I recently invested in a fascinating medical technology company. I also thought a good friend who practices medicine in a related field might be interested in the deal, so I told him about it.
He thought the technology looked solid, and he was interested in investing. But then he asked me, “Is it FDA approved?” I explained that it’s not FDA approved yet. And that it’s an early-stage med-tech company that probably won’t be selling in the market for years to come (if at all).
He then replied that he wasn’t interested because the company’s first product wasn’t approved and on the market yet. I tried to explain that the early stage of the product’s development is the very reason it’s such an interesting investment opportunity with such big potential.
My friend didn’t budge. And I had to respect that. Some people are simply not built for investing early. These folks need all (or most) uncertainties removed before they can invest in something. I’ve found that many doctors and engineers operate this way. They need everything to be “complete” before they invest.
So even though this startup could potentially increase 50X to 100X in value if it gets the product right, many people will pass on investing because there’s a good chance the company might fail. And that’s perfectly OK.
As private investors, we have to figure out what level of risk we’re comfortable with. If you have a high risk tolerance and can wait up to 10 years for startups to pay off, early-stage investing might be right for you.
If you’re more like my doctor friend and need things to be complete, you may want to evaluate later-stage opportunities. But if you do go this route, I strongly suggest not investing too late. There are plenty of private company opportunities at the $500 million to $2 billion level, where the growth rate is still very high. This is what I consider the sweet spot for later-stage opportunities.
But once you get up into the $5 billion to $20 billion valuation range, growth generally starts to slow down quite a bit. At this level, the companies should almost certainly be public already. Why aren’t they? That’s the question we should be asking when looking at late-stage public companies.