Why Does 70% of all US Startup Investment Happen in Only 20% of the Country?

America accounts for about two thirds of all global venture capital activity. Europe comes in at a very distant second, with around 15%. However, within the U.S. itself, some states fare significantly better in securing startup funding than others.

Silicon Valley, in California, dominates, followed by Boston (Massachusetts), Seattle, (Washington) Austin (Texas), Denver (Colorado) and New York (New York). But even in the Big Apple, there are only about a fifth of the startups per capita compared to Silicon Valley.

What makes startups in these cities do better than anywhere else in the country? And why do they attract so many investment dollars? While no one can actually come up with a definitive reason, there are a number of factors contributing to this interesting phenomenon.

Silicon Valley, for example, is known as the hub for high-tech startups. According to the Halo Report, mobile and Internet startups (together with healthcare) accounted for almost 80% of angel investment in 2013. Experts in these industries thus naturally tend to gravitate to the area, bringing with them their expertise, innovative thinking and ideas. These things in turn attract investment. Supporting industries spring up around idea hubs, encouraging more growth and thus more investment. Suddenly everyone in the area is in the same business.

Hope for Other States
In 2011, the National Venture Capital Association cited only four states – California, Massachusetts, New York and Texas – as having broken the $1 billion mark in VC investment. Since then, however, other states are starting to catch up just a little.

Oklahoma City, for example, was voted the best place to launch a small business in 2013, according to NerdWallet – up from 5th place in 2012. Investment is encouraged by the city’s comparatively low income tax, and low cost of living. In addition, getting a business started is easy – applications can be done online, and the entire process completed in a morning.

While the rest of the country still has a long way to go to catch up with the amount of startup investment flooding into California, it’s obvious that there is potential for growth in many other US states as well - an encouraging sign for our laboring economy.

Certain types of offerings require that investors be verified as accredited investors.  To learn more, visit VerifyInvestor.com.

You've Found Investors - Now What?

Investment always comes with strings attached. Making peace with that is crucial if you want your business to enjoy the potential growth and development that can come as a result of a significant injection of outside cash.

The biggest string is usually a stake in the business. How big a piece of the pie you are going to have to surrender to an investor depends on how much your company is worth, compared to how much an investor is investing. For example, if your business is valued at $100,000, and an investor invests $50,000, he is essentially buying a 50% share of your company. However, the same investment only buys a five percent share in a company worth $1 million.

So, now that your company is part of someone's investment portfolio, there are certain expectations you will be expected to meet:

Form a Board of Directors

A formal board with rights of approval on all strategic decisions must be created. Investors will often demand board seats, and will also expect a periodic report from you, highlighting key issues.

Meet Milestone Objectives

On every funding term sheet there will be a list of milestone obligations that must be adhered to if you don't want to risk losing support from your investors for future fundings. The Board (and the investors) must be satisfied with the progress you're making.

Be Available

You are no longer your own boss, and your time belongs to someone else. Investors can and will visit or call for regular updates and progress reports. You will have to make time for these calls.

Communicate Often

You cannot communicate too much with the people who have invested in you. Don't wait for demands before giving them important updates or changes. And don't keep bad news a secret - you have a legal obligation to share all information with your shareholders. However, it is a bad idea to seek their opinion on every minor issue. Strike a balance.

Be Even Stricter With Investor Cash Than With Your Own

Spend it wisely in accordance with the business plan you used to secure the investment in the first place.

For help finding accredited investors for your business, visit VerifyInvestor.com.

Is the JOBS Act Working?

Not to be confused with the American Jobs Act, the Jumpstart Our Business Startups (JOBS) Act was passed on April 5th, 2012 mainly to promote job creation by improving access to capital markets. Title I of the JOBS Act provided a mechanism for “emerging growth companies” to go public. These provisions are referred to as “the IPO (Initial Public Offering) On-Ramp.”

Some other key provisions of the JOBS Act: The first allows for the easier launch of startups through the use of crowdfunding, and the second permits companies seeking investment to do so via “general solicitation” - for example, social media.

Two years on, is the Act having the effect it was passed into law for? While there is some difference of opinion on the matter, many experts feel that the answer to this question is definitely Yes.

The most effective part of the Act appears to be the IPO on-ramp. Reports indicate that IPOs increased by 70% in 2014, with just over 100 companies filing to go public. Technology companies in particular are taking advantage of the Act, with IPOs enjoying their highest levels in over 10 years. A recent study by Latham & Watkins showed that nearly 9 out of 10 IPOs are by emerging growth companies.  While there are undoubtedly other factors also contributing to these statistics, securities attorneys involved in these transactions cite approximately 74% as being a direct result of the simpler pre-filing disclosure regulations of the JOBS Act.

So What is the IPO On-Ramp?

Historically, many of America's most successful companies (think Apple) went public a few years after they got started. In the economic boom of the 1990s, over 80% of the IPOs were for companies less than five years old, and for offerings of less than $50 million.

In the last few years, however, there has been a drastic drop in that number, to the point where only 20% of companies go public within the first five years of their existence. Investors soon get tired of waiting and force the sale of the company so that they can recoup their investment. This has a negative impact on our economy as job creation is accelerated when companies go public.

The JOBS Act’s IPO on-ramp lowers the initial compliance costs of an IPO, meaning more companies are in a position to consider this route. Of course, many companies will still decide not to go public, but the JOBS Act at least gives them the option.

Almost 90% of investors in startups have accredited investor status. To see if you qualify, visit https://VerifyInvestor.com/how-to-order-self-investor-verification.

[Infographic] How Rule 506(c) of the Securities Act Affects You

What is Rule 506(c)?
An amendment to Rule 506 of Regulation D, making it possible for companies to solicit funding from accredited investors through general solicitation and advertising.

Main Benefit:
Most private companies have limited capital and limited financial networks. This can make using traditional channels for soliciting funds impossible. Rule 506(c) makes solicitation legal.  Capital raising through digital methods, such as social media, can be very affordable.

Other Benefits:

• Provided that they provide all material information necessary for investors to make an investment decision, businesses can choose how much, and in what way, they disclose details of their business to potential investors.

• No need for audited financial statements.

• Any amount of capital can be raised.

• Businesses are exempt from pre-sale filings and state reviews, saving time and money.

• Positive impact on small business development and capital formation.

Main Stipulations:

• Investors have to be verified as accredited investors.

• Previously, the investors could self-certify that they were accredited. Now the company raising funds is required to take “reasonable steps” to verify this accredited status.

What Are “Reasonable Steps?”
Taking “reasonable steps” ensures you are protected from the potential risks of noncompliance – which could include enforcement action and having to return funds to investors.

The SEC doesn’t stipulate how companies must verify the accreditation of an investor, other than the fact that “reasonable steps” must be taken. However, there are several safe harbor methods ways in which a company can do this, including:

• Verify income through a combination of tax reporting forms (such as W-2 or 1099) and written investor representations.

• Determine net worth through bank/brokerage statements, tax assessments, recent credit report, etc.

• Written confirmation from an SEC registered investment advisor, a registered broker dealer, a licensed attorney or certified public accountant.

How Do Accredited Investors Benefit Startups?

When you’ve exhausted your initial startup funding – which was more than likely sourced from friends and family - and your business is a functioning entity, you are now ready to look for more serious investors beyond the scope of your own personal network.

Accredited investors form a wide and varied pool of potential funding and they often got to where they are through an innate instinct for good business and savvy investing. In addition to money, they often have vast amounts of experience and expertise to bring as well. They are also usually well connected and have the necessary “street cred” to help your business get to where you want it to go.

The Right Resources

In order to be classified as an accredited investor, an individual has to have significant assets. Current regulations define an accredited investor who is a natural person, who has:

• Earned an income of at least $200,000 (or jointly with a spouse, has earned $300,000) in each of the previous two years, and have a reasonable expectation of achieving the same in the current year, or
• A net worth, (alone, or with a spouse) of over $1 million, excluding the value of a primary residence.

There are multiple other categories of accredited investors tied to the type of investor they are or other thresholds.  Accredited investors, in general, have resources at their disposal to make a positive contribution to the growth of your business.

No SEC Registration

Properly done, an offering of securities made solely to accredited investors meeting the Securities and Exchange Commission (SEC) criteria do not have to be registered with the SEC.  Raising money from non-accredited investors, on the other hand, may mean that you have to provide a vast amount of information about your startup company. This can incur high legal and accounting costs which, as a startup company, you may not be able to afford.

The Big Picture

Money is money, but one should think about the costs of obtaining capital.  See the bigger picture and think long term.  If you seek investors, think carefully about whether you want to take non-accredited investors into your company.  Are they the type of investors you want in your company, and is your company ready to take on the extra burdens that might come along with accepting non-accredited investors?

For more information on accredited investors, what they are, and how to prove they are accredited, visit VerifyInvestor.com.

Redefining Accredited Investors – What This Means for You

Under current legislation, an natural person “accredited” investor is either:

• An individual who has earned an income of at least $200,000 (or jointly with a spouse, has earned $300,000) in each of the previous two years, and who has a reasonable expectation of achieving the same in the current year, or

• A person with a net worth, at the time of investment (alone, or with a spouse) of over $1 million, excluding the value of a primary residence.

This definition is about to come under review, in accordance with Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the Securities and Exchange Commission (SEC) to re-examine the definition every four years to determine whether it should be modified “for the protection of investors, in the public interest, and in light of the economy.”

The possibility that the income threshold and net worth thresholds might be increased (they haven’t been revised since the thresholds were initially put in place) has led to an outcry by many capital markets participants. Many of them feel that any revised definition should distinguish who is capable of “fending for themselves” vs just who has money. They have expressed that the legal definition should determine whether accredited investors have:

• Access to proper information

• The financial capability and the sophistication to access and undertake the risks and merits associated with offerings.

Areas of Discussion

Among other things, the SEC Chair Mary Jo White has stated that the SEC will be examining

• Whether the existing net worth and income tests are appropriate measures to determine accreditation.

• Whether more “sophisticated” individuals – such as legal counsel, CPAs and other experienced financial professionals – should be considered “accredited investors” regardless of whether or not they meet the income and net worth criteria.

• Whether individuals with degrees in business, finance, accounting or economics should be considered based solely on their education.

• Whether individuals who don't meet the wealth thresholds can still invest in private placements — provided they have a financial adviser.

Just under $800 billion in offerings were made exclusively to accredited investors in 2012. Increasing the net worth requirements of these investors would immediately remove about 60% of this investment from the pool. Whether this would then be supplemented by the numbers of individuals who qualify on criteria other than net worth, remains to be seen. The SEC will be looking at the overall effect on the capital markets and the economy if the accredited investor pool is expanded or contracted.

To see if you qualify as an accredited investor, or to verify one for your business, visit VerifyInvestor.com.

Pitching Your Product Perfectly – A Guide to Finding Investment

Most startup businesses begin their lives funded with friends and family money. Entrepreneurs will tap into as many generous relatives and good-hearted friends as they can find in order to get the capital they need to get their venture off the ground. There comes a point, however, when those funds run out, and you need to look to outside investment to fund further growth.

Securing investment for your business is not easy, and it requires hard work and proper preparation on your part. Being personable and enthusiastic was enough when you need Mom and Dad’s money, but serious investors will need to see more than that. A well thought out and practiced pitch, backed up by a solid business plan and marketing strategy, will go a long way towards convincing investors to back you.

Less is More

Practice your elevator pitch! Lengthy presentations do not impress, so keep it short, concise, and simple enough that it is easily remembered. Your potential investors can then can go back and repeat your key points to other investors.

Include points such as how your product either solves a problem or improves a situation, explain what specific benefits it has, and why people will buy or use your product over a competitor’s.

Talk like a real person and steer clear of trendy buzzwords and jargon unless you’re sure that your investor is very familiar with your industry.

Start from a Position of Strength

Before looking for investment, find ways to test your company’s viability with the means already at your disposal. Turning your ideas into a working business and being able to present investors with a track record and actual, real-world experience gives you a much better chance of securing funding.

Be Realistic

Not many investors are interested in funding over-enthusiastic businesses looking for millions of dollars to fund hundreds of different product lines. Walk before you can run. Prove that you can create, manage and meet demand for one excellent product. Develop strong marketing strategies and sales tactics for that one product. If you prove you can get it right with one product or service, investors are much more likely to believe you can do the same with more.

If you’re looking for how to verify accredited investors as required in Rule 506(c) offerings, visit VerifyInvestor.com.

How to Tell Which Startups are Good Investments

Whether you’re a conservative investor, or someone who thrives on the thrill of high risk, public markets offer enough diversity to cater for all tastes. Startup businesses, on the other hand, are a very different proposition. They are high risk all the way. The successes succeed big, but they are few and far between. Many more startups lose than win, so how can you tell which ones are going make it?

The simple answer to that question is, you can’t. There are no guarantees when it comes to investing in startup businesses. But there are things you can do to increase your chances of backing a winner.

Follow the Smart Money

Venture capitalists are the professional investors of the startup world. Where are they putting their money? Which industries do they think look good? If you can pick up investment trends by following the professionals, you can steer the results more in your favor than if you just made random, uninformed investments.

Know What You’re Actually Buying

When you invest in a startup, you’re essentially buying a piece of the business. It’s important to know what that means. Are you happy with the people and the product? A company is essentially 70% management and 30% product, so pick a business where you know you’re going to be able to work with the people in the company. This is essential in order for the business to grow, make profits and increase the value of your investment.

More than Just the Numbers

While the value of conducting due diligence before investing cannot be over-emphasized, instinct based on experience can be a helpful indicator. If a business doesn’t feel right, don’t invest in it. But if it makes the small hairs on the back of your neck stand up (so to speak), you may have a potential winner. Startups can give returns of between five and 100 times your initial investment. Evaluate the investment based on its inherent worth beyond the cold numbers.

Know that It’s Not Just About the Money

Granted, investment is usually all about the money, but a huge part of the appeal of startup investing is not actually the potential of getting a return. It’s about the opportunity of being able to get in early and be a part of the rise of something great.

Here is an article on top 5 FAQs about startup investment.

5 Ways to Get Investors Interested in Your Startup

Securing funding from investors is a great way for startup businesses to avoid getting into debt from high-interest loans. However, this is not always as easy as it sounds. Investors want to know that any capital they invest will be used properly and wisely. Here are a few ways you can gain investor confidence:

Have a Good Plan

Most new companies have great ideas, lots of energy and boundless enthusiasm. What many don't have is good business planning. Investors want to know where their funding would go - expansion, operations etc. They'll need to see how you've stayed in business to date and what your long-term projections are for growth and operational costs. A professional, well-constructed business and marketing plan is vital.

Be Formidable

Having said that, however, a good business plan is no good if the investors decide within the first few minutes of meeting you that you don't have what it takes to implement that plan and make it work. First impressions are hard to change, and most investors will base their decision on the image you project right from the beginning. Be a winner. Show them why you are the right person to execute your plan.

Believe in Your Own Business

Your investors will never believe you have a business worth putting money into if you don't believe it yourself. Don't lie about this - don't even think about looking for funding if you can't be truthful when you say your business is worth investing in. All investments involve risk, and investors know this. Investors are more likely to invest if they see an entrepreneur that is passionate about his or her product and is willing to fight to see their vision realized.

Be Ready for the Future

You have a great idea today, but will it still be relevant and exciting in the future? Do you have the vision and talent to move with the times and grow with your clients? You need to show your investors that you are adaptable and flexible enough to stay in business no matter what.

Don't Be Shy About Your Success

If you've got it, promote it! Make sure investors know about major accomplishments and successes. Have the facts and figures to show off growth and results. This can set you apart in a market flooded with entrepreneurs. Don't go overboard though. Nobody likes a cocky jerk.

Find out how you can verify accredited investors for your capital raise by visiting https://www.VerifyInvestor.com.

Crowdfunding – Risk or Opportunity?

Crowdfunding, as embraced by Title III of the Jumpstart Our Business Startups (JOBS) Act, is the practice of raising funds for a project or venture through the solicitation of a large number of people that they do not know (and are unlikely to ever meet), usually via the Internet through social media and other channels.

Not likely to come into effect until next year, some have touted Title III as being the rescuer of the American startup. Crowdfunding will give our country a much-needed economic helping hand, generating revenue in an otherwise sluggish economy and pumping fledgling businesses full of life-giving cash. This has the knock on effect of motivating entrepreneurs to continue creating, innovating and providing jobs, even in the slow economic times we are currently experiencing.  At VerifyInvestor.com, we believe that Title III as it is currently drafted is unlikely to be very successful, but we’re optimistic that improvements to it might make it a very powerful tool for startups.

People Funding People

A huge part of the appeal of crowdfunding is that it’s a grassroots type of fundraising. It is, quite simply, people funding people. Most of any funding raised is donated, invested or loaned directly to the owner of the business wanting to raise the capital.

Crowdfunding means fundraising is no longer such a tedious (not to mentioned time-consuming and expensive) process. This in turn allows startup business owners to spend more time where it matters – on their business. It also levels the playing field – entrepreneurs from humble backgrounds are now able to secure funding.

Another huge tick in the crowdfunding column is that it means entrepreneurs with complicated or niche business ideas, which may have had a problem securing funding through more conservative and traditional channels, are now able to solicit funds directly from like-minded individuals through more directly targeted methods such as social media.

The downside of this is, however, that many crazy ideas with no chance whatsoever of success, will receive funding from risk-taking kindred spirits. More ideas already get funding than can possibly ever make money and crowdfunding will simply add to the numbers of ideas that never take off. Too many failures will see tighter restrictions being placed on crowdfunding.

All investment carries a degree of risk, and crowdfunding is no different. However, there is no doubt that it is here, and set to radically alter America’s entrepreneurial and investment landscape.