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]
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Random Useless Fact:
About 4 billion toothbrushes are sold worldwide each year.
What kind of preferred shares? What rights do you have as a preferred shareholder? Voting, Dividend, Non/Cumulative, Callable, Redeemable, Convertible, Participating, etc. Also, is there any protection against being diluted out, for example, they keep creating extra shares so your portion becomes minuscule and worthless.
They’re series A type preferred shares. They are non voting shares, but they do have conversion rights and give the holder special privileges in situations when the company is sold. Dividends are paid to common shares and preferred shares side by side on equal footing. But there is the risk of dilution depending on the company’s future actions. There’s supposed to be anti-dilution protective provisions for preferred shareholders but I don’t know how effect that’ll be.
Congratulations on your first private business investment! Very interesting and certainly not as boring as investing in the broader stock market! All the best and keep us updated on how this investment goes!
Thanks. I’ll keep you posted. :0)
I can definitely see why you went for the passive investment rather than something more active. The whole “who am I going to find to run this damn thing” is the biggest factor keeping me from buying a Subway franchise.
What does 8 Tracks have going for it that Spotify, Apple Music, Pandora, etc. don’t have? That would be my first question.
That’s a good question. I honestly don’t know. Other than Pandora uses a computer algorithm to generate playlists while every playlist on 8tracks was manually put together by a person so there’s that human touch. 8tracks lets DJs be more creative with their mixes too. As a listener I like being able to search by combining keywords together, for example, jazz + blues + relax, and discover new music that way. It works a bit differently than Spotify and I think it’s pretty neat.
I’ve been invested in PE for close to a decade now. My biggest winners have been in the oil sector (yes, even after the downturn in prices). Here are some things I like about the companies: I enjoy oil – I mean, who doesn’t right? Not so much the actual oil, but everything oil gives us, which is everything ?. Oil has over 7 billion monthly active users, and its user base is growing. It has been in business for 100+ years already. Startups that make it past the 5 year hurdle have greater chances of survival, and are less risky to invest in. 100% of its audience are people between the ages of 0 and 100. This is every generation! ? One of my PE companies went public. I considered selling it but decided to see where it goes. The other company remains private, which I am enjoying immensely and will most likely never sell. Things like 8track are luxuries, in my opinion (but they do use oil!). They will come and go and will either fail, get bought out, or just float around like so many other zillion pieces of plastic in the ocean. Or perhaps I just… Read more »
Infotainment gains:
Encyclopedia->Internet
Talk Radio->Podcasts
MTV->YouTube
Radio->Playlists
Magazine->iPad
Books->Kindle
Cable->Streaming
Not sure ‘Radio’ is a monster money maker of a sector, no matter what name you give it.
Gotta love the thumbs down. More readers revealing their insecurities! ???
I like the energy sector as well. As a Canadian investor it’s hard not to have exposure to oil and gas. I’m surprised most of my oil stocks are doing okay all things considered. Good use of emojis by the way. 🙂
Do you get any passive income as an investor once the business is profitable? Or is it just that your shares may continue to be worth more?
Hi Mongrel. Happy national dog day! There is a chance that the company will pay out dividends in the future if it becomes profitable. When that happens I will receive payments as a shareholder. Proceeds will probably be deposited back into my account with the crowdfunding dealer. But I don’t expect the dividends will ever have significant value. The real hope is for the company to continue growing and become more valuable so that my shares will be worth a lot more by the time it gets bought up by a larger company, or files for an IPO.
A company’s value does not necessarily have to become more valuable in order trade publicly (IPOs are for raising additional funds).
The private-cum-public company I hold simply transitioned their shares from private to public with the same valuation.
A question about 8tracks: “The real hope is for the company to continue growing and become more valuable…” — how does this company make money, e.g. ad revenue, subscriptions, etc.? Is subscription growth the only thing that will make it “more valuable”? What else can the company produce (service or good) that will create more value?
That’s right. As mentioned in the original post, it makes money from both ad revenue, and subscriptions. I don’t know what else it can produce that would create more value. It currently operates in Canada and U.S. only, so maybe expanding into other countries would be accretive over time.
[…] Liquid Independence made an investment in a not yet publicly traded online music player. I’m not exactly sure what it has going for it over all the other alternatives, but hey. […]
We’re on a very similar wavelength here! I’m doing some due diligence with private equity investing right now. Hopefully if it all goes well i’ll be writing an article about my investment by the end of the year! I’m directly in touch with the company for seed round funding though, it’s very intimidating. I wouldn’t have considered it at this stage if I didn’t know one of the executives from school.
Cool beans. I’m interested to learn more about your private equity investment. Let me know when you post your article about it later this year.
Tried to invest, said I need a US address. How did you circumnavigate that?
Hi J-Bone. I would hold off on investing in 8tracks for the time being. I was recently told that my investment with the company has been terminated and my money will be returned to me. I’m trying to find out why this happened. I’ll update with a new blog post when I have more details. But to answer your question, Seedinvest uses a non-U.S. application form for international investors. I contacted them through email and told them I don’t have a U.S. address or tax identification number with the IRA. They sent me the alternative investment agreement and I signed that one instead.
Good thing your investment didn’t go through….
Ah yes. I was surprised to find out its business model failed and the company no longer streams music. I was really fortunate my investment was rejected. I could have been out a lot of money right now, lol.
[…] Canadian investors and they said yes. So I wired them $55,000 to put into a startup business which delivers online music streaming, and some other companies. I imagined my seed money was going to turn into $100,000 when the […]
Private equity investments often involve taking an ownership stake in a company, and can be used to finance growth, make acquisitions, or provide liquidity for existing shareholders. Private equity investors typically take an active role in managing the companies in which they invest, and may work closely with management to help achieve their goals.