The Huge Potential of Early-Stage Companies

If you’re tired of the overhyped headlines, political posturing and negative thinking in general, I have the cure for you. Spend a few days around entrepreneurs who are fighting with everything they have to make their businesses successful and I guarantee you will come away feeling better about our future and our country.

I was lucky enough to attend the FUND Conference in Austin for a couple of days last week. We talked a little about this last Wednesday as I shared my thoughts on women-led companies, which are the hot trend in start-ups. The overall environment was incredibly positive – and it has to be when you think about it. One of the hallmarks of entrepreneurs is their belief in their businesses and its possibilities, so when you get hundreds of entrepreneurs and investors together, the focus is on making things happen instead of bemoaning everything that’s wrong.

I would call it a display of everything that is right about our country, a very welcome reminder that the entrepreneurial spirit that America was built on is alive and well.

All great businesses started with an idea and a passion to make that idea a reality, be it the local family-owned restaurant down the street or Apple (AAPL) or Amazon (AMZN). The FUND Conference at times was a bit like the television show Shark Tank, as entrepreneurs had a very short period of time to pitch their start-ups to venture capitalists (VCs) and angel investors.

As one listening to the pitches, I generally liked what I heard and saw. A few really impressed me while others fell a little short. One of my rules of thumb is that if you can’t explain your business to me in 30 seconds, you probably haven’t thought it through enough yet. I believe that some of the ideas I heard will end up being the next big companies, and I absolutely love seeing them firsthand in their very early stages.

Long-Term View, Big-Time Profits

The venture capitalists and angel investors lucky enough to put their money in the next big thing will make huge profits in the years ahead. Notice I said years and not weeks or months. To be a successful VC or angel investor, you absolutely must take a long-term view on your investments and have the ability to be patient. The “get rich quick” attitude is a sure path to failure when it comes to investing in private companies. They need time to grow.

Most people aren’t venture capitalists, but you can still invest in early-stage companies that are publicly traded. You can make a ton of money this way, too. There will be big short-term moves in these stocks, and investors make costly mistakes when they overreact to them, usually by buying on a move up or selling on the way down – exactly the opposite of what you want to do. That’s why it’s the long-term view that’s really important.

Even some of the biggest winners over the last two decades had hiccups in their early stages. Stocks such as Microsoft (MSFT), Amazon (AMZN) and others did not go straight up, and I guarantee you that a lot of investors got out early because of kneejerk reactions to short-term price swings instead of the correct mindset of investing for the long term. The truly mind-blowing gains are not made holding for a year – they’re made over years and even decades. Let me tell you, it’s worth it.

Take Microsoft for example. At the end of 1987, the stock hit a split-adjusted high of $0.49. It took a full two years to get back to that level before the company started to explode higher. Today, the stock is at $94, so a $5,000 investment at $0.49 would now be worth…wait for it…$959,184. But a lot of folks who did not have the patience to ride out a sideways investment for two years lost money – not to mention life-changing profits.

If you are able to take the mindset of the investors who put their money into Uber before it was Uber or Airbnb when it seemed crazy to allow strangers to rent a room in your house, then you can also be successful in early-stage publicly traded companies.

Investing in such companies is a combination of art, science and deep analysis. It’s also about face-to-face contact – asking tough questions of management and looking them in the eye when they answer. That’s what I love about conferences like the one I attended last week, and it’s why I also love to visit companies directly. In fact, I’m putting together my agenda now for a trip to Southeast Asia in the fall, and I’m already excited about what’s happening in some of those countries and especially the specific companies that are still evolving but hold enormous potential.

I’ll be sure to let you know what I find there, and I also want to talk more in the coming weeks about investing in early-stage companies. There are important considerations to minimize risk and maximize profits, and I want to be sure you know them all.

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