around for opportunities in this space. One particular company that caught my attention was 8tracks.com, which is a bit like Spotify. It’s an internet radio and social networking website revolving around the concept of streaming user-curated playlists consisting of at least 8 tracks, hence the name. 🙂 Users create free accounts and can either browse the site and listen to other user-created mixes, or they can create their own mixes. 8tracks sees itself as Pandora’s younger, cooler sister, haha.
The company makes money through a subscription-based service and advertising. The site was recognized on Time magazine’s 2011 incarnation of its “50 Best Websites.” 8tracks has also received positive comments in Wired Magazine, CNET, Business Insider, Engadget, and The Guardian. Warren Buffett once said that we should only invest in things we understand, as it will reduce our tendency to make mistakes. 8tracks is certainly a business I can understand. 🙂
Here are some things I like about the company:
- I enjoy music – I mean, who doesn’t right? Going to bed while listening to soothing music always gives me sound sleep.
- 8tacks has over 5 million monthly active users, and its user base is growing.
- It has been in business for 8 years already. Startups that make it past the 5 year hurdle have greater chances of survival, and are less risky to invest in.
- 88% of its audience are people between the ages of 18 and 34. This is my generation! 🙂
So a couple of weeks ago I went to the crowdfunding website SeedInvest.com, and filled out the application to invest $5,000 into 8tracks. In exchange for my money, I received preferred shares of the business, which carries special privileges and are different than common shares. My $5,000 will be combined with money from other angel investors and venture capital firms in this round of funding which will raise $11,000,000 for the company to hire new employees and expand its market share. 🙂 8tracks isn’t turning a profit yet, but it’s revenue growth is pretty strong.
I have read the company’s Offering Circular which is the equivalent of a mutual fund’s prospectus. It has all the information the investor needs to know to make an informed decision. After spending an hour perusing through the documentation, the only reservation I have is the really high valuation of 8tracks. Given its current sales projection it’s hard to fathom the value of the issuer.
But hey, what do I know about the value of internet companies? 😛 Not a whole lot it seems. I thought Facebook (FB) was grossly overvalued when it went public a few years ago. But now the social media site is worth 3 times more so I totally missed the boat on that one, lol. Revisit my previous post on private equity to see other risks and pitfalls associated with all venture capital deals, such as not being able to take my money out for a very long time.
This is why I only put $5,000 into 8tracks. It’s money I know I won’t need any time soon, and it represents a small portion of my net worth so I’m comfortable with this level of risk. 🙂
The Investing Process
This is my first time doing equity crowdfunding. So here are some things I’ve learned through the process.
First, I created an account with a crowdfunding dealer. There are many great options out there which I’ve blogged about before. I decided to go with SeedInvest because after speaking on the phone with them I found they are very professional and responsive.
Second, I set up an investor profile for myself. This part requires my photo ID, and proof of citizenship so I scanned and gave them a digital copy of my driver’s license and passport. Sending personal information across the internet can be risky, but it’s necessary to verify the investor’s identification for tax purposes and to prevent fraud. Anyway, it’s just something to be aware of if you’re thinking about investing in this way.
Third, I picked the company I wanted to fund and filled out the investment agreement, and signed it electronically over the internet.
Finally, I received the payment instructions via email, which I printed out and took to my bank to make the transfer. The first time I tried to make the wire transfer TD Bank messed up the instructions and forgot to include the account number so the transaction was rejected by the receiving bank. To be fair, this was a rather complicated wire transfer involving both an intermediary bank as well as the actual beneficiary. So early last week I went to TD a second time and we tried again to wire the $5,000. I checked the instructions very carefully and made sure there were no more mistakes, lol.
Then a week later I received the following email from the dealer.
Yay! So that’s basically how it’s done. I believe this music streaming website has sound business practices. If some time in the future 8tracks announces it wants to go public, then that would be music to my ears, lol. But at the same time, venture capital is highly speculative. Some people believe it’s even riskier than trading penny stocks.
So did I manage to take advantage of a great investment opportunity, or did I just throw $5,000 down the drain? It’s hard to say right now. But I’m all agog to see how things play out! 😀 8tracks investors should get updates from the company annually, so I’ll update when I get new info later on. 😉
[Update – Nov 2016] Unfortunately this opportunity is not available for Canadian investors at this time so my 8tracks investment was cancelled and my $5,000 was refunded back to my bank account. [/Edit]
Random Useless Fact:
About 4 billion toothbrushes are sold worldwide each year.