5 Keys for Startup Investors

Hundreds of thousands of businesses are formed every year. Many of them are in significant need of capital, presenting opportunities for investors.

While startup investing is not for everyone, those with a high risk tolerance can find it a stimulating and potentially rewarding pastime. The possibility of getting in on the ground floor of the next Uber or Facebook, speculative as that might be, can be compelling.

Suppose you hear about an exciting new company looking for investors. You are aware that a majority of startups end up failing within the first few years, but you think this one could hit it big. What do you do?

1. Check out the Management

You ultimately are investing not just in a product or an idea, but in the people running the company. No matter how innovative or promising the business concept may seem, the enterprise is unlikely to succeed without capable management. You should assess not only the founders, but also those promoting the investment. An initial review often can be done online. In the case of those with professional licenses (such as brokers, accountants, and attorneys), you can check their license status and any disciplinary history. You want the people running or associated with the company to not only have clean backgrounds, but also a record of success in other ventures. Look for qualities such as experience, intelligence, creativity, integrity, discipline, and leadership ability.

2. Determine How the Business Will Make Money

Lots of companies are based on an intriguing concept. But the company must be able to translate that concept into a product or service that it can produce and sell at a profit and in sufficient quantities to generate reasonable cash flow. What is the startup’s monetization plan? What is the market demand? Who are the competitors? What is the marketing strategy? Is the business scalable, having the ability to grow rapidly without sacrificing quality or profitability? If the company is unable to provide good answers to these questions, its likelihood of success is dubious.

3. Rely on Advisors

If you are buying a used car, it is good practice to hire a mechanic to look the vehicle over to make sure you are not getting a lemon. The same principle applies in evaluating a startup. It is crucial to use qualified professionals, such as an attorney and accountant. Make sure your advisors are familiar with startups-an attorney specializing in personal injury cases probably will not be a good fit. You may also want to consult with experts in the business sector in which the startup operates. Your advisors will provide various insights you would not have on your own. They also will help you command respect from the company.

4. Thoroughly Research the Startup

Ask lots of questions and request lots of documents. If the business is concerned about revealing confidential information, it can have you sign a nondisclosure agreement. You and your advisors will want to examine the startup’s business plan, offering memorandum, financial statements, budgets, capitalization table, and corporate documents (articles, bylaws, prior investor agreements, etc.) If the documents are shoddy or incomplete, that is a bad sign. Be wary of internal financial statements; statements prepared by an outside CPA have more credibility. Audited financial statements are best, but are less common because of their expense. If your investigation raises red flags, insist on complete explanations.

5. Review the Investment Documents

Your advisors can be of great help here. At the very least, you want to be fully informed as to how the deal is being structured and what rights and obligations you and the company will have. Your attorney can advise you as to what document changes might be in your best interests and help you negotiate with the company. Your accountant can let you know whether the valuation seems reasonable. Do not proceed unless everything is fully documented. You should not invest based on a handshake or mere verbal assurances.

Startup investing requires patience and hard work. Although there are no guarantees, you can reduce the risks and boost the chances of success by following the principles discussed above.

Winning Bidding Strategies – From The Tax Lien Lady

Recently I went to a tax sale in New Jersey. It was a very small tax sale in a small rural borough. There were only 7 properties in the tax sale and I was able to get 2 liens at 10 and 12 percent. That’s not bad at all in today’s competitive tax sale environment in New Jersey. Usually at a tax sale like this I come away empty handed because I’m not willing to pay premium for small tax liens.

Most of the liens in this sale (all but one) were under $600. In some states, local governments sell utility liens at the tax sale right along with the taxes. Anything that is paid to the local municipality can be sold as a tax lien at these tax sales. Most of these liens were for either water or sewer delinquencies. Only one lien included taxes along with delinquent sewer amounts and was just over $1700. All of the others were for either water or sewer amounts or both.

The trend in the last couple of years in New Jersey has been to bid premium on these small utility liens. Investors are willing to pay premium on these liens in order to pay the subsequent taxes. But on small utility liens, you usually do not get to pay the subsequent tax payments, but only the subsequent sewer or water amounts which are much smaller than the tax amounts. Keep in mind that in New Jersey, the interest on the lien is first bid down to 0% before premium is bid. Although you do get your premium back if the lien is redeemed in 5 years, you do not get interest on the premium amount bid or on the lien amount. You do get a small penalty on the lien amount and the statutory interest rate (18% once the tax payer is $1500 delinquent and 8% on anything before that).

What some tax lien funds have been willing to pay to get these small utility liens has gotten a little out of hand. In the last year I have seen them pay up to $1500 premium to get a small $200 or $300 lien. What that really amounts to is that they are making such a small blended return on their investment that it’s really not worth it at all; especially for the individual investor.

So how was I able to buy 2 small liens at decent interest rates at the last tax sale I attended? First I went to a small sale that had only 15 liens on the original tax sale list and there were only 7 properties left on the list on the day of the sale. Secondly, there were no really big liens in this sale; the largest one was under $2000. Large liens bring out all the competition.

Third, you’ve got to know when to stop bidding. I actually was a little lucky at this sale as there was only one other bidder representing a tax lien investing fund company. I bid on every lien except one, but I didn’t bid him down too far. If you don’t get greedy and insist on bidding every lien to your bottom line, then the other bidders might not bid every single lien down to their bottom line.

The forth thing is that I was happy to get the crumbs from this sale. What I mean is that the 2 properties that I got liens on were the worst properties in the sale. One was bank owned and falling apart. It hadn’t been taken care of in years. You can see a picture of it on the cover of this issue. You can’t see it from the picture, but it also had junk piled up in the driveway and backyard and a dilapidated, falling down shed in the back. The other house was vacant and about to be foreclosed by the bank. It was also a very small house with no garage, in need of some TLC and a lot of updating.

If I had decided not to bid on these properties because of their condition, I would have missed out on a couple of good liens, and the only liens that I would have been able to get. You have to be willing to take what the big boys don’t want or are willing to let go. These properties might be vacant and in terrible shape but they are still good liens. The bank is going to redeem them at some point, but probably not until they sell them which could take a long, long time. That will give me time to pay subsequent utility payments (remember these were small utility liens, add to my investment and make more interest!

Things to Remember While Investing in Art

The Indian art market is divided into two segments – Modern and Contemporary. Modern segment comprises of masters like M F Husain, S H Raza, F N Souza, VS Gaitonde, Amrita Sher Gill and more. Contemporary segment is comparatively young, around last 30 years. Alternately, Painters who were born after 1930.

1. Do your own research.

One of the first things to do before buying art is to empower yourself by reading up on art, visiting local art galleries, meeting artists/ collectors and other people who are actively involved in this field. Talk to artists, consultants and curators to get insights about the functioning of the art market and to also network with like-minded people intending to buy art also known as “Collectors”.

There are international auction houses like Sotheby’s and Christie’s which focus on Indian art. Also there are domestic auction houses like Pundoles, Asta guru and Saffron Art. You can contact dealers and galleries. You can also approach an art advisor. You can end up paying a consultant 2-5% fee for expensive works. The service for smaller works may cost 5-15% of the value of the artwork. Fees also depends upon rarity of art work.

Ensure that the dealers and galleries sell genuine/ authentic works. Art market is full with fake artworks, so make sure you do proper research before buying the art. Check few important documents while purchasing art like authenticity guarantee, a provenance certificate, that is the previous owners of the artwork, condition report, publications (if any). Nowadays, many auction houses like Saffronart do not provide authenticity certificate. While buying from the auction houses make sure you understand buyer’s premium and the total cost incurred by (delivery charge, taxes, etc). Usually when you are buying through a dealer, only the seller has to give commission to the dealer and not the buyer. This can also be happen when you buy from a gallery. Again this depends on dealer, gallery and artwork involved.

2. Quality, not quantity.

Invest in fewer pieces that are higher quality. Not all pieces done by a renowned artist are masterpieces. You must take help from experts to recognise a masterpiece. For instance, an oil on canvas is perhaps the most expensive form of painting. Then is an acrylic on canvas, followed by an acrylic on paper. Then would follow watercolor on paper and charcoal on paper.

3. Buy art that you like and understand. Allocate a budget.

Buy art that you like. It is something you may keep for a lifetime, as you don’t know whether you will be able to sell it or not. Unlike other forms of investment such as stocks, it is worth remembering that art has an aesthetic quality that can, and some say should, be appreciated outside of its monetary value. Art is a long term investment. Also, prices of a renowned artist’s works do not necessarily shoot up when he dies. Art should not form more than 5% of your total investments.

4. Maintaining the artwork

Once you buy the art, you also need to incur the maintenance cost like insurance, storage cost. Also you need to take care of the artwork, like art should be stored in an environment that does not get direct sunlight.

5. Investing in emerging artists

Experts say you can look at investing in emerging artists whose works are available from Rs 1 lakh onwards. Though they may be a good option, it is difficult to predict who will make it big in the future. For this, you need to take advice from experts in the field.

6. Prints, limited editions

If you have limited budget, you can also invest in limited edition prints like serigraphy, lithography.

7. Evaluating an artwork.

LPAs in Slow at Writing Development Plans in the UK

British planning system changes should speed up housing delivery in an orderly fashion. But developers may be better at designing growth plans.

Two very important changes in how residential properties are developed in the UK have been implemented in the past few years. First, the Localism Act of 2011 enabled local communities to have a greater say in what is and is not built in their neighbourhoods. Secondly, the National Planning Policy Framework, published by the UK Department of Communities and Local Government in 2012, is widely regarded as a much-needed simplification of the process by which towns determine and implement their development objectives.

The backdrop to all this of course is the tension between a critical housing shortage in the UK and a long-standing culture of greenfield preservation. In other words, we need houses – more than one million residences to meet pent up demand of a growing population – and yet the country has long determined it wanted to avoid American-style suburban sprawl. Princess Anne herself has weighed in on this in support of the efforts of the Council for the Protection of Rural England, which advocates for incremental development on a small scale over large blocks of new homes, numbering in the thousands, in a single development.

The NPPF essentially tells local planning authorities that they need to think through and structure how development should unfold in their jurisdictions. It also expresses the need to enable development, as the housing shortage in the UK over the past decade and for some time to come, requires that new homes be built. Of course with all forms of development (including that driven by strategic land developers), there are opposing sides and differing opinions on how that should take place.

Which can mean that how development unfolds is a matter of influence. Ideally, good ideas lead the way – identifying where development will be smartest, where the municipality can benefit the most from new homes and new neighbourhoods. Under ideal conditions, new development will support the local economy and local infrastructure. Done right, everyone benefits.

So how are local planning authorities doing at this? The Department for Communities and Local Government provides the Strategic Housing Land Availability Assessment, a guide to determine where housing might make the most sense from a variety of perspectives (sustainability, economics, town centre vitality, transport, protection of Greenbelt lands, conservation of natural and historic environments, etc.). Presumably, the 48 per cent of local councils that had a plan written up by the end of 2013 used this and other guides to form their plans.

But this means that about 52 per cent of councils lack such a plan, even in 2014 (reportedly, about half of them are at work on something). Some say this leaves those un-planned areas subject to developers’ whims.

Further, it should be noted that many councils have out-of-date plans, based on pre-NPPF dictates. Those plans often do not take into account the critical housing shortage and the NPPF-driven requirement that the need to build be taken into account. That often is the reason why developers win on appeal, that the plans put forth were unrealistic and out-of-date.

Why are local councils failing to develop true, NPPF-compliant plans? According to a 2014 review of 109 local plans by TRIP (Targeted Research & Intelligence Programme) and Nathaniel Lichfield & Partners (an economic planning firm), “the key reason Plans have stalled is the policy requirement to meet objectively assessed needs with the housing target remaining the key battleground at examinations. Just over half of Plans propose less housing than had been proposed by former Regional Strategies, but a third of sound plans end up having to increase their target to pass examination.”

In other words, local councils are having trouble planning enough to alleviate the housing shortage. And in many of the districts studied by TRIP, a lack of information or out-of-date evidence plagued the plans that already exist.

Developers – such as joint venture partnerships of investors who buy and build on raw land – answer to market needs. Which means they do the work at assessing if new homes will sell. In all UK towns they still must get planning approval, then cover costs of new infrastructure demand (often through the Community Infrastructure Levy). What should be noted is that, as of April 2014, house building activity in the UK rose for 15 straight months while demand for property remained strong, according to data firm Market and the Chartered Institute of Purchasing & Supply.

House building continues to draw investors, such as those interested in strategic land (land that requires LPA approval for a use change). This is where the value of the land can increase considerably as it is prepared for development. Individuals who find the investment opportunity worthy of investigation should consult with an independent financial advisor to determine the weight and place of land investing in an overall wealth portfolio.

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