If you’ve had the chance to explore other online investment platforms focused on the early stage company space, you may have noticed SeedInvest’s target minimums (also known as escrow target, escrow minimum, or funding goal) are 10X – 100X higher than the $10K – $25K target minimums established elsewhere. There’s a good reason for that and something every investor should consider.

 

What’s the big deal with target minimums?

Let’s start with an example:

  • Company A is looking to raise $500,000 to build a sales & marketing team as well as invest in R&D for their next product. If their escrow target is set at $500,000, they would need to raise the full $500K to access investors funds. If, on the other hand, the escrow target is $50,000, they can start spending investors’ money with only $50K raised – even if they are not able to raise the full $500K needed to expand their business and build shareholder value.

 

So, who sets the target minimum?

Traditionally, a venture capital fund leading a company’s financing would stipulate a minimum amount the company would need to raise in order for them to fund their investment. Although funds wouldn’t necessarily always be held in an escrow account, establishing the minimum amount raised for a first close essentially serves the same purpose.

In the context of online venture capital, it depends on the platform. Platforms like StartEngine and Wefunder let companies pick the minimum amount they are willing to accept before being able to access investors’ funds. And not surprisingly, some of the lowest minimums on the market are found on these platforms.

Please keep in mind that nearly all online investment platforms only make money when the funds raised are released to the fundraising company. If the platform allows for low target minimums, they get paid faster. Allowing for low target minimums also allows online investment platforms to have a high “success rate”, because they technically raised a successful offering – even if the company fails just a few months after closing their round.

 

What makes SeedInvest different?

SeedInvest does not allow the fundraising companies to decide the target minimum, instead the number is decided on towards the end of our due diligence process.[1] Our Investment Committee establishes each company’s target minimum by reviewing a company’s current cash position, historical financial performance, projected future performance, and use of funds, among other factors.[2] Our goal is to ensure that – should the company’s offering be successful – they have at least 9-12 months of runway to refocus on growing their businesses before a potential subsequent financing event.[3] As a result, our target minimums are typically 10X – 100X higher than those found elsewhere.

Investing in start-ups is inherently risky. Most start-ups will fail and only a select few will deliver outsized returns. It is important that investors are afforded the advantages traditional VC investors have wherever possible. In ensuring investors are able to deploy capital into companies with a fighting chance, setting the right target minimum is an important step towards achieving that end.[1]

 

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[1] SeedInvest’s due diligence process is no guarantee of success or future results. All investors should carefully review each investment opportunity and cancel their subscription within the allotted time-frame if they do not feel comfortable making any specific investment based on their own DD. Learn more about due diligence in the SeedInvest Academy (/academy/how-to-assess-a-startup-investment)”and"our vetting process in our FAQs (/faqs)

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[2] SeedInvest’s selection criteria does not suggest higher quality investment opportunities, nor does it imply that investors will generate positive returns in investment opportunities on SeedInvest. Investors are advised to conduct their own independent review of the offering documents and perform their own independent due diligence. The due diligence undertaken by others (including SeedInvest) can supplement but should not be a substitute for each investor’s own due diligence. Investors should take the time to understand and analyze the factors of the business that you consider important to your investment. Learn more about due diligence in the SeedInvest Academy (/academy/how-to-assess-a-startup-investment)"and our vetting process in our FAQs (/faqs)

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[3] This is not meant to be a guarantee of future results, and there can be no assurance that any particular investment strategy will be successful. Nothing contained herein is intended to predict the performance of any investment. In addition, SeedInvest’s diligence criteria does not suggest higher quality investment opportunities nor does it imply that investors will generate positive returns in investment opportunities on SeedInvest.

This post was written by Jonathan Casterline on February 18, 2021

Investor Education Series: Target Minimums


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