Ari Stiegler: How to Invest Safely in Businesses

Many people like the idea of investing because they know it's one way of achieving real long-term wealth. However, they also know that investment has risks, and that causes fear. Also, many people don't understand how investing in things like venture capital works, so they simply don't do it. 

That would be a mistake, according to Ari Stielger. He has spent his career in startups and understands what makes them successful. He founded TutorMe, an online teaching platform that was sold to Zovio in 2019. He is co-founder and CEO of Prism, which originates loans against shareholder equity. 

He is also a managing partner of Flux Capital, a venture capital fund based in Los Angeles. Flux Capital focuses on corporate leaders in certain markets. These are a small group of large companies that control most of the market share in their areas. 

Those that invest in this fund know that the companies receiving venture capital maintain healthy, steady-state margins, so the risk is reduced. 

Understanding Venture Capital

Venture capital investments can be risky because only 10 percent of startups find success. More than half of all startups fail within the first year. The primary reason for failure is a lack of investment. Other reasons could be bad management, too much competition, or simply a bad idea. 

Venture capitalists help with the first problem of a lack of investment by providing equity financing to startups that show a potential for extreme growth. These are private investors who put up money for a return on the company's profits when it does well. 

However, the largest group of venture capital investors is made up of institutions with a wealth of resources, like university endowments, pension funds, and financial firms. That's because most venture capital investments require a large sum of money. Investments can include multiple rounds of financing and each round has different options for how it offers shares and dividends, or splits profits. 

The three primary rounds of venture capital financing for startups are seed stage, early-stage, and late-stage. The exact beginning and the ending of each stage are set by the startup, but they are defined by where the business is in its operations, from research to initial operations, to expanding distribution or gaining contracts. 

Investing in Startups

There are two ways to invest in startup enterprises. The first is as an individual venture capitalist who finances the operation using their own money. Doing this alone can be highly risky. 

Individual venture capitalists need to know about the industry they are investing in and the startup asking for the money. They also need a keen business sense to make it work. 

A venture capital firm, like Flux Capital, is a company that pools money from many private investors to finance startups. It operates a portfolio so a person's investment is spread out across many industries and companies, similar to a stock portfolio. 

Benefits of Venture Capital Investing

Venture capital offers some excellent rewards including a high return on investment or ROI that can be between 10 and 100 times the original investment.

This type of investing also allows investors to diversify their portfolio so they can offset risks with more conservative approaches in their funds. 

The best and most successful venture capital funds are those that do extensive research into the companies they are investing in and who have some diversification. Some funds specialize in particular industries, like technology. 

Those types of funds come with advantages and disadvantages. An advantage is that a fund that specializes in one sector understands that industry better than most. A disadvantage is that the lack of diversification brings extra risk if the whole industry collapses.

Benefits of Using a Venture Capital Firm

Using a venture capital firm rather than going it alone offers some investment protection. Those who run a firm like Flux Capital research startups and have enough diversity to spread risk. 

Another benefit of using a venture capital firm is that investors don’t need to be accredited. However, the Securities and Exchange Commission (SEC) does limit the amount that non-accredited investors can contribute annually. There are also limits placed on individuals, determined by their income and net worth. 

[Alt Text: A phone tracks metrics, representing the growth that Ari Stiegler and Flux Capital can bring]

The Difference Between an Accredited and a Non-Accredited Investor

The primary difference between an accredited and a non-accredited investor is income. Accredited investors must have either a minimum $200,000 annual income or net assets that are valued at a minimum of $1 million.

Non-accredited investors have less than that, but how much they need to qualify in a venture capital fund depends on the fund. 

Considerations for Investment

Those seeking to invest in venture capital should consider a few things before they put money into it. First, they need to decide how much they can afford to invest. Everyone has their limit and this can determine which fund to invest in or whether a private investment would be more suitable. 

Second, potential investors should look at when ROI is expected. Some startups, like growing tech startups, may have a quick ROI if they get a large contract or create a product that becomes the gold standard for the industry. Others may take years to see a return. Investors need to understand how much time they can afford to wait. 

Finding a Fund

Venture capital funds abound, but potential investors should look for one like Flux Capital which has a history of success. They should also check the venture capital firm’s past investments to see the ROI and the founder's or CEO's background, to lessen the risk as much as possible. 

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Investing in venture capital can make some uncomfortable. Ari Stiegler of Flux Capital shares how to lessen the risk. Click for more.