Try to be an accredited investor. Once you are, you can invest more easily in private companies.
Do you know what the market capitalization was of Microsoft when they went public on March 13, 1986? A mere $500 million (~$1 billion in today's dollars). If you had bought just 100 shares of Microsoft at the $21 offering and rode it all the way up to its peak in 1999, you would have cashed out for $1.4 million.
Of course the stock came tumbling down and then back up. But you'd still have around $1 million bucks today. Not bad.
I remember working on the syndicate with my US colleagues during Google's IPO back in 2004. We took the company public at a $23 billion market cap. Meanwhile, Facebook went public in 2012 at a $100 billion market cap. See a trend here? Companies are going public later and later in the game, meaning the public is getting less and less of the upside benefit!
The people who are getting rich are 1) Private institutional investors such as the hedge funds, venture capital funds, venture debt funds, and private equity funds, 2) Accredited investors who are able to invest in such private funds, and 3) The employees qualified enough to get jobs at these hot startups. Everybody else is shut out!
Accredied Investors Have More Access To Unicorn $1 Billion Companies
A market cap of $1 billion is almost commonplace nowadays. There are dozens of private companies with $1 billion+ market caps that you probably have never heard of. Just take a look at the image above and a comment below where I list out 80+ names. The chart is from early 2014, so valuations are even higher e.g. $15 billion for SnapChat now vs. $10 billion.
Uber probably could have gone IPO in 2013 with a $5B+ market cap, but they chose not to. Why bother subjecting yourself to massive regulatory scrutiny when you can raise billions in the private market through institutional investors and accredited investors?
Private companies no longer need mom and pop public investors because the rich have gotten extraordinarily rich over the past 30 years. There is just too much liquidity held in massive private funds chasing too few deals. Add on hot foreign money, especially from Russia and China, and it's easy to see why the IPO market is slowing down.
Initial public offerings in the U.S. have dropped to around 100 a year from more than 300 a year between 1980 and 2000. The 34 IPOs in Q12015 raised $5.4 billion, marking the fewest IPOs since since Q1 2013 and the smallest in proceeds raised since Q3 2011, according to Renaissance Capital. The health care sector accounted for 47% of the IPOs, mostly biotechs and small medical device companies.
THE PUBLIC IS GETTING SCREWED
After the scandals at Enron and WorldCom, Congress in 2002 gave us Sarbanes-Oxley, a federal law that set new, higher, standards for publicly traded companies. In other words, being a public company got much more expensive and onerous than in the past. If you're a smaller company, you're not going to be able to afford a team of lawyers to make sure your company complies with all these new rules. Think about the already arduous tax code individuals have to go through.
Sure, the government may have wanted to protect the retail investor from more Enrons and WorldComs, but instead, the government has essentially shut out retail investors from a massive amount of wealth creation as private companies stay private for longer! Talk about the law of unintended consequences.
I run my own small online media company. If I can raise $1 million dollars from private investors with little effort and cost, why on Earth would I spend hundreds of thousands of dollars on lawyers to subject myself to Big Brother? Freedom is glorious!
One of the main reasons why any private company would want to go public is because they've reached the 500 individual investor maximum and need more capital for expansion. The other big reason is to allow for earlier investors, including the founders and early employees to cash out in an orderly fashion.
Finally, if the founders and early employees are cashing out at IPO or soon thereafter, what business do retail investors have buying? The easy money has already been made because the company grew so massive in the private markets!
PRIVATE MARKET IS KING – Being Accredited Gives You Access
If you're looking to supercharge your wealth during your one and only life, hurry up and make $200,000 as an individual, $300,000 as a married couple, or have $1 million in investable assets so you can at least try to gain access to the private investment market. Of course, then it's up to you to decide which private investment companies or funds offer the best returns.
The government has once again found a smart way to keep the middle class down, without the middle class even realizing what the government is doing! Pro-Big Government voters just get excited about more regulation, when more regulation is what shuts the public out.
I worked in the public equities market for 13 years and I've been a private equity investor for 10 years now. Trust me when I say the shift towards staying in the private market is real. There will be no more Microsofts that go public for a mere $1 billion dollars. The next Microsoft will probably go public for $100 billion as private investors cash out. Nobody wants to face the wrath of the government if they don't have to, especially not entrepreneurs with incredible access to capital.
“Being the CEO of a public company is horrible right now. Trying to get my employees motivated to work while they see their private company peers get valued at higher and higher valuations is frustrating. Do you have $4 billion for a management buyout so I can go private again?” – My friend, a CEO of a publicly traded company.
THE PATH TO BECOMING AN ACCREDITED INVESTOR
I realize some of you might be thinking, Umm, easier said than done becoming an accredited investor, and I hear you. Just know there are plenty of industries that provide plenty of jobs that pay six figures a year.
And if you just can't last long enough to get to the six figure mark, then there are plenty of wealthy people out there looking for love. And if you can't find anybody to shack up with you, then not to worry either. There's around $30 trillion of wealth getting transferred down to you!
Let's say you can't find a six figure job, can't find a wealthy spouse, don't have parents who will leave you anything, aren't willing to take any entrepreneurial risk in this land of opportunity, and suffer from some terrible physical and mental affliction. You can always invest in the public equity markets. At least the pubic equity market is liquid, with much more transparency, and plenty of research to go behind your investments.
But part of getting rich is making educated bets about the future. It's my belief that wealth is going to accrue at an increasing pace towards those who invest in the private markets.
Don't Need To Be Accredited To Invest In Private Growth Companies
Consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Track Your Wealth
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Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There's no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
About the Author:
Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $350,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom. Sam is an accredited investor.
One of the investment categories I'm most interested in is real estate crowdsourcing. If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. Accredited Investor is a FS original post.
Hi Sam,
Is it just me or did the paragraph labeled “THE PATH TO BECOMING AN ACCREDITED INVESTOR”, seem to end abruptly before going into the nuts and bolts? Very intrigued to read more about this.
Hmm, I’ll look into that. Here are some posts to help get to $200K or $1M net worth.
How To Make Six Figures At Almost Any Age
The First Million Might Be The Easiest
How To Build Passive Income For Financial Independence
[…] industry bonuses are generally broken out into cash, stock, and private investments, depending on your seniority. The more senior you are, the less cash you get. I was a Director (one […]
“do you think the public realizes….”-lol, probabilistically this answer is almost always no, no way in hell. We get in our little spheres and surround ourselves with other like minded individuals and are sometimes tricked into believing the average person is more semi aware of the market and implications/benefits of derivative instruments when in reality you’re speaking a different language and they can tell you all about what the Kardashians are doing.
Someone mentioned crowdfunding, this is brilliant. Its also incredibly sad as it just demonstrates the complete lack of financial knowledge of the public. Here are companies that are able to raise sometimes millions, without having to share a fraction of equity or future profits, just a token item. Its brilliant and saddening at the same time.
I wish I qualified as an accredited investor! Oh well a worthy goal to work towards. But if you qualified you are pretty wealthy already, more than middle class. It’s just another example of the wealthy just getting richer.
Another great post…Sam…
Interesting post here from Mark Cuban a few months back on the Angel Funding “bubble”..and potential implications.
https://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-worse-than-the-tech-bubble-of-2000/
I don’t completely agree with him, in that most of the people who will take a bath this time around will be accredited folks who are unlucky or did not perform the necessary research. As Sam says….research, research. and research. I would add a dose of prayer with that…..you need a little luck as well.
There are some start up gems out there…along with a lot of financial sink-holes in the list. I have experienced liquidity drying up in the 2000-2002 market, ……..painful to say the least. This time will be no different, except the people hit will be the wealthy….. Hope they have made their gains and cashed some $$ out before-hand.
Working in a public tech company now, and having been in a private and public tech company before and after Sarbanes-Oxley, I believe Sarbanes-Oxley was one of the most damaging pieces of legislation enacted over the past decade. It is a crime how much public companies have to spend on compliance and unfathomable revenue recognition laws. …the only winners are accounting firms and the accountants. Our company could save millions and cut half of our accounting staff if we could get back to being private….but going private is no picnic either…
Crowd funding innovation has a LOT of upside… As crowd funding opens up more capital and liquidity in these alternative markets, more and more companies will stay away from traditional public markets….until they are huge. As Sam said, it not in their interest, nor their shareholder interests, to deal with public markets. If the accreditation hurdle were to drop/be lowered, we would, I believe, see a sea change in the market. However, I don’t expect that to happen any time soon, with a very regulatory and litigious group leading our government.
If you become accredited it will open up the opportunities and the risk for investors. I agree private money is growing, but it will be hit or miss as more companies go under compared to reaching Microsoft status. Looking forward to what lyft will do to grow and compete with UBer. I’m sure you will be happy when lyft goes public.
The private valuation jumps are crazy. Prosper raised money at $600 million in 2014. Now they raised money at $1.8 billion in 2015. WOW! If there was a 200% move in a publicly traded stock, everybody would be all over that e.g. news, forums, etc.
You can also be an executive officer, director, or GP under 501(4). A lot of executives who don’t meet the income/net worth requirements of private companies use that provision to rollover their shares into the holdco when a PE fund buys them.
There’s one last reason why a private company like Prosper might eventually want to go public like Lending Club: publicity.
Lending Club got to have a roadshow, got to wrap their a big red banner on the front of the NYSE, and appeared on endless media outlets that steamed them into a million television sets. In fact, Lending Club’s CEO stated that marketing and publicity is the entire reason they had an IPO to begin with.
That is true. Just like how every startup who gets funding reaches out to TechCrunch to gain more publicity. Why not? Helps with recruiting talent too. It’s fierce out here for good labor.
Can you write a post on what to do once you’re an accredited investor? I’m a senior associate in big law in litigation (so I have no finance or investing expertise) and am accredited but am a little lost on how to choose private investments. I got on Tim Ferris’s syndicate on AngelList and made one investment but other than that I’m having a hard time figuring out what to invest in.
Kate, as a senior associate at a big law firm, you’d probably be able to write a great post about exactly what you are asking!
There is no correct and only path. You basically have to search and research investment ideas you feel comfortable with, and measure your investment to your overall investment portfolio and liquidity needs.
Any tangible success stories from retail investors from sliced or another small PE/VC world? Realistic rate-of-returns? Say one were to hit the benchmark as an accredited investor? Is there a registration process? How would you recommend approaching investing in the private world as far as asset allocation, pitfalls, risks?
The same was as one would approach investing in the public market. Research, research, and more research. The benchmarks for returns are similar, but with different volatility and lockup periods in many cases.
Success stores are happening every day. They are just private.
Good points about the shift to private markets. I know Elon Musk wants to keep SpaceX private because he has a long term vision for the company to colonize Mars, and he doesn’t want that vision compromised by investors focused on quarterly profits or the occasional failed launch. Staying private allows the company to take bigger risks and possibly gain commensurately larger rewards! Although public investors will give a massively profitable company like Google more leeway in taking risks (Google X lab projects), they still complain vociferously about all the money Larry and Sergey sink into these “moonshots,” even though they have the most future potential (e.g. self-driving cars). I know that if I ever started a successful company, I’d keep it private for as long as possible to retain maximum control over its direction. That is, unless I get too greedy and IPO so I can bathe in moolah!
If I’m worth billions like Elon, there is NO WAY IN HELL I would ever IPO SpaceX, unlike that is what is required to get more Government funding like he got with Tesla :)
Sorry to be a downer, but while becoming an “accredited investor” is a nice goal, that alone doesn’t really get you into private equity and venture funds unless you have a close connection with the fund sponsor. My understanding is that most funds don’t want to deal with investors unless they have a large amount of cash to invest because, due to security regulations, they are limited in the quantity of accredited investors that they can accept into their fund. I think you posted something earlier about a fund of funds that accepts smaller $$ investments, but that was a hedge fund, so it still wouldn’t get “accredited investors” with less than say $1m and no connections into something like a venture fund that might’ve invested in Uber at an earlier stage….
It’s not a problem being a downer. It’s a good balance to my optimistic outlook.
Your feedback is EXACTLY why I’m so bullish on the crowdfunding industry. You don’t believe a normal accredited investor can gain access so such funds or deals. But it’s happening before our very eyes. I read somewhere just yesterday you can invest in KKR’s private equity funds for $25,000. Sliced just provided a couple million in access to the Lyft deal that just closed a month or so ago.
There’s no guarantees once you become accredited, you will crush it. You still have to make the right investments. But your world of investments opens up. The goal is to not be blocked by technicalities. Why get B’s, when you can get A’s?
If you can better forecast the future trend, you can make a lot more money in the process.
Thanks! I looked a little further and understand better how the platform works. Very cool that they got investors in Lyft.
There is nothing more insane than subjecting yourself to accrual based accounting , perpetual audits, process audits (can you believe someone actually made an industry out of auditing processes for regulatory compliance) and having to generate loads of paperwork because an institutional investor is sending a consultant in for 30 minutes.
First of all, I love the site. Your topics are more diversified than most and coming from finance and PE background really adds to your writing. Usually my only (minor) complaint is with the promotion of products but I’m writing to thank you for bringing my attention to sliced investing. The learning section is really helpful. I keep most of my net worth in RE and have no interest in entering a meaningful amount to the public markets. I’ve wanted to try the private markets but fear of unknown and lack of knowledge has kept me with my RE business. it’s great that someone made it so we can dip a toe into that PE world before making a jump.
Thanks Scott. A publisher has to eat! I’ve always said I’ll refund people’s money for those who visit and are dissatisfied with my content.
I hope you can diversify your net worth beyond real estate. As we’ve seen in the past, having all one’s eggs in one basket can be dicey during downturns.
The current private company that I would wish that I could invest in the most would be Tidal. Jay Z is the real world Luscious Lyons. If that company ever shows up on Sliced or any other site at a reasonable valuation, I might have to click that check box :)
What is this based on? Everything I’ve read about Tidal being a music fan points to how humongous a flop it is. As far as I can tell it’s a bunch of overpaid musicians boycotting the mainstream music services because the fees the market pays them off it aren’t enough for their lavish lifestyles and ridiculous levels of overhead.
I’m not sure what additional value Tidal brings to the marketplace over its competitors, especially seeing how tough a segment it is to make money in?
Everything I read about Apple a few years ago was that innovation was done at Apple. Tim Cook isn’t Steve Jobs and blah blah blah.
See the vision. Look past what you read and draw your own conclusions. The artists that are a part of Tidal have probably sold over a billion records combined. They will attract subscribers. Let’s say Jay Z and Beyoncé put out their rumored album that this they are working on exclusively on Tidal, that alone will draw a ton of subscribers.
Could you make the graphic of company names and values larger? Or make it so that if I click on it it moves to full screen?
Sure, here is a list of companies $1 billion or over. Plenty of them are right here in the San Francisco Bay Area, which is why a good strategy may be to simply just buy commercial and residential real estate as the workforce grows and gets richer. Unless the bubble bursts of course!
All Companies as of April 2015
Company Latest Valuation Last Valuation
Xiaomi $46.0 billion December 2014
Uber $41.2 billion December 2014
Palantir $15.0 billion September 2014
Snapchat $15.0 billion March 2015
SpaceX $12.0 billion January 2015
Pinterest $11.0 billion March 2015
Flipkart $11.0 billion November 2014
Airbnb $10.0 billion April 2014
Dropbox $10.0 billion January 2014 (Techies vs. locals at the Mission Playground)
Theranos $9.0 billion June 2014
Didi Dache-Kuaidi Dache $8.8 billion April 2015
Spotify $8.4 billion April 2015
Meituan $7.0 billion January 2015
Square $6.0 billion August 2014
WeWork $5.0 billion December 2014
Cloudera $4.1 billion March 2014
Dianping $4.0 billion April 2015
Stripe $3.5 billion December 2014
Jawbone $3.3 billion February 2014
Fanatics $3.1 billion June 2013
VANCL $3.0 billion December 2011
Legendary Entertainment $3.0 billion September 2014
Pure Storage $3.0 billion April 2014
Moderna $3.0 billion January 2015
Bloom Energy $2.9 billion September 2011
Slack $2.8 billion March 2015
Powa $2.7 billion November 2014
Ola Cabs $2.5 billion April 2015
InMobi $2.5 billion December 2014
Lyft $2.8 billion March 2015
Houzz $2.3 billion October 2014
Trendy Group $2.0 billion February 2012
Nutanix
$2.0 billion
August 2014
Magic Leap
$2.0 billion
October 2014
Snapdeal
$2.0 billion
October 2014
Coupang
$2.0 billion
December 2014
Instacart
$2.0 billion
December 2014
Domo
$2.0 billion
April 2015
Prosper Marketplace
$1.9 billion
April 2015
Delivery Hero
$1.9 billion
February 2015
Intarcia Therapeutics
$1.8 billion
March 2014
Tanium
$1.8 billion
March 2015
MongoDB
$1.6 billion
December 2014
DocuSign
$1.6 billion
March 2014
InsideSales.com
$1.5 billion
March 2015
Adyen
$1.5 billion
December 2014
Oscar Health Insurance
$1.5 billion
April 2015
Koudai Shopping
$1.4 billion
October 2014
Jasper Technologies
$1.4 billion
April 2014
Deem
$1.4 billion
September 2011
Social Finance
$1.3 billion
February 2015
Sunrun
$1.3 billion
March 2014
AppNexus
$1.2 billion
August 2014
Infindat
$1.2 billion
April 2015
Sprinklr
$1.2 billion
March 2015
Automattic
$1.2 billion
May 2014
Gilt Groupe
$1.1 billion
April 2011
Actifio
$1.1 billion
March 2014
Proteus Digital Health
$1.1 billion
June 2014
AppDynamics
$1.1 billion
July 2014
IronSource
$1.1 billion
August 2014
Nextdoor
$1.1 billion
March 2015
Home24
$1.0 billion
December 2014
Yello Mobile
$1.0 billion
December 2014
CloudFlare
$1.0 billion
December 2012
Evernote
$1.0 billion
May 2012
Good Technology
$1.0 billion
April 2013
Eventbrite
$1.0 billion
March 2014
Tango
$1.0 billion
March 2014
Mogujie
$1.0 billion
June 2014
Kabam
$1.0 billion
August 2014
Lookout
$1.0 billion
August 2014
JustFab
$1.0 billion
August 2014
Honest Co.
$1.0 billion
August 2014
Credit Karma
$1.0 billion
March 2014
Qualtrics
$1.0 billion
September 2014
Razer
$1.0 billion
October 2014
Shopify
$1.0 billion
December 2013
Shazam
$1.0 billion
January 2015
Beibei
$1.0 billion
January 2015
Grabtaxi
$1.0 billion
December 2014
SimpliVity
$1.0 billion
March 2015
Farfetch
$1.0 billion
March 2015
Pluralsight
$1.0 billion
April 2015
Funding Circle
$1.0 billion
April 2015
Quickr
$1.0 billion
April 2015
Fab
Exited
—
March 2015
Beats Electronics
Exited
—
August 2014
Box
Exited
—
December 2014
Coupons.com
Exited
—
March 2014
Fisker Automotive
Exited
—
March 2014
Hanhua Financial
Exited
—
June 2014
GoPro
Exited
—
June 2014
Hortonworks
Exited
—
November 2014
JD.com
Exited
—
May 2014
LaShou
Exited
—
November 2014
Lending Club
Exited
—
December 2014
Mobileye
Exited
—
August 2014
Nest Labs
Exited
—
February 2014
New Relic
Exited
—
December 2014
Rocket Internet
Exited
—
October 2014
Wayfair
Exited
—
October 2014
Zalando
Exited
—
October 2014
Kuaidi Dache
Exited
Source: Dow Jones VentureSource and The Wall Street Journal
It’s surprising seeing the valuations of some of these companies. A few of the big names we already constantly hear how ridiculous some of their valuations are. Then there are smaller players – some of whom I’ve actually dealt with through my work (a large public company in the SF area) and it was scary how thin they’re running, how scrappy their product is, and how hungry they are for any deal.
I can only attribute their valuations to speculation due to how new their business models and markets are (i.e. all the possibilities!)- interestingly enough one of the main reasons we DIDN’T go in to business with one of them. They promise you the moon for decades to come but have little to prove their viability to exist even through the next fiscal year.
There is a HUGE disconnect with the valuations of private companies and the valuation of public companies now.
If I was a private company, I’d stay private and sell to a gorilla like Google (Nest to Google for ~$3.5B for example), stay for a couple years and leave.
There are 10 or so food delivery companies funded with tens of millions, for example. I don’t need 10 delivery companies sending me my tacos! What a low margin business too. Someone is going to die.
Agreed on the food delivery companies! That’s a prime example of caution signs everywhere, but people still jumping in and VCs jumping in right behind them without any signs of concern.
I know some people working at a few of these companies too, and as far as I can tell they are operating at huge losses using their strong funding to keep them afloat, hoping for traction and market dominance someday. So – essentially, it’s a gamble. Most businesses are, but this seems even more so – providing pretty much the same product as everyone else, with your own little twists on placement, marketing, and SELL SELL SELL hoping you’re the one that will stick.
And you’re right – while I am a proponent of the checks and balances required of publicly traded companies, getting acquired at ridiculous valuations by a market mammoth seems like a very lucrative option – especially if its early enough where you haven’t had to put in the time, money, or effort to get in line with compliance and/or your business model is based more or less on unfounded information and bets on the future. I guess at that point its a question of how big your ego is to make the decision of whether to sell now or stick with it in hopes of cashing out at $2B instead of $200M.
Crazy times we live in. Secret just folded (thank god), Grooveshark is dead as of today…we’re certainly going to see quite a few more close their doors in the next few months. Hopefully it’s at a gradual pace and isn’t enough to create panic all across the board.
Gotta love the founders of Secret cashing out on $3 million each without telling their employees and then closing the company. Good for them but I wonder whether they’ll ever be trusted again?
Ha, lol for real.
Exactly. With tech, WHO gets lucky and joins the right start up is paramount to that person’s success, or successive failures. But as an RE investor here, all I care is that SOMEONE gets rich from tech. Even if tech crashes again, A- it’ll still be a major employer and B- there are other well paying professions in the city.
It’s why landlords and RE investors in SF bat last :)
You know who got lucky? The founders of Secret.ly, who raised $35 million in under 2 years, took $6 million off the table for themselves without telling their employees, and closing down their company today! Now that’s how you take advantage of VC money looking to invest in anything.
I just feel bad for their employees.
We can expect that AI limitations will be raised in the future (as they have been in the past when the rules removed your home from your net worth calculation). This will further price out most individuals. As I have argued, the AI rules are for the benefit of the promoter not the investor – and certainly not the middle class. The government has provided legal means to discriminate against a large class of people – those who may be more likely to bring fraud suits. That’s great protection money.
Maybe. It’s funny how the JOBS Act created a lot of startups to take advantage of a potential new financial regime, but still creates a disconnect for regular investors and bigger investors.
I really don’t know whether the government realizes all their unintended consequences. Surely, they must calculate the kinks in the journey.