Small guide to start investing
After many years investing in companies, a lot of you have asked me about investments and how to make the most out of your spare money or a few bucks you want to take more risk with.
The answer is: I don't know.
I wrote this for some friends a few years back and I've decided to repurpose it as a blog post for a wider audience. Hope you enjoy it!
The reason why I started investing in startups is because I was spending too much money on concerts, travel and beer. Actually, after a HUGE fuckup that cost me 1000 euros, I decided to invest that amount in a startup for the first time.
So, if you want to learn from someone who hasn't had any kind of financial training or education and that merely invests to outsource his/her finances, then so be it.
I'll give the high-level overview, but I will go into more detail in the investments section I'm writing (work in progress, as of July 2023).
I started investing in startups because, well, I'm surrounded by them and by people who do it.
Investing in startups - Pledge funds
High risk, relatively low entry barrier, moderate to big returns.
I started investing in startups through Lánzame, which is a pledge fund. A pledge fund is sort of a crowdfunding for startups, where pledgers are investors. When a startup wants to raise funds through Lánzame, they share their conditions with about 500 professional and non-professional investors within the Lánzame network, and Lánzame do the rest. Similar platforms are Crowdcube or Republic, just to name a few.
As such, they charge two fees (don't know by heart, but it's around 8%):
- Once when you invest in a deal.
- Once in the event of an exit (successful sale of the company, and therefore when you earn your returns).
Good:
- They give you dealflow very often.
- You can start investing from 500 euro per deal.
- They're great at selecting startups. Actually, very good.
- It helps non-professional investors to start investing their first money.
Bad:
- The commissions are high.
- You're actually buying a service through them, so you can't deduct this as an investment in your tax filing (renta/IRS).
If you want to just learn and play a bit, Lánzame are a good entry door to this world. Their portfolio is pretty impressive, I must say.
I started with them but pretty soon I started getting investment proposals to do on my own, but before that, let's see another option.
Investing in startups - Real funds
If you want to get more serious, you get involved in a fund. It requires a big commitment of money, but basically you give them money so they can invest for you.
Lánzame is a "opt-in" method, kinda like a crowdfunding. Real funds can be "opt-out" but not really. Usually, there's no consensus and they invest your money for you.
Two years ago, I was invited to be part of the Itnig Future One. Itnig is an ecosystem of startups from Barcelona, all built with Ruby on Rails (Quipu, Factorial, Camaloon…), so I thought it'd be interesting also for MarsBased, to be close to them.
Funds require a big commitment in money. In this case, I think they had three tiers: 10k, 15k or 40k per year, and a commitment of 3 years minimum. According to your investment, you get shares in the fund, and they do the rest. No commissions, and as a partner of the fund, if you ever want to quit, you sell your shares to another member and that's it.
Good:
- No commissions.
- Usually they're more oriented to get better returns for the partners than in a pledge fund.
- They can get better dealflow if the fund has sufficiently good reputation.
- Less management. Once you pay, that's it.
Bad:
- Higher barrier of entry.
- Usually hard to get in if you're not in the ecosystem.
Investing in startups - Business angel
I used to think that in order to be a business angel you need to be certified or have a minimum of money or investments: bullshit. Anyone can be one.
If you're ever invited to invest in a company and want someone else's opinion, I can help you with that. I usually ask experts in the field of the startup, and then decide myself.
After being in the startups ecosystem for 3-4 years, I started to get invited to invest in companies. You can do two things: buy primary and buy secondary stock.
To put it simply, primary means when you invest in the company directly. Usually, it means bigger amounts of money, more paperwork, and to appear on their cap table (the relationship of shareholders-number of shares).
Secondary is when you buy shares of a partner extra-officially. For instance, I own secondary shares from companies of friends who want to cash out and make some quick money. Founders do that between investment rounds, in order to get some quick cash, and usually it's a good way to let friends invest in your company who wouldn't be able to afford primary because the minimum investment check in primary is - for instance - 15k. You can buy secondary for almost any quantity. I usually buy 2-3k at a time.
Good:
- No commission.
- Sometimes, the best startups don't go to funds and they only raise through friends.
- Fast and with very little management.
- Literally, you can invest ANY amount.
Bad:
- Beware of investing in friends.
- You need to do the audit and due diligence.
- Lots of back and forth negotiating conditions.
- If you're not well-known, you might not get any deal ever.
Cryptos
I don't wanna talk about cryptos.
I literally bought cryptos the day before bitcoin went from 20k to 3k. I know they're way above 20k now, but I'm not following the news/market. Luckily, I didn't sell, but I don't know what I'm doing here and I haven't bought ever since.
Extremely volatile but with extremely good returns if you know what you're doing. In my opinion, I've treated this category as gambling in the past and now I don't do it because of my own personal values.
Stonks
Stonks is code for "stock". This means, you buy shares of publicly traded companies through platforms like Revolut, Interactive Brokers, eToro and such.
The moment you buy your first stonks you turn into this guy
I started in August 2020 and did it for about a year. I've been investing a small percentage every month in a lot of tech companies and the plan is to think long-term, buy every month and never sell.
Before the 2022 tech market crash, I had averaged returns between 13 and 18% since then, which is extremely good, if you think that some of the best markets will give you on average 7.5% in a year. After that, welll… not so good.
Also, on top of your money growing, you will earn the dividends that these companies pay out at the end of the fiscal year to their shareholders. Unless you earn big percentages, you will get misery, but it'll grow over time.
Startups, for instance, if they have profits, they reinvest them into the company, and don't pay out dividends. This happens very rarely, really.
Good:
- Invest any amount.
- There's a lot of platforms out there. No need to get sophisticated software unless you want to do it seriously.
- Available to everyone.
Bad:
- A lot of people fall prey to day trading, which can be highly addictive.
- Since it's a real-time thing, it creates a bit of anxiety at the beginning.
- Takes some time until you learn how to do it properly.
- If you want to do it right, you need to keep an excel to track your money.
I think I can stop here and concentrate in the investments guide! Stay tuned for updates!
Thanks for reading!
