Would you like to know a way to generate 5x – 7x the potential returns you could get on every Pre-IPO investment?
And no, it has nothing to do with negotiating warrants, using options, or any “high risk” trading strategy.
In fact, if you use this, you could actually lower your risk while increasing potential returns!
Well good news…
Today, we’re going to reveal the secret behind what might be the most important part of Pre-IPO Investing most retail investors never do.
How to 5x – 7x Your Pre-IPO Returns
If you haven’t had a chance to read Part 1…
Here’s a quick recap of what you’ll need to know to get the most out of this article.
- Most unsuccessful investors live in a constant state of fear. They are afraid of money, they are afraid of taking risks, and they are afraid of losing.
- Successful investors, however, live in a constant state of confidence. They see investing as a winnable game and they have fun playing it.
- A game is a form of art in which Players gather (1) Information and make (2) Decisions in order to (3) Manage Resources… through the use of (4) Game Tokens… in the pursuit of a (5) Goal… in the face of (6) Opposition.
In Part 2, we discussed the basic Information every Pre-IPO investor needs to be comfortable with before playing the game (you can read about it here)…
Because every Player needs to know how to gather Information that helps them make Decisions.
And if you’ve already decided that Pre-IPO investing is something that could help you reach your Goals…
The biggest problem you’ll face is finding great deals (Sourcing), deciding which ones to invest in (Selecting), and how much to invest (Supporting).
When it comes to Sourcing deals, chances are, you got started by signing up to one of the various investment newsletters (or crowdfunding portals) out there.
And chances are, you also have some level of expectation that those newsletters perform some level of due diligence.
But if you’re blindly trusting someone else’s “recommendations” without doing your own due diligence…
You could be missing out on the biggest gains of your life!
Here’s why…
- Due Diligence: Spending time on due diligence is significantly related to better outcomes.
Simply splitting the sample between investors who spent less than the median twenty hours of due diligence and investors who spent more shows an overall multiple difference of 5.9X for those with high due diligence compared to only 1.1X for those with low due diligence.
The differences become more stark when comparing the top and bottom quartiles of time dedicated to due diligence. The exits where investors spent more than 40 hours doing due diligence (the top quartile) experienced a 7.1X multiple.
Spending time on due diligence is significantly related to better outcomes.
Or put another way, the more time you invest into due diligence, the better your potential returns.
And if you’ve been tempted by the suggestion that “you could invest as little as $50 and potential 1,000x – 10,000x your money”…
Unless you’re doing 20 – 40 hours of due diligence per “lottery ticket” you’re buying…
That’s called gambling. Not investing!
In case you’re wondering, before any Issuer is listed on the Equifund Crowdfunding Portal, they go through 8-12 weeks of due diligence (usually 80 – 120+ hours).
And the reason why you’ll find such in-depth offering pages (sometimes 15,000 words long) is to demonstrate our findings so our members can both educate themselves and challenge the research!
Because it turns out, there’s a second “return enhancing” factor you should be aware of.
- Industry Experience: Investor’s expertise in the industry of the venture in which they invest also is related to greater returns.
Not surprisingly, the more you know about a specific sector, the easier it is to perform due diligence.
According to the same study…
When ventures were related to an [investor’s] expertise, the [investor] typically had fourteen years of relevant experience.
Analysis indicates that expertise had a material impact on angel investors’ earned returns.
Investment multiples were twice as high for investments in ventures connected to investors’ industry expertise.
Investment multiples were twice as high for investments in ventures connected to investors’ industry expertise.
If you’ve ever heard the old adage “invest in what you know,” it appears to be even more important when investing in Pre-IPO opportunities.
But there’s a third major Decision investors need to make in order to boost their returns…
- Participation: Investors that interacted with their portfolio companies at least a couple of times per month by mentoring, coaching, providing leads, and/or monitoring performance experienced greater returns.
According to the study…
[I]investors who interacted with the venture a couple of times per month experienced an overall multiple of 3.7X in four years.
In contrast, investors who participated a couple of times per year experienced overall multiples of only 1.3X in 3.6 years.
Now, to be fair, most of our members aren’t writing $25,000+ checks that are standard for angel investing…
Nor do they have the ability or desire to provide mentorship, coaching, or financial monitoring…
But you can still have a meaningful impact on the success of the business, even if you’re not a large check writer.
We call this idea the Customer/Shareholder Flywheel…
Which, in a nutshell, means investing in companies that you are also a customer of, or would otherwise refer business to.
The more value you can bring to these companies by providing product feedback, helping to generate new customers, or connecting them with potential strategic partnerships…
The more “control” you have over the potential returns each of your investments makes.
It’s also another reason why a more focused approach to investing beats a “spray and pray” approach. You only have so much time, and if you don’t have enough invested in the deal, it’s not mathematically worth the effort.
But there’s another decision most Pre-IPO investors struggle with as well:
- Exit Strategy: deciding when to sell can dramatically impact potential returns
Unfortunately, most people are looking for “Get Rich Quick” style returns, and are likely planning on dumping the stock when it goes public for a short term gain (maybe).
But according to the research:
[T]he length of time investors held their investments increased with each level of positive return; analysis indicated that it is not unusual for group-affiliated angels with strong returns to hold their investments for more than ten years.
While the average hold period was 3.5 years, exits with a less than 1X multiple took only three years to achieve that result.
The average years to exit were 3, 3.3, 4.6, 4.9, and 6 years, demonstrating the importance of patience and non-liquidity in angel investing.
To echo an earlier article we published…
Amazon, Apple, Microsoft, or Netflix… none of those companies shot for astronomical “10,000x+ gains” at IPO, quite the opposite.
It took years (even decades) of being a public company before their real value was unlocked.
And when it finally happened, those long-term investors reaped the rewards.
Sincerely,
Jake Hoffberg – Publisher
Equifund
