Why Everyone Needs Private Investments Today

by Adam Sharp, Co-Founder of Early Investing LLC
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When Amazon went public in 1997, the company was just two years old.

At that time, e-commerce was only getting started, and Amazon had done just $16 million in sales the quarter before its IPO.

But some investors had already seen the light. By the time trading closed, shares had risen from $18 to $23.50.

Amazon ended that first day of trading valued at $560 million.

In the 20 years since, those Amazon shares have increased in value by more than a whopping 50,000%.

It’s one of the great stock stories of all time.

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And there’s almost no chance of similar returns happening in today’s stock market.

Allow me to explain...

Contrast With Today

Amazon was one of the last “hypergrowth” companies to go public early. It just doesn’t happen these days.

It’s been this way since the tech bubble burst and Sarbanes-Oxley was put in place (2002).

This chart from Grant Thornton shows the grisly outcome. There are far fewer IPOs, especially small ones...

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Today, “hypergrowth” companies try to stay private as long as possible.

Take Airbnb, for example. The powerhouse valued at $31 billion just raised $1 billion from private investors, with no plans to IPO soon.

 

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Uber is another prime example. It's valued at $68 billion, with net revenue of around $5.5 billion last year, and we still don’t know when Uber’s going public...

 

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Why should it? Uber just raised a whopping $5 billion round (the largest private round ever) from private investors at a high price multiple.

So why would it go through the hassle of an IPO any sooner than absolutely necessary - spending a year preparing and giving up a nice chunk of shares to investment bankers?

It wouldn’t.

So what we see today is that, by the time companies IPO, they naturally have far less growth potential. They’re later in their growth curves.

Look at Facebook (Nasdaq: FB). For as well as that stock has done, imagine if it would have IPO’d as early as Amazon did, instead of when it was already a $74 billion company. That would have made a world of difference for public market investors.

Because once a company reaches a certain size, investment returns are automatically capped by the sheer mass of the thing. There will be only so many $300 billion to $600 billion companies in the world at any given time, after all.

The Solution(s)

Sadly, this is the new normal in stocks. The best, fastest-growing companies are simply not available to the vast majority of investors during their peak growth phases. That ship has sailed.

As the world adjusts to this new reality, mutual fund giants are being forced to go private to find growth.

However, most mutual funds hold no more than 1% of their assets in private companies. And unless you’re an accredited investor, it’s going to be difficult to get sufficient exposure through companies that, by all rights, should already be public - but remain private.

On the bright side of things, however, there is now a way for all investors to get exposure to early-stage private companies: equity crowdfunding.

This is possible thanks to the JOBS Act, which went into effect in stages over the last two years.

Equity crowdfunding, a cornerstone of the JOBS Act, allows everyone to invest in private deals. Minimum investments start around $100, which makes it easy to build a large diversified portfolio.

Let’s look at an example of the types of private companies that are open for investment.

High-Quality Private Investments Open to All

Court Innovations (CI) is a young software startup that just used equity crowdfunding to raise $500,000 on Netcapital.com.

We recommended this deal to subscribers of our research service First Stage Investor.

CI has developed a sophisticated suite of software that brings court case resolution online. That’s right, Court Innovations’ platform allows citizens to resolve court cases on the web.

And its traction so far is impressive, having signed up more than 20 court systems to date. There have already been more than 10,000 cases resolved through the system.

So here we have a company that...

  • Is first to market in the U.S. with an online court resolution solution
  • Has proven its system with 20 early adopter court systems
  • Is improving access to justice, often allowing defendants to go without legal counsel
  • Is ready to attack the 15,000 U.S. courts using antiquated, inefficient processes
  • Was valued at $2.7 million (pre-money) in this round of funding
  • Required a minimum investment of just $99.

The deal was a gem, plain and simple. The entire company during this latest round of funding was valued at $2.7 million!

For such an advanced piece of software, I knew this was a bargain right away. Our subscribers shared my enthusiasm, and within a week of recommending CI, the deal went from $60,000 raised... to full at a little less than $500,000.

This is the kind of bargain you occasionally come across in private deals. And our subscribers got the chance to invest at an extremely early stage (the seed round).

So while high-potential opportunities may be disappearing from traditional stock markets, a whole new world is opening up to those who are paying attention.

If you’re interested in learning more about these kinds of opportunities, I advise checking out First Stage Investor.

My co-founder, Andy Gordon, and I are constantly looking for the next great startup investment for our subscribers. We do the legwork and research for you, delivering one to two vetted opportunities per month.

I’ve personally invested in more than 80 early-stage startup companies and have seen how amazing the returns can be firsthand. (You can see some of my portfolio here.)

So if you’re looking for something different, exciting and potentially extremely profitable, check out our recently updated presentation here. I can almost guarantee it won’t be a waste of your time.

Good investing,

Adam

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