Earning an Annuity as an Angel Investor- Yes, Virginia it can be done

Similar to other investment options, an investment in a private company can produce annuity type income.   When starting out as an angel investor an investor should plan on making multiple investments with diversification of industry and structure as a core principal.  Accredited investors with sufficient liquid capital to make multiple strategic investments over a period of time, will likely diversify their portfolio of private equity stock investments to include multiple types of investment structures.   Similarly to an investor looking to get involved in real estate investments with different targeted outcomes; short term return (flip), revenue producing (rental), and long term (raw land). An angel investor should seek to diversify into multiple types of offerings:  debenture with option to convert (flip); royalty or revenue cycle financing (rental); and traditional equity (raw land).

In this episode of the Compassionate Capitalist Radio Broadcast (REPLAY) http://www.blogtalkradio.com/karen-rands/2014/03/25/earning-an-annuity-as-an-angel-investor  Karen Rands shares her insight into the different types of angel investments and specifically how to identify private alternative investment opportunities that can produce a re-occurring revenue stream.

The conventional wisdom for angel investing is similar to venture capital investing— invest in 10 companies, wait 5-10 years to discover which one or two of the lot produced a big enough return on the investment to make up for the 4 that lost all of the investment and the 2 that broke even and the 2 others that gave you just a teeny return.   It doesn’t have to be that way.   When wealth men and women apply the same discipline they have learned when managing their public stock decisions and their real estate investment choices, and seek to have a long term strategy that calls for diversification of industry and investment type, they increase their odds of a higher rate of return because they have balance and load.

Diversifying by industry and into market areas that an investor already has an interest ensures some level of insulation from the natural economic ebb and flow industries experience.   Diversifying by product / investment type allows for shorter term results off set by long term hold.   For example, an investor just starting out could “loan” money as an investment secured against orders with the option to convert or to have it paid back but with warrants, then they get their money back, but have an option for discounted equity.   After a couple of those types of investments, they begin to accumulate additional liquid capital that could be invested in to an offer for royalty or revenue cycle financing.   This is a type of investment that is made but instead of an equity stake, the investor received a re-occurring revenue stream as a % of revenue until an agreed to multiple on the investment is paid back, usually 4X the investment.  Companies with the potential for long term growth and opportunity to go public are ideal for equity investments where the investor will have their investment capital tied up and illiquid for 5-8 years.   This type of equity investment is the most risky, because a lot can happen in 8 years to cause a company to not succeed, but if they do, then the results can be 10X to even 25X return on investment.    Early investors in Microsoft, eBay, Amazon and many others all experienced this type of return.    Keep in mind though… for every one of those, there are at least 10 that never got that far and never gave a return on investment.   There are some, like the companies that went public with a big splash… Web Van, even Facebook,  that did not hold its value after going public, but the initial angel investors made their money back and them some, probably at least 5X if they sold when it first went public.

You have an opportunity to get more information on this type of diversification by listening to the podcast or buying the Inside Secrets of Angel Investing.    This is the topic discussed in detail in Chapter 5.   You can also sign up for free excerpts from the ebook, Inside Secrets to Angel Investing.

Are you an investor that is tired of the volatility and unpredictability of the stock market? Are you frustrated that you have little influence to affect the management or operation of that public company? Have you realized that the public stock market is actually pretty risky and the overall return on investment isn’t that great?  The Join the New National Network of Angel Investors and be a part of the growing community of wealth men and women that want to master their wealth portfolio and learn how to be Compassionate Capitalists  – make money and contribute to the economy at the same time. 

What Keeps 750,000 Accredited Investors from becoming Angel Investors?

What Keeps 750,000 Accredited Investors from becoming Angel Investors?

Karen Rands, covered this topic on her Compassionate Capitalist Radio Show recently.

In a nut shell….lack of knowledge — The men and women who are earning over $350,000 a year in income, as tracked by Census and the IRS, are likely executives in a large company or run small to medium size businesses.  They didn’t make their money in a venture backed high tech company and likely aren’t part of a company that raised capital to get started, or if they are, they weren’t part of the team that founded that company.   They aren’t being encouraged to invest in private companies by their financial planner.  For the most part they aren’t even aware of “angel investing” as a wealth creation strategy and may not know that stock of private companies are available to purchase before they go public.   They are the ones that try to “get in on” the first issue of public stock for the hot company they are hearing about.  They are sophisticated investors so like the idea of having their money work for them.  That is why they often invest in real estate.  Yet if they knew they could apply the same practice they use to decide if a property is a good investment or a public stock is a good buy to the decision to purchase equity in a private company, and have the opportunity to own a % of multiple entrepreneurial endeavors with strong potential, they would choose to include that as part of their wealth accumulation strategy.

According to the US Census, there are an estimated 1,150,000 households that earn over $350,000 a year. Furthermore, there is an estimated 250,000 active angel investors involved in structured groups and actively considering investment in early stage companies as a means to create wealth in their diversified portfolio. And if we assume there are at least 150,000 of the wealthiest that have too much money to be angel investors…they don’t invest directly into companies, they invest in the funds that fund the companies. That leaves an opportunity for the remaining 750,000 to become angel investors.

Listen to the Podcast for the full report.

Whenever there is a shift in the market, there are key factors that trigger it and contribute to a successful shift.  The 3 A’s of Market Movement:

  1. Awareness
  2. Adoption
  3. Access

Awareness of the potential to invest in a high growth company before it goes public or grows in value to attract an acquirer is growing as “crowd funding” news continues to spread around the internet and in the general press.  With the advent of the Jobs Act of 2012, “crowd funding” became a common term bantered around, often within the wrong context, but none the less a phenomena that people were talking about.  Wealthy men and women who consider themselves “sophisticated investors” with an  above average Financial IQ are curious about this as a new “hot” investment platform.  Yet there exists a cloud of confusion around “crowd funding” because although passed by Congress and signed into law by the President, the sale of securities is regulated by the Securities Exchange Commission (SEC).   As of this writing, the SEC still has not issued their rules for the Title III part of the Jobs Act that specifically addresses  how companies will do equity crowd funding at a national federal level.   Currently 4 states offer specific legal guidance and approval for companies incorporated in their state to raise money from investors in their state via crowdfunding methods- Kansas, Georgia, Michigan, and Wisconsin, with Washington, Alabama and South Carolina considering legilsation.   Companies are permitted through Title II to raise capital from Accredited Investors under the Reg D 506c and Reg A, under specific conditions, and market to them via the same means that companies use in rewards based crowd funding.  Learn more about history and status of crowdfunding.

As this community of sophisticated investors who would easily qualify as “accredited investors” via the certification process by providing copies of their W2 or past tax filings become aware of the opportunity to invest in private companies they must learn to adopt the mentality of an angel investor.  Angel investors think differently than regular investors who are simply wealthy.  Angel investors have to have vision and imagination.   Entrepreneurs seeking angel investment must be able to cast a vision that the potential angel investor believes can be a reality.  They must imagine the potential results that the management team will be able to produce with the product and strategy they are offering that is at the core of their investment opportunity.  If the entrepreneur is successful in conveying that story and it is better than the one the investor just heard or will hear the next day, then they will be the lucky one to get that angel investor’s money.   Traditional investors look at the history of a public stock to anticipate a trend, the market comps on a real estate to predict a trend… all with the intention of buying low to sell high.  None of that really exists with private companies.   That is where an investor has to “think outside of the box” and think about the company beyond just what has been done so far and grow to understand that buy adding private equity investment to their portfolio they have an opportunity to produce a greater return…if they don’t lose the entire investment.   Investment in private companies is by its nature very risky.   It is an illiquid investment and sometimes the return doesn’t come for many years down the road.   So as sophisticated investors adopt private equity investment in early stage companies as a strategy to grow their portfolio, they must also be extremely patient.  They also must take the time to learn about the legal requirements to make this type of investment.

With knowledge that they can own pieces of many companies, and the desire to become an angel investor, all that is left is access to the deals and the due diligence.  Traditional angel investors join groups that help with the screening and due diligence process. Committees are formed to screen deals so only the best get a chance to pitch to the group at large.   Committees are formed to conduct due diligence on the company and report back to the group of investors so they can decide to participate in a pool of funding for that company.   They may have an obligation participate on a committee periodically and to attend the monthly pitch meetings and follow up meetings.  They can spend this time because they typically don’t have a day job.  They are wealthy because they had an exit from a company or an investment that provided them with disposable income to invest.   They “self certify” in traditional angel investments so as to avoid full disclosure on their actual net worth and sources of income.  The 750,000 accredited investors we are talking about here, that are void in the marketplace now, are too busy to participate in those groups and participate on a committee that requires time, even if the group is actually located in the city they live in.  They have access to public stocks through stock portals to do the research and trades whenever they want, 24/7. They have real estate agents find them investment properties.   Their financial planner won’t find them private company investment opportunities because of the rules they have to adhere according to FINRA.  So gaining access to a variety of opportunities to consider that also have full disclosure and due diligence information available is critical as the final trigger in the market shift.

Kugarand Capital Holdings, LLC is launching a secure portal to provide the opportunity and the due diligence necessary for this type of sophisticated accredited investor.   The 22 year old NBAI is being transformed into The National Network of Angel Investors comprised of small regional groups forming virtually around the country based on regional or special interests.  Education is provided on an ongoing basis through articles, white papers, podcasts and videos.  Sophisticated Accredited Investors seeking to understand how to become an Angel Investor…how to adopt the mentality, but also learn the ropes of being an angel investor… applying the knowledge of stock market and real estate investment to private equity investments will purchase the book “Inside Secrets to Angel Investing” as their road map.

Are you an investor that is tired of the volatility and unpredictability of the stock market? Are you frustrated that you have little influence to affect the management or operation of that public company? Have you realized that the public stock market is actually pretty risky and the overall return on investment isn’t that great? Then the time is now to participate in this market shift….  Then learning how to invest in private companies, purchasing shares in a company before it goes public, while the valuation is still low, could be the wealth creation strategy for you.   Tune in to learn how to join the world of compassionate capitalism

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The National Network of Angel Investors

Why is Angel Investing such a Mystery to Wealthy People?

Interestingly enough, if you were to ask the average millionaire that you encountered on the street (not that any millionaires are actually average) their thoughts on entrepreneurship, capitalism, and creating wealth; you would likely get comments such as the following:

“Entrepreneurs are the backbone of our society. They create jobs and bring innovation to the market.”

“It is only in creating wealth that anything gets done or paid for.”

“I’d rather give my money to an entrepreneur with half a brain and the gumption to go out and do something with it, than some government empty suit that is just going to give it away. ”

“The people who solve problems make the biggest bucks.”

“Buy low and sell high!”

“The free market – capitalism – gives you personal freedom – to choose your future destiny.”

“I seek to invest my money where I can get a return on investment…the greatest reward relative to the risk.”

So with thoughts and feelings like this, what keeps millionaires with the capital on hand to make alternative investments and invest in early stage private equity opportunities?  It is estimated that 10% of the American population has the means to qualify as an accredited investor, that translates to millions of potential investors, yet only a few hundred thousand participate in angel investor type deals.

Our investigative team has determined that the very regulations intended to keep fraud out of the process and protect high net worth individuals is actually creating a situation where misinformation abounds.   Further, greed and fear actually limit the free market access to information about investment opportunities into private companies these potential investors should have to be able to become “angel investors”.

The Securities and Exchange Commission (SEC) regulates the sale of securities.   What this means is that for entrepreneurs to be compliant in their sales of equity in their company, they must adhere to rules regarding selling those securities as a non-public company.

1. General rule of thumb is that they sell to only accredited investors, with a few exceptions.

2. They must provide documents that clearly state the risk, typically in a Private Placement Memorandum

3. They cannot do a public solicitation through an online posting, email blast, advertisement or anything that will offer the security to the public and therefore they must have pre-knowledge of the investor, or if they work through a licensed broker the broker can sell their security on their behalf.

4.  If they are to pay a commission for the sale of that security, they can only do that with a licensed broker, with few exceptions.

This leads into the Broker side of the equation which is regulated by FINRA.  FINRA, the Financial Industry Regulatory Authority, is the largest independent securities regulator in the US whose chief role is to protect investors by maintaining the fairness of the US capital market.  They regulate the brokers that are authorized to sell and take a commission on private placement opportunities.  Typically brokers/dealers charge large upfront fees and large back-end fees for the sale, and assuming the liability, of selling that security.  They have a due diligence fee, retainer, commission and stock options. To justify those fees, they typically want to work with companies that are raising $5M or more and have revenues to manage to the upfront fee, or have cash on hand from their friends and family round of financing.

Broker/Dealers (BD) often have affiliate brokers, financial planners etc, that hang their license with them.   The brokers, according to the FINRA guidelines, create fear with these affiliate brokers if they are caught “Selling Away”.   So if an affiliate broker sells anything to their clients, the people whose money they are managing, that is not offered and approved by the managing BD, then it is considered selling away from the brokerage.

What Does Selling Away Mean?
When a broker solicits you to purchase securities not held or offered by the brokerage firm. As a general rule, such activities are a violation of securities regulations.
Investopedia Says
Investopedia explains Selling Away
Typically, when a broker is “selling away,” the investments are in the form of private placements or other non-public investments.

On the surface this is all good because the investor only gets products, securities, investment vehicles that have been fully vetted by the brokerage house.   They sleep well at night believing that they have placed their money in solid investment vehicles, whether private or public offerings, they really don’t focus on the difference.

As with any private equity transaction, this does not guarantee that they will not lose money in that investment.  We’ve seen that all over the place even in reputable firms like Stanford or in public stocks like Enron.

But in reality, how this plays out is that the Broker will only promote private offerings that they are being paid to promote.   And investors that want to participate in angel investing, want to “own a piece of a company” don’t get the benefit of having their financial counsel to help them  in evaluating the deal, they don’t get quality deal flow from other sources, and they don’t gain insight into how to make wise investment decisions in that area and manage to the tax implications on the return on investment.

Not all high net worth individuals think of investing in private companies as “angel investing”.  If they are readers of Robert Kiyosaki’s books (Rich Dad, Poor Dad or Cashflow Quadrant) then they likely are working on their financial IQ and working toward being Business Owners and Investors so that their money works for them rather than working for their money.   Angel investing in effect is the entire scope of the right side quadrant….business ownership through investing in private businesses.  Yes you have the greatest likelihood to lose all the money invested in an early stage private company, but you also have the potential for greatest return on investment.   Private equity investing at the early stage produces greater returns than real estate or stocks or any other asset class.

Angel Investing has the potential to create more wealth than any other asset class…at multiple levels.  It can create wealth for the investor that directly invests.   It creates wealth for the entrepreneur that is bringing the product to market and building a successful company.  It creates wealth for the newly hired employees in their earned income.   It creates wealth for all the businesses along the supply chain that service the company, build the products, and so on.

On the other hand, most real estate investment only creates wealth for the seller and those that assisted in the sale and the investor who gets a return from rental income or the upside when it is sold the next time.  Public stock investment doesn’t create wealth for anyone except for the person who is able to sell the stock for more than they paid for it.  There is a commission paid to the broker for handling the transaction.  The money used to buy public stocks doesn’t go into the company’s coffers to invest in R&D or hire new people, it goes to the seller of the stock.

So for those millionaires that “get it”….there isn’t a lot of guidance on how to determine if an early stage private equity opportunity is a good investment nor how to decipher the terms of the investment and if the return on investment will come in the best format for the tax implications and so on for that investor’s overall investment strategy.   The tax implications from a convertible note that has accumulated interest may be different from an investment that shared in the revenue (and losses) of a company; the investment made as a straight purchase of equity that is held for 18 months vs one that is held for 5 years.  And what would the impact be if you purchased the equity through your self directed 401K or as an investment made through a ROTH IRA.

Entrepreneurs that think they are doing the right thing, creating a PPM that even allows for a broker commission and only selling securities to accredited investment has NO idea that a whole source of potential investors are not available to them, actually blocked from them getting access to them.   It is crazy to think they would go to one broker to get access to their investors, pay the fees, then go to another one, pay their fees, and so on.   They typically will work with one broker for a while and then forge out on their own trying to find the individual investors.   If they go the broker route, they typically can’t go back and work with angel groups because the structure of the stock offering is set in stone.   The greed of the brokers won’t let the entrepreneur just pay the broker a commission or to have the affiliated broker take it to one or two of their high net worth clients that have expressed an interest private placement opportunities.   And because of the fear that the affiliate broker has in losing their license if they are accused of “selling away”, they won’t even tell the client about the investment opportunity and NOT take a commission.   When the licensed financial adviser knows the client wants to make real estate investments or buy a franchise, they will refer them to a source for those deals and help them to understand the implications on their financial diversification and asset allocation, and any tax and estate implications.  They don’t collect a commission, they don’t think of this as selling away, they think of it as providing full service to their client based on the client’s interest in different investment options.

So what is the solution?

For investors, that want to be involved in angel investing and they don’t have the benefit counsel from their investment adviser they should do the following:

  1. Buy the series Learn to Be an Angel Investor…it is concise look at the history, process and structure for angel investing taken from 5 years of working with successful investors and their secrets to success and countless industry reference materials. 5 books, or one compiled “Secrets….”
  2. As part of the Compassionate Capitalist Radio Show where Karen Rands revealed the insights gained recently on why so many wealthy people don’t know about or participate in angel investing. Podcast file is include in this posting….

  3. Form a team of advisers that will help you and protect you…this includes a lawyer accountant and financial planner/wealth manager.  They should all have made angel investments in the past or at least counseled others in that arena, either entrepreneurs or investors in early stage capital.
  4. Attend a seminar that can teach you how to be an angel investor or be a better one if you have not achieved the results you hoped for in your previous investments. 

How Will Today’s Economic Times Impact Angel Investing?

How will today’s challenges in the economy impact angel investing? How do you feel? Are you worried? Is Private Equity investing in early stage private companies really a viable alternative to stock market investing as an asset class?

What does Karen Rands think? Listen as she shares her opinion and insights from her recent radio show: Listen now:  http://kugarand.podomatic.com/entry/2008-10-13T14_16_11-07_00 !

Angel Investors and Savvy Investors seeking to learn more about this intriguing asset class are making plans to attend the last two investor forums hosted by the Network of Business Angels and Investors before year end:  Oct 22nd and Dec 3rd.    If they are going to reallocate their liquid assets into an asset class that could generate 4-10 times their investment in the next few years, they need to begin the process of: Idenification, Investigation and Investment as soon as possible to take advantage of year end market movements.  The sophisticated investors we have been talking with are eager to get back into angel investing or get connected with a group they can learn more about the process by attending these scheduled event in Atlanta.    To learn more about the events and RSVP to attend, please go to www.dothedeal.org or visit http://launchfn.com/id150.html

Get your 5 Secrets of Billionaires! Go to www.learntobeanangelinvestor.com

Check out these investment websites:  www.nbai.net, www.kyrmedia.com, and www.howtobeanangelinvestor.com

SPEC Talk Radio: Interviews Exciting Companies from the NBAI September Event!

Karen Rands interviewed exciting companies which presented at an NBAI Private Equity Forum on September 10th on this session of SPEC Talk Radio.  SPEC Talk Radio is the SE Private Equity Community Radio show that is scheduled for every Friday at Noon.   It is where the investor and entrepreneur community tune into hear great insights into how company grow and succeed and how investors participate in this exciting asset class.   This recording of the broadcast from September 12th,  is an opportunity for investors to hear first hand about some hot new, growing companies and for other entrepreneurs to learn from others that are leading the way in building successful business models.  Although not exactly like their pitch to the angels at the NBAI event, because the entrepreneurs cannot publically solicit for investment, the entrepreneurs cover the other relevant areas of information an investor would be interested in.

SPEC Talk Radio: Interviews Exciting Companies from the NBAI September Event!

To get more information about these companies go to www.launchfn.com and click on the Company Profile Tab. 

Visit www.kyrmedia.com for information for investors and entrepreneurs.

Listen, Learn, Enjoy and Share with a Business Associate!

Interview with Innovative Entrepreneurs Qualified for the Investor Forum

SPEC Talk Radio: These companies have been selected to present at the upcoming NBAI Investor Forum. We will hear from these market makers about the spark of innovation that lead to their creating unique solutions for their targeted markets. Valtx, Worthpoint, Cognitive Code, Teen Alive USA and| ApoImmune.

To learn more about these companies …. Click here! Go to the Company Profile tab.

Listen to the SPEC Talk Radio Interview Now!

Listen, Learn, Enjoy and Share with a Business Associate!

To get the full list of Free or Near Free resources, go to www.launchfn.com and click on the Information section.

Get a Free White Paper on Billionair Secrets to creating wealth! Go to http://www.kyrmedia.com/kyrmedia.htm  and explore www.kyrmedia.com to get more info about private equity investing and success principals for entrepreneurs.

Check out these investment websites: www.kugarandholdings.com, www.launchfn.com, www.nbai.netwww.entrepreneurblogspace.com and www.getinvestormoney.com

Google Mafia as Investors?

Interesting philosophical discussion about the multi-generational approach to creating wealth and then spreading that wealth around. It compares the second generation of those that came from the eBay/Paypal phenomena with the Google phenomena. It is a similar discussion we have regarding west coast angels and east coast angels. Multi-generational entrepreneurs occur when one company succeeds tremendously, and it creates entrepreneurs that want to go out and do it again, creating a second generation of success, and so on. Then there are those that make it and are done, they have enough wealth to live on and give some to charity etc. Some of those that added comments seem to resent the notion that it is good (and expected) for those who have been successful to go out and strive to repeat that success. It is important to keep in mind the real impact of second generation entrepreneurial ventures….jobs and regular wealth for working folks and greater wealth for the founders and investors who then can go spread it around some more. It is the foundation of our capitalist culture and what keeps our economy growing. One thing to also consider when reflecting on the different outcomes of these two great successes, is that there is half a decade between them. It could be very well that those companies spawned company creators rather than company investors because they had some idle time while they rode out the dot.com collapse and dabbled in the new media of web 2.0 community….and they could provide their own seed capital. Even Kiwasaki of Garage.com fame is promoting building web 2.0 communities without seeking outside investment because the cost to launch is so low.
Every new company needs to have access to founder capital to get it off the ground, then seek outside investors as necessary to scale. From that perspective it takes both types…builders and investors.

To get the full list of Free or Near Free resources, go to www.launchfn.com and click on the Information section.

Get your 5 Free Investor Tips Now! Go to www.getinvestormoney.com

Check out these investment websites: www.kugarandholdings.com, www.nbai.net, www.kyrmedia.com, and www.entrepreneurblogspace.com

Should I invest in a web 2.0 company?

I was finally catching up on old magazines and came across a September issue of Business 2.0 and an interesting article “The Facebook Economy.”   We hear so much about web 2.0 social communities, so how does an angel investor determine the hype from the substance?  Do they watch this trend flame out or do they jump on the wave?  The danger of the hype of the web 2.0 companies is that we can get caught up in the same groundswell of exciting yet non-commercial concepts as we saw happen in 1998 with the flood of dot-com investment opportunities.  It is important to understand that “web 2.0” isn’t a new technology platform or a new World Wide Web, rather it references the changes in how software developers and end users use the web.  It is kind of like the difference in 2-D and 3-D video.   It is still video but in changing the way it is used, you create a whole new experience.  Visit http://en.wikipedia.org/wiki/Web_2.0 to get more insight into the start and evolution web 2.0.

The west coast angel investors seem to “get” the web 2.0 social community concept and invest seed and early stage capital.  The shock of the market value on such early market makers such as Myspace and YouTube got the attention of angel investors seeking the excitement of jumping in and being at the forefront of another trend.    The east coast private equity investors and venture capitalists seem to be much more hesitant for two very valid reasons: 

1.  It is hard to identify the shining golden apple from a whole bushel of apples…..   so many of them are popping up all over how does one know which one is the one that will make it when you don’t want to be the one that bet on Pets.com (the one with the sock puppet) , a pure Internet play, rather than the investment in a hybrid that made it like PetSmart.  

2.  Similarly to the dot.com bubble, the revenue models for the “social community” companies is often ill defined.   Therefore, individual investors have a difficult time understanding how the company will scale and produce an expected return on investment.   Wise early stage investors are wary of an exit strategy that is solely based on attracting enough users (eyeballs) to the become an attractive acquisition candidate, but lacks a strategy to create positive cash-flow.  Fundamentals of business should still apply regardless of whether or not a company is part of a hot trend or not.

 So here are 4 revenues streams that a web 2.0 “social community company” ought to address….either because it is included in their revenue stream or because it is not, and therefore why it is nota valid revenue stream for them….what is now being called the “facebook economy”:

  1. Sell Ads:  obvious and the most documented source of revenue for web 2.0 communities.   The problem is that it depends on the volume it drives.   The very nature of web 2.0 social communities is that they have a viral appeal that causes one friend to tell another friend and so on and so on.  That is very “trend” centric and anyone who has paid attention to trends know that the come and go and the Internet speeds up that process of fire to flame out significantly.    The whole world of pay per click and screen real estate selling is changing more rapidly than one can even forecast therefore it is an extremely unreliable source of revenue for a start up/ early stage company to build a whole company on.
    Take away:   if  a web 2.0’s company’s primary source of revenue is advertising they are a turtle with their head in their shell.
  2. Attract Sponsors:   This is a viable alternative to advertising in that the “sponsor” is advertising but to a very targeted group and often it is related to a symbiotic product or event.  It is similar to product placement in a movie or show.   When you see the stars of your favorite show drinking Budweiser instead of some unknown foreign beer or no name, you connect with that image. 
    Take away:   If a company has some focus group that it has been successful in targeting, sponsoring because a valid alternative to advertising….it is like the “infomercial” for an online alternative.  It takes longer to develop the validation of a sticky community, but can be much more effective because the community doesn’t realize they are being “sold to”.
  3. Sell services:  This is  as a result of the large onslaught of ancillary applications (widgets and plug-ins) that avid users of social communities use to enrich their experience.   Usually there is a “free” version to get started with and then a for fee version for an enhanced functionality.   
    Take away:  This is a very viable business model because a compelling application or service will gain a loyal user community.  Awareness often comes from others seeing the functionality or the use of that app/service and with built in click appeal, that company has a new user.   As an investor, you need to make sure the management team really understands the viral marketing strategy and knows what their target market will bear.   You don’t reach users and paying customers with a Google adwords campaign for this type of business model.
  4. Sell Products:    Typically, this is affiliate products being sold for pennies on the dollar.   The idea is “now that I have eyeballs at my site, let’s sell them something”.   It gets very compelling when the products are actually originated and centric to the community.   The products become popular in the same viral way the web community gets known and embraced.
    Take Away:  This is much more like an old school business model that has a new twist because the “store” and the target market is all virtual and none of the old rules and methods apply.   But given a management team with insight and knowledge on how this can be done, in part because they are part of the “facebook” economy as users, this can be very solid.

The article only listed the 4 revenue sources, and I’d like to add a 5th: Subscriptions.   We are seeing a trend where users are willing to pay a monthly subscription to get better or more services.   They can participate a long as they want for free for basic service or usability, but at some point their hunger for more will drive them to upgrade.   This revenue model has the greatest scalability and brings together both worlds:   Cash-flow and the hype of a large user community.   The other revenue streams (advertising, products etc) can add onto the foundation of subscription revenues.

Bottom line:  An early stage investment opportunity needs to have a plan to reach cash flow positive in the foreseeable future.   It doesn’t take a lot of money to launch a web 2.0 community and to make it known if the company knows how viral marketing in social communities works.   Often, the company will grow organic and have minimum friends and family seed investors involved and only seek significant capital when they are ready for the real push into the market and their platform needs to be enhanced to make it more robust to handle volume and incorporate new features.   This is a good time to get involved for an angel investor because the valuation is still low, but the basic market appeal and business model has been proven.

I welcome any insights you may have as investor who has invested in web 2.0 communities, the decision process you went through, or other insights you have gained regarding investing in this sector.

UPDATE  to POST 2/14/09.  

Statistics posted at www.techcrunch.com shows that the term web 2.0 is dropping off dramatically in search engines and in the way that companies describe their online business.   I commented that we have seen the same thing when companies submit their business plans to angels for investment.   I think web 2.0 isn’t going away or dying, it just isn’t novel anymore.  Companies aren’t using it to describe their companies because it as assumed they are integrating that functionality in any web design.  Like not calling your company a dot.com company by year 2000.