If you want to play The Great Game of Pre-IPO Investing, you’re going to have to make a choice…
A choice that could be the difference between you having a fun – but challenging – journey towards your version of personal freedom…
Or a hard, miserable, and frustrating job that keeps you feeling trapped.
It all has to do with this critical first step.
Create your character
As a 30-something millennial, I grew up in the “Nintendo Era” of video games.
And as much as I enjoyed launching my controller into the wall after dying (again) in side-scrolling adventures like Super Mario Brothers – or getting slaughtered in fighting games Mortal Kombat…
Once I was introduced to turn-based role playing games (RPGs) of the time – like Final Fantasy, Chrono Trigger, and Super Mario RPG – I fell in love with the game format.
Why? Because it provided – for me – a far more enjoyable and intellectual experience.
Instead of trying to hit obscure button combinations to try and dodge attacks and perform special moves…
I could play the entire game – at a slowed down speed – and think critically about how to navigate the main story arc (and whatever “quest” I was currently playing through).
But the thing I liked most about these games was the importance of character creation and team building.
In some games, the hero was already decided for you… in others, you could create your own based on character classes…
Either way, these games typically revolve around leveling up your character (and the other characters in your team) and progressing through the main story.
The choices you made – on how to allocate stat points, skills, and equipment – made a huge difference in how you experienced the overall game.
I’ve said this several times already, but it bears repeating…
- A game is a form of art in which Players gather Information and make Decisions in order to Manage Resources… through the use of Game Tokens… in the pursuit of a .. in the face of Opposition.
And if you’d like to have fun playing this game, it all starts with knowing you’re playing the game in the first place.
After that, your gameplay experience will be heavily influenced by decisions you make around character creation, team building, and the investing strategies you use to progress through the story we all tell ourselves about our life.
Generalist, Thematic, and Thesis Driven Investing
Everywhere you look, there’s someone telling you they have the secret to getting rich (yours today for only $49!).
But no matter how much we want to believe that we’re going to retire rich off a single roll of the dice…
Building long term wealth requires more than simply “finding the next Amazon.”
Outside of pure luck, all of the data suggests that the “Single Stock Retirement Plan” is a well marketed fiction that doesn’t hold water.
According to Clint Corver, co-founder at seed stage venture capital (VC) firm Ulu Ventures…
VCs cannot reliably pick winners.
They can, however, construct portfolios that consistently generate great returns.
However, there are limits. Portfolio construction requires weighing the benefits of diversification against a VC’s ability to generate and support high-quality investments.
Striking the right balance separates great VCs from the rest.
Put another way, if you’re going to play The Great Game of Pre-IPO Investing, it’s going to require a long term portfolio building strategy that you can stick with for 5-10 years.
We touched on the importance of the Investment Policy Statement in another article (go here to read it).
As a quick refresher, this document should help you identify four things…
- Primary Motivation: What is the goal of this portfolio?
- Investment Style: What types of investment products (or trading strategies) will you consider when building the portfolio?
- Investment Process: How do you answer the question “is this a good investment?”
- Risk:Reward Profile: How much risk are you willing to take for the anticipated reward?
Let’s unpack some of the considerations on “Investment Style.”
Generally speaking, there are three types of investing philosophies you can use.
- Generalist – you will consider any deal in any category
On a regular basis, I try to ask our membership what types of investment opportunities they are interested in…
Most frequently, people start as an “Generalist Investor” – they don’t really know what they’re doing, so they often wind up picking investments based on how well they are marketed.
This is expressed when people tell me something overly simplistic like “I’m just looking for ways to make some extra money and leave something for my kids.”
However, there are some generalist investors who have a wide range of expertise and feel comfortable investing in any deal in any category.
- Thematic – you will consider any deal in a specific category (i.e. Financial Services, Healthcare, Internet of Things)
After that, I hear a LOT of people say things like “I want to be in cutting edge technology stocks / psychedelics / block chain / whatever is hot right now.”
This is most likely a “Thematic Investor” who is interested in identifying big themes and going after them.
Most retail investors, however, likely aren’t building a thematic portfolio with the same rigour as a professional investor.
- Thesis Driven – you will consider any deal that fits a specific worldview, usually over a 5-10 year period of time)
The rarest investor is the “Thesis Driven Investor.” This investor is someone who has a vision for what the future could look like, and every investment is evaluated in the context of this worldview.
And if you’ve read any of the offering pages, you’ll notice there is a lot of space dedicated to explaining the overall thesis of the market…
The major opportunities and problems that exist in the market…
And how the company raising money is planning on entering that market, executing their business plan, and creating shareholder value.
Also, this is one of the main reasons why you have not seen some of the current trendy deal types on the Equifund Crowd Funding Portal.
Even though we think it would be relatively easy to raise money from these buzzword fueled pitch decks…
A lot of the deals we see in those spaces simply don’t fit our investment thesis regarding retail investor supported deals.
Wondering which type of investment style is right for you?
At the end of the day, that’s a decision only you can answer.
“Thematic investing is good for bigger firms. It allows each partner to pick a couple themes and go after them. Thesis driven investing is good for smaller firms. It requires a tight team that works to keep themselves on the same page executing after a singular vision.
I believe thesis driven investing produces the best returns when the thesis is directionally correct and probably also the worst returns when the thesis is wrong.
I believe thematic investing works less well because it can lead to “bucket filling” where the firm just runs around filling the themes with deals without much thought to why and how they will work.
It also leads to a lot of “me too” investing which is a scourge that the venture industry can’t seem to figure out how to rid itself of.
But both thematic investing and thesis driven investing are better than a generalist approach because they both promote domain expertise which is critical to building a sustainable investment advantage.”
There’s certainly no one right way to build a portfolio.
But there is a way that works for you based on how much time, energy, and effort you’re willing to put into building and managing your portfolio.
The key is figuring out where you can get a sustainable investment advantage.
Once you figure out what that is, investing starts to become a whole lot more fun because you can put your confidence in a long term strategy instead of feeling anxious over short term moves.
Jake Hoffberg – Publisher