Did you know that almost all investment returns are now private?
If you don’t invest early, you don’t make any money. If you’re going to invest in a tech company like Uber, you MUST invest while the company is still private or long before the company is sold.
A few years ago, Andreessen Horowitz, one of the world’s leading venture capital (VC) firms, produced a study and noted that “ALMOST ALL THE RETURNS ARE NOW PRIVATE.” The chart above shows that you used to be able to invest in a company like Apple or Amazon after they completed an initial public offering (IPO) and actually make money. These days, it just doesn’t work out that way. Why?
Venture capital and private equity are waiting longer to IPO.
Venture capital and private equity firms have lots of cash. Since they have lots of cash, they are squeezing every bit of upside out of their investments as they can. They keep a company private as long as possible, providing all the investment capital needed for the companies to grow. Then, when the company completes their IPO, the VCs and private equity firms cash out all of their profits and move on.
Where does that leave the individual investor?
These days, when fast growth tech companies sell or become a public company, allowing individuals to invest, the profits already have been squeezed out. Recent IPOs like Uber are a great example. Uber’s IPO stock price was $45 per share and immediately dropped to $40. As of the writing of this post, it trades at $30.93 per share. So, if you invested post-IPO, you have LOST over 30% of your investment.
Guess how much the early angel investors in Uber made? They returned 18,500 times their investment!
How can the individual invest?
Today, the big VC firms and private equity firms still have things pretty locked up. However, that is slowly but surely changing. The 2012 Jobs Act included SEC changes that allow companies to raise early capital publicly and allow individuals to get in BEFORE the VCs and private equity firms. Eventually, as investors become more familiar and comfortable with these mechanisms, many companies will avoid VC and private equity investments altogether.
In fact, this type of investing is now essential to get startups started. VC firms and even large angel investors are waiting to put larger amounts of capital into startups at a later stage. So, even though the VCs have more money than ever, they’re waiting to invest, leaving early stage startups to fend for themselves. This problem is even more prominent in the “flyover” states and cities like Louisville. Investors are conservative, so it’s very difficult for a startup to raise early stage funding.
By using equity crowdfunding, we can level the playing field. A great example of how this process works is a company called Knightscope.
Knightscope is a company that is building robotic security guards. The company got started by raising $20 million on SeedInvest from 5,757 investors using the Regulation A+ crowdfunding exemption. Since then, they have raised over $40 million through equity crowdfunding and are planning an IPO in the next 12 to 24 months. This is a fantastic example of how lots of small investors can make the profits instead of huge VC firms!
So how do you invest safely?
Multiple angel investors studies have shown that angel investing can be safe and VERY profitable. In fact, the AVERAGE angel investor in the United States makes a return on investment of 27%! However, in order to make those kinds of returns, the average angel investor invests in 12 startups over a 5-year period. You can download our angel investing workbook here: https://metrostart.org/littleangels-bigprofits/
So, the best way to make that happen is to invest in at least 2 or 3 startups every year. If you can invest $1,000 to $10,000 (or more, if you can afford it) in 2 to 3 startups every year, you eventually will begin to produce returns of 27% with 1 out of 10 investments producing 85% of your returns.
5 New Ways for Louisville to Invest and/or Raise Startup Capital
To help local investors make 27% returns and to help local startups raise capital, MetroStart soon will begin monthly meetings to encourage and educate local investors on how to invest in startups. We’ll also will be providing mechanisms to make it REALLY EASY. Here are a few:
1. We are working to educate and help startups accept direct investments using the new SEC laws.
For example, you can invest as little as $1,000 right now in Knightscope here: https://www.startengine.com/knightscope
You also can invest as little as $1,000 right now a local company, Blue222, that is building a global app to “Uberize” the business of real estate inspections: https://mailchi.mp/b008c614aab9/interested-in-investing-in-blue222
2. We’re working with the Sheltowee Business Network to promote the formation of a new angel investor group. You can learn more here:
3. MetroStart is partnering with a company called Paystr that is building multiple Paystr Jumpstart funds. These funds will allow you in invest as little as $10,000 in a fund that will be investing in 10 startups each. They will be curating and structuring the deals and making it easy for you to invest in 10 startups at one time.
4. We’re also working with a local company that is packaging up to 20 investments at a time with investment minimums of $25,000.
5. Finally, and this one is really cool, we’re working with a regional company that will allow you to invest as little as $100 in any startup you like and even automate the entire process. They will be a public company that manages the entire investment process for you, tracking all of your investments from startup to IPO.
So, make sure you’re subscribed to MetroStart and keep an eye out for our first investor meeting. I’ll be announcing it soon!