Early Investing

The Trick to De-Risk Startup and Collectibles Investments

The Trick to De-Risk Startup and Collectibles Investments
By Vin Narayanan
Date October 19, 2022

The baseball card universe has changed quite a bit since I was growing up. People don’t just buy cards for the bubble gum or trade doubles to complete their sets like I did. Instead, they seek out unique or scarce cards that can grow in value. They keep cards in mint condition. And then they sell them for a lot of money.

Baseball cards are a big business now. Just look at the numbers. Here are the eight most expensive baseball cards (based on what they sold for) according to data pulled together by NBC

  1. 1952 Topps Mickey Mantle: $12.6 million
  2. 1909 T-206 Honus Wagner: $7.25 million
  3. 1933 Goudey Babe Ruth: $4.212 million 
  4. 2009 Bowman Draft Mike Trout: $3.936 million
  5. 1916 Sporting News Babe Ruth: $2.46 million 
  6. 1955 Topps Roberto Clemente: $1.107 million
  7. 2011 Topps Mike Trout: $1.05 million
  8. 1969 Topps Reggie Jackson: $1.006 million

Collectors — or investors, depending on how you look at it — have taken notice. Earlier this year, someone bought a one-of-a-kind Jasson Dominguez baseball card for $474,000. If you’ve never heard of Dominguez, don’t worry about it. I’m a sports nut. And I’d never heard of him either.

Dominguez plays in the minor leagues. He was promoted to double A ball (the second highest minor league level) late in the season this year and struggled in his five games there. He was much better in single A and A+ ball (if you’ve never heard of A+ ball, neither had I until I looked up his stats).

Professional scouts initially viewed Dominguez as a generational talent. Now, he’s the second-best prospect in the Yankees system. Projecting baseball greatness isn’t easy. Neither is developing major league talent. If it was, the New York Mets and the Detroit Tigers (two teams I follow) wouldn’t have such prolonged droughts of irrelevance.

That’s what makes the $474,000 purchase of Dominguez’s card so interesting. He’s far more likely to have an average-to-above-average career than a great one. Yet the person who bought the card is banking on Dominguez’s upside to justify the purchase. If Dominguez turns into the next great New York Yankee, that card could be worth $5 million or more, netting the collector/investor more than a 10X return.

In many ways, the baseball card collectibles world resembles startup investing. Investing early in startups carries substantially more risk than investing in companies with a track record. It’s hard to judge whether a company with little to no operating history has what it takes to succeed. But the reward for taking on more risk is outsized gains. Early investors are rewarded more handsomely than investors who wait until there’s a more substantial track record. Buy low, sell high. It’s the first rule in investing.  

The same principle applies to baseball cards. Early investors/collectors are looking for cards with big upside before the general public becomes aware of them or a player builds up a track record. In essence, they’re trying to find the next Lebron James, Michael Jordan or Aaron Judge before the general public is aware of him. That way, they can buy the collectible cheaply and auction it off for a massive profit once the player becomes a star.

Both processes are fraught with risk. Most startups fail. Most sports prospects do not become stars. That’s why in order to succeed, investors have to build a portfolio of 25 to 30 startups or collectibles. Two or three big winners will generate incredible profits. A few might break even. The rest will be losers. But the returns from the big winners (assuming there are big winners) will be so big that the overall return on investment (including losers) should be substantial.

To be fair, the startup to collectible analogy isn’t perfect. Early Investing co-founder Andy Gordon’s head just about exploded when Senior Editor Allison Brickell first suggested it. Andy’s point is there’s a lot more risk in collectibles than startup investing. And while that’s true, I believe Allison is right in principle. Startup investing and collectibles share common DNA. The trick in both cases is figuring out how to best de-risk an asset class that’s filled with risk. The formula for de-risking a startup investment is clear. We apply it all the time to find investment opportunities for our First Stage Investor members (click here to sign up). The de-risking path in collectibles is relatively new. It will evolve over time as the space matures. 

Andy, Allison and I will hash out our differences in public in an upcoming Early Investing Podcast. Look for fireworks on that pod.

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