Chris’ note: Our tech expert, Jeff Brown, is about to kick off his Silicon Valley “Unlocked” event. It’s about an alternative way to play the booming IPO (initial public offering) market. As I’ve been spreading the word about this week, he reckons it’s one of the last bastions of serious wealth creation in America.
Even though Jeff is getting started just hours from now, at 8 p.m. ET, there’s still time to sign up and attend. So go here now to secure your free spot. Then read on below as he shares the three keys to successful IPO investing he’s developed over his more than two decades as an early-stage investor.
So you want to be an early stage tech investor?
I don’t blame you…
Investing in bleeding-edge tech companies ahead of the crowd… when so much growth lies ahead… is one of the most lucrative investment strategies in the world.
I say this from personal experience. I’ve invested in dozens of early stage tech deals over the years.
These include four “unicorns” – private companies valued at $1 billion or more. I’ve also backed two “decacorns” – private companies valued at $10 billion or more.
Few people are comfortable with this kind of investing. But if you are, it can be wildly profitable. By my count, I’m sitting on returns of 936%, 14,000%, and even 25,000%.
And over my two decades as a private investor, I’ve learned three keys to success I want to share with you today.
I use these three keys every time I invest in early stage tech. Now, you can use them too…
Success Key No. 1: Know the Fundamentals
The first key may seem obvious. But you’d be surprised how many early stage tech investors get stuck right away because they can’t assess the fundamentals of what they’re investing in.
Does the technology make sense? Is the company doing something unique? Or is it just moderately better than what exists in the market already?
I’m a private investor in Ripple Labs. It’s a blockchain-based payment services company. It’s transformed how central banks, private banks, and multinational corporations transact across borders. It’s implemented brand-new technology, not a small upgrade to an existing system.
When a company revolutionizes a sector like this… with little to no direct competition… that makes it ripe for huge growth.
Grasping the core technology… and the market opportunity… is essential.
It’s also essential to focus on valuations.
I was looking at one early stage tech company yesterday that went public trading at 35 times annual sales. That’s another way of saying investors are paying $35 for every $1 of the company’s sales over the past 12 months.
How can a company be worth that much? It can’t.
Even if that company quadrupled its sales right out of the gate, it would take nearly nine years for you to earn your money back (35/4 = 8.75).
And last year, cloud-based data warehouse firm Snowflake (SNOW) went public at a price-to-sales ratio (P/S), as it’s called, of 177. That means investors were paying $177 for every $1 of the company’s annual sales.
If you’re getting into early stage tech companies at nosebleed valuations like that, you’re not investing. You’re speculating. You’re hoping somebody else will pay an even higher price when you go to sell.
That’s not my objective. My team and I focus on the best early stage opportunities in bleeding-edge tech. And instead of passing along hyped IPO stocks with sky-high valuations, we hunt for misunderstood and undervalued early stage stocks.
That’s where the largest investment returns come from. We find these fabulous stocks with bleeding-edge technology or bleeding-edge therapeutics that most people don’t yet understand. So valuations are still low… and the upside potential is still huge.
Success Key No. 2: Be Patient
With early stage investing – whether that’s in the pre-IPO market or in stocks that have recently IPO’d – you need to play a long game.
The “Penny IPO” strategy I’ve developed, for instance, involves buying stocks after they IPO… and ahead of very specific catalysts.
For reasons I’ll explain during my Silicon Valley “Unlocked” event tonight, by waiting until after the initial IPO hype has died down, you can often get in on these early stage companies at lower valuations than the venture capitalists who got in during private funding rounds.
So being patient is key. By waiting a few weeks… or a few months… after an IPO, you can tilt the playing field toward you as a regular investor.
Success Key No. 3: Diversify
This is something I encourage all investors to do. But it’s especially important if you want to maximize your chance of striking it rich on early stage stocks.
Don’t invest in just one stock. Instead, build a mini portfolio of early stage companies that all have great investment return potential.
Many of your investments will fail completely. Some may return your money with only modest profits. But if you make the right moves, a small percentage of them will deliver life-changing returns.
It’s these jackpot investments that make up for all your losses and then some.
So you want to have a large basket of private deals and let the statistics work for you. Simply put, you want to be diversified.
I have strong beliefs about which companies will deliver the most extraordinary returns. But there’s no way to be certain which ones will be jackpots.
As I said, I reckon I’m sitting on a return of 25,000% – more than 250x – on one private deal. When this company lets me exit, my return will more than make up for the small number of losses I’ve taken on other deals.
Your pre-IPO portfolio will ideally have a minimum of 30 companies. If you can build a portfolio of 100 companies, even better. The more quality private investments you make, the better your chances at life-changing gains.
And investing over the long haul will always work to your advantage. Don’t make all your early stage investments at once. And wait for them to mature over the 5 to 10 years that follow.
A Final Invitation
I recently traveled to Silicon Valley to investigate a small group of companies that go public early… when they’re still tiny… and can give you the chance at six-digit gains. I’ve been crafting a list of the best of these “Penny IPOs.”
I’ll explain exactly what “Penny IPOs” are at my Silicon Valley “Unlocked” event tonight at 8 p.m. ET. I’ll even reveal the name of one of my favorites from my list. It’s a company I expect to go public in the months ahead. And when it does, you’ll want to pay attention.
The event is free to attend. You can reserve your spot here. I look forward to seeing you at 8.
Editor, The Bleeding Edge