Early Investing

The Power of the Private Market

The Power of the Private Market
By Adam Sharp
Date July 31, 2020

Two amazing American companies went public (IPO’d) in 2004 — Google (GOOG) and Domino’s Pizza (DPZ). 

Since then, Google (now Alphabet) has become one of the largest companies in the world. Today it’s worth more than $1 trillion. Domino’s is currently valued around $15 billion.

So it might surprise you to learn that Domino’s shares have outperformed Google’s since the IPO, according to a CNBC analysis from February 2020. 

  • Domino’s return since IPO: 5,438%
  • Google return since IPO: 2,939%

Part of the answer to how Domino’s beat Google is that Domino’s paid a regular dividend. Those who reinvested the dividend and held tight did incredibly well. This is the power of compounding in action.

But it still seems odd, doesn’t it? It begins to make more sense when you look at how much the companies were valued at when they went public. 

Google’s market cap (valuation) was already large — at $23 billion — when it IPO’d. Domino’s was worth less than $1 billion when its IPO occurred. So stock market investors were able to invest when DPZ was a much smaller company.

This example highlights a big problem in our markets — hot tech companies are going public too late. Google was already a $23 billion bruiser by the time most people could invest. Investors in Google have done well, but there’s only so much that shares can increase from that high of a starting point.

The early, private investors in Google are another story altogether. It is estimated that Sequoia — a leading VC firm — made $4.2 billion from their $12.5 million investment in Google. Google’s few angel investors (who got in much earlier) probably made thousands of times their money, but it’s hard to find verified data on that.


Accessing Private Markets

Since 2004 when Google and Domino’s IPO’d, the situation in public markets has become much worse. In 2012, Facebook IPO’d with a $104 billion market cap. And last year Uber IPO’d at an $84 billion valuation. For most fast-growing companies, the amount of money available to them in private markets makes an early IPO not worth the effort.

There are some exceptions. Shopify ($1.2 billion), Twilio ($1.2 billion) and Square ($2.9 billion) went public relatively early. But examples like these are somewhat rare now. These days you almost never see hot companies IPO at valuations of $100 million or even $500 million.

This leaves most investors with few ways to access high-growth tech startups. There are no ETFs (exchange-traded funds) that give you that kind of exposure. 

In 2016, a new option to access private markets finally became available. When Regulation Crowdfunding (Reg CF) went into effect, it opened startup investing to everyone. Companies can raise up to $1.07 million a year under Reg CF. And that may soon increase to $5 million (which would be huge).

Today the equity crowdfunding industry is thriving. In 2019, total Reg CF investments rose to $137 million from $86 million in 2018. That’s an impressive 59% year-over-year increase.

Reg CF platforms have significantly increased their deal volume over recent years too. According to KingsCrowd data, there are currently 380 live Reg CF deals spread across platforms like:

380 live deals! Startup investors today have an incredible amount of companies to choose from. And in my opinion, the quality of deals is steadily increasing. Equity crowdfunding is finally becoming a key force in the world of early-stage capital formation.

This is great news for new startup investors. My advice for those just starting out is simple. Start with small investments and spread your risk out across at least 20 companies. 

Try to be selective with your investments. Look for startups with solid traction — either in revenue or active users. I recommend prioritizing traction over an attractive market. Back founders that know their industry well. Look for teams that have worked together before and found success. 

And finally, look for companies that have made a LOT of progress with money they’ve raised previously. If a company hasn’t raised any money yet but has still managed to make serious progress… Take a serious look at that “bootstrapped” deal –no matter how boring the industry is!

It’s unlikely that any one startup will meet all the criteria, so use your own judgement. You’ll get better at identifying the promising deals over time. That’s why it’s good to start with small investments in the beginning.

That’s it! Now you can go out and start combing through those 300+ deals to find the gems.

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