Chris’ note: Our mission at The Daily Cut is to help you level the playing field with the “One Percent.” And we’re jumping right into that in 2021.
Today, I’m sharing with you an insight from our tech expert and early-stage tech investor, Jeff Brown, about one of the most lucrative investing strategies in the world. It’s all to do with a market typically reserved for the ultra-wealthy… where it’s not uncommon to see quadruple- or even quintuple-digit gains.
But as Jeff reveals below, he’s finally found a way for everyday investors like you to get in on the profits…
So you want to be an angel investor?
I don’t blame you.
Angel investors buy into private companies – before they reach the public markets such as the New York Stock Exchange or the Nasdaq.
This is one of the most lucrative investment strategies in the world.
I say this from personal experience. I’ve invested in dozens of private early stage tech deals over the years.
I’ve invested in four “unicorns” – private companies valued at $1 billion.
I’ve also invested in two “decacorns” – private companies valued at $10 billion.
By my count, I’m sitting on returns of 936%, 14,000%, and even 25,000%.
I’m not the only one making these kinds of returns in private markets. There are famous examples of private investors and venture capital (VC) firms making a fortune with early stage companies, too.
Private investors in Uber (UBER), for instance, turned $30,000 into $149 million… $50,000 into $248 million… or even $510,000 into $2.5 billion.
Investing in private deals can be highly lucrative. But it’s a dark art. It involves high-risk decisions.
Angel investors are also always dealing with imperfect and incomplete information. There are no Securities and Exchange Commission (SEC, the main public stock market regulator) filings. Often, the product doesn’t even exist yet. Sometimes I don’t even have proof that the market exists for the product or service.
Not only can I not be risk-averse… I have to embrace risk…
Not everyone is comfortable with this kind of investing. In fact, few are.
But I’ve learned a ton during my years as an angel investor.
So if you’re interested, I can offer a few rules I’ve learned about how this market works… Feel free to print these out and pin them beside your computer for reference.
The first rule seems obvious. But you would be surprised how many angels get stuck right away because they can’t assess the value of the technology or the market opportunity.
Does the technology make sense? Is there a clear vertical (i.e., a narrow market where the tech can flourish) for this tech to be deployed in? Is the company doing something entirely new and unique? Or is it just moderately better than what exists in the market today?
For instance, I’m a private investor in Ripple Labs, a blockchain-based payment services company. Without getting into the specifics, this company has radically transformed how central banks, private banks, and multinational corporations transact aross borders. It’s a brand-new technology, not a small upgrade to an existing system.
Understanding the core technology and the market opportunity is essential before making any investment as an angel investor. Investors who can’t correctly answer the questions I mentioned earlier end up making bad investment decisions over and over. They lose money. They’re gambling rather than making informed investment decisions.
Investing in private companies is very different from investing in public markets.
Investors can purchase shares in public companies one day and then turn around and sell immediately if they want. That’s because public stocks are widely traded – or “liquid,” in Wall Street-speak.
With private investments, that’s not an option… They are, for the most part, completely illiquid.
Private investors must wait for what’s known as an “exit” to take money off the table. Typically, an exit means the private company either is acquired or goes public. This allows private investors to sell shares to the public markets.
As an angel investor, you may be sitting on gains as high as 250,000%. But if the company never exits, guess what? All those gains are just on paper.
If you want to be an angel investor, you’re going to have to be patient for these exits. Very patient…
Your first major exit will likely happen within seven to eight years. But private investors have been known to sit on a deal for 10, 15, or even 20 years waiting for an exit.
The longest time I had to wait for an exit was 15 years. The company finally went public. I profited on the investment, but it wasn’t large enough to justify the 15-year wait. Some early stage investments are like that.
Do you have the emotional fortitude to wait that long for a return?
If you want to be an angel investor, you’ll have to cultivate patience and be completely comfortable with the chance that you’ll lose all your money in some deals.
This is something I encourage for all investors… even when investing in publicly traded companies.
You need to build a basket of early stage companies that all have great investment return potential. In other words, you need to let the numbers work for you.
As many as 75% of VC-backed companies never return money to early investors. That means most investments VCs make fail.
An important rule to being successful as a private investor is to cultivate a large basket of private deals and let the statistics work for you.
Many of the investments will fail completely. Some might return your money with modest profits. But a small percentage can go on to deliver life-changing returns. It’s these “jackpot” investments that make up for all your losses and then some.
That’s why the basket is so important.
While I may have opinions about which companies are going to deliver extraordinary returns, there’s really no sure way to tell which ones will.
As I said, I estimate I’m sitting on a return of more than 250x on one private deal. When this company has an exit, my return will more than make up for the small number of losses I’ve taken on other deals.
Your portfolio should have a minimum of 30 companies. A more robust portfolio would aim for a broader basket of 100 companies. The more quality private investments you make, the better your chances at life-changing gains.
And investing over an extended period will always work to your advantage as an angel investor. Don’t make all your early stage investments at once and then wait for them to mature over the 5 to 10 years that follow.
Technology is advancing at an exponential pace. So it’s vital you get exposure to new companies that are working with the most advanced technology every year.
We can think of our investments in “cohorts” we make each year over a span of years.
Now, here’s the bad news…
Unless you’re well-connected and have a very large amount of capital to deploy, breaking into the private investing space is difficult… perhaps even impossible… for most folks.
This has been one of the most unfair dynamics in the investment world over the past decade.
Bleeding-edge tech companies with the potential to be the next Amazon.com (AMZN) have been mostly locked away from everyday investors. They are intentionally kept private for extended periods of time.
This allows well-connected venture capitalists and private equity firms to capture the majority of the upside for themselves. Once a company finally goes public, there is very little upside left for everyone else.
So I decided to do something about this inequity.
For the past five years, I’ve been quietly investigating how I can deliver VC-like returns to everyday investors. And now I’ve finally come up with a way for regular investors to get in on “pre-IPO” shares (shares that are still private, before a company’s initial public offering, or IPO).
It’s something totally new to most of my readers. In fact, I’d bet 99% of investors have never heard of this before.
You don’t need to be an accredited investor to take part. And all these investments can happen with just a few clicks in your brokerage account.
If that all sounds too good to be true, I encourage you to tune in for my Pre-IPO Code Event on Wednesday, January 13, at 8 p.m. ET.
I’m hosting this special presentation to give you all the details on these investments. I don’t want anyone to miss out on this.
I hope to see you next Wednesday evening. Go right here to reserve your spot.
Editor, The Bleeding Edge