Question #1 when vetting a private company … is inflation a threat to this asset class? … what will happen if stocks roll over? … a “public” example of “private” return potential

 

When’s the last time you sunk $5,000 into an investment and it turned into $180,000?

That’s a gain of 35X.

It’s also roughly what private investing specialist, Cody Shirk, has enjoyed with one of his recent, private deals (I suspect the amount invested was somewhat larger than $5K).

Yesterday, we featured the first in a two-part Digest series centered around Cody (click here if you missed that issue).

We did this because the long-time barriers to being a private investor have been removed. As recently as just a few years ago, this world was reserved only for the wealthy. No longer. Today, even regular investors can access the private markets.

Frankly, this is huge, because private investments offer the potential for vastly greater returns than just about anything you’d see in the public markets. The 35-bagger just mentioned is one such example.

Today, we continue with the second installment of our two-part series.

There’s lots to cover, so let’s keep the introduction short, and get right to it.

***Private deal red flags, time-frames, and what to expect if the public stock market rolls over

Jeff: For newer private deal investors, are there any immediate red flags you would suggest they look for that would immediately disqualify a potential investment?

Cody: Valuation. Let’s say you have $1,000 to invest into a company. If a company is already valued at $100 million, basically your $1,000-part of the $100 million is going to be very, very small.

So, in order for you to 10X your investment, that company has to sell for $1 billion dollars. 100 million times 10 equals $1 billion.

This sounds like a silly exercise, but it’s something that I still do. I’ll look at valuation immediately and say, is this worth my time? Is there really that much upside?

Jeff: It’s funny how you casually mention a 10X return. Most investors in the public markets are thrilled if they can get a 1X, or 100% on their money.

Cody: I get it. But if I’m going to do an investment, I’m not getting pumped over a 30% return over however many years. If I’m going to be doing the work, if I’m going to be working hard to really figure out what investment is the best, I want something that has huge potential.

Jeff: What is a reasonable suggestion for the amount of time for capturing these monster returns?

Cody: The industry standard is three-to-10 years, and essentially what that means is that the average company will exit somewhere in that range.

Now, that vastly changes depending on what industry you’re focused on, depending on who the founders are, depending on how fast their funding has been.

Plus, the past couple of years have seen very quick exits, meaning the path from initially funding a company to going public has been very quick, so investors have had a lot of liquidity.

I’ve had some investments this past year that have exited in less than six months. 10-20X returns in less than six months. And that’s typically unheard of, but we’re in a market right now where there’s some very interesting things going on.

Jeff: Switching gears, any thoughts on inflation and private investing?

Cody: The big question right now, or fear, is inflation. I’m nervous for inflation if I’m holding cash, but I’m not nervous for inflation if I’m invested in a company that’s doing great business.

If a business has customers, is generating revenue, and is continuing to do that in an upward trend, I would rather have my money invested there than any other place, because any other place is just a gamble to me right now.

Jeff: I would say that’s especially true if the private company has pricing power and is able to raise its prices, passing along higher inflation to customers.

Cody: Exactly. So, it’s almost like the best way to, I don’t want to say hedge, but just track the market without actually being directly exposed to fluctuating prices.

Jeff: So, many investors fear inflation today, but there’s also the fear that that the public stock market is overdue for a crash – and this time, a lingering bear market that sticks around far longer than what we saw last year.

If that happens, would there be a similar crash in the private markets?

Cody: If you have money in a private company right now, it is going to be a little bit risky because the expectation is that your investment should be acquired or going public.

So, in order for a company to get acquired or go public, typically we should be in a bull market. If we do have a market crash, these companies that should be acquired or go public probably will not.

Instead, they’ll need to operate privately for a while, which could mean they will need to go out and raise more money from private investors, which could mean a down round. By that, I mean they’re raising money at a lower valuation, which means previous investors kind of get screwed.

Now, that’s from the eyes of an investor who currently has their money in private investments. If you’re new to this market and just getting started, this is actually a very interesting time.

In fact, it’s an exciting time for me because I have not made many private investments over the past year. That’s because companies are overvalued, in my opinion.

You have these stocks, Tesla, or whatever, that are so overpriced that they have tons of money. So, they can go out and acquire smaller, private companies. And that raises the market value of these private companies.

We’re seeing these inflated valuations. That’s not to say there aren’t great opportunities out there right now, but that is to say that, hey, when we do have a correction, when we do have some “back to reality” valuations, there will be some incredible deals.

Jeff: Cody, this has been lots of fun. Thanks for taking the time to join us.

Cody: My pleasure.

***As we wrap up, let’s look at a simple, “one-click” way to be a private investor

Though there’s no replacement for investing in a diversified portfolio of private startups, an alternative is a publicly-traded, private equity company, like the Blackstone Group (BX).

But as I’ll show you, even the “public” returns from this “private” investment are extraordinary.

Well, below we look at the S&P 500, the iShares Tech-Software ETF (IGV), which is a good proxy for tech, and Blackstone over the last decade.

In short, Blackstone’s return is in a completely different ballpark – even from tech. See for yourself…

Blackstone has returned more than 1,730% compared to 766% for IGV, and just 288% for the S&P.

This is the power of private investing.

As we noted yesterday, your homework is to check out the platforms Cody referenced in yesterday’s Digest (WeFunder, Republic, and SeedInvest). Familiarize yourself with deals. Get the lay of the land. As your financial situation permits, begin investing.

This asset class is where the real wealth is made.

We look forward to helping you navigate this world in Digests to come.

Have a good evening,

Jeff Remsburg