by Simon Black
Five years ago, a company called Yo raised $1.5 million at a $10 million valuation.
What did investors and end-users get for this much money? An app that allowed users to send the message “Yo,” (and NOTHING else) to their friends.
It didn’t take long for the company to blow through all that cash in typical Silicon Valley manner, and let go of all its employees.
At the peak of investing hysteria, it was that easy to scoop up a couple million dollars to fund your company, no matter how worthless the idea.
With so much easy money from low interest rates and booming stocks, people were dumping money into anything with a pulse.
There’s still a lot of money out there today. But investors have tightened their purse strings and become more discriminating with where they put their money.
Last year’s venture capital was distributed to fewer businesses, and it went to more established companies over startups.
It hasn’t been this hard for early-stage companies to get venture capital investments since 2011. And the number of SaaS (Software as a Service) investments is also at a seven-year low.
With the stock market looking shaky, and investors starting to worry, people are focusing on removing risk, not diving into uncertain new businesses.
But anyone looking to start a company shouldn’t feel like the chance to get funding has passed. There is still one big pool of money that NEEDS to be invested.
We’ve talked about using Opportunity Zones as a way to save big on capital gains taxes. People are dumping their gains into Opportunity Funds to defer taxes after exiting asset classes at almost all-time highs.
In order to take advantage of the tax savings, those funds need to invest that capital inside one of almost 9,000 designated underdeveloped areas in the US called Opportunity Zones.
Right now there are billions of dollars sitting in Opportunity Funds… and the clock is ticking. Opportunity Funds have to deploy 90% of their capital in Opportunity Zones within 6-12 months of receiving the money from investors.
If you have ever wanted to start a business, but worried about having to raise a lot of money, or attract investment capital, this is your chance.
Starting a business in an Opportunity Zone is a way to tap into billions of dollars of capital.
Instead of paying a huge tax bill, investors can put their gains into equity in your company and defer paying capital gains tax until 2026 (plus get a 15% discount if they hold the investment for seven years).
In the meantime, all that money that would have gone to taxes will be growing your company instead.
And a huge plus to investors is that any growth they spur in your business will be tax-free if they hold the investment for ten years.
That means you and your investors can focus on long term growth– not cheap gimmicks that don’t last.
Plus the IRS guidance on Opportunity Zones keeps getting better.
The whole point of these Zones is to bring investment and jobs into neighborhoods that need it most. So the IRS says a business must be active (you can’t just sit on real estate without improving it), and must earn 50% of its income inside the Opportunity Zone.
But the IRS gave three different ways to satisfy the income requirement:
- Either your employees (and independent contractors) spend at least 50% of their work time within the Opportunity Zone.
- Or at least 50% of the wages of your employees (and contractors) come from performing services within an Opportunity Zone.
- Or at least 50% of the income of your business is generated by tangible property located in an Opportunity Zone, and the management or operational functions are performed within the Opportunity Zone.
This leaves the door open to all sorts of businesses.
A storefront business would easily apply, because all sales are in the OZ.
But even something like a landscaping company could work even if all of its clients are outside the Zone, as long as the physical equipment and business headquarters are located there.
Keep in mind that you don’t even have to employ anyone other than yourself.
And there is a wide range of business possibilities. For instance, many of these Opportunity Zones are in beautiful wilderness areas that would be perfect for nature tourism.
Bigger ideas can work too.
The Pearl Fund is a new Venture Capital Opportunity Fund looking for tech-startups with potential to grow at least 10x. Its ultimate goal is to fund “the next Apple or Google.”
But tech startups will have to be careful to deploy the capital properly to meet the requirement of doing business within the Opportunity Zone.
Still, it could be worth the extra effort to attract investors. If you go from an initial $1 million investment to a $100 million valuation in ten years, your investors will pay no capital gains on the $99 million growth.
But you do have to act quickly. A lot of the capital will flow into these funds by the end of the year, because after that, it will be too late to get the 15% discount on deferred capital gains.
And remember, these funds MUST invest their capital within a year of receiving it, which means they are hungry for good businesses to fund.
So this could be the perfect time to start your business.