This is the third lesson of your Private Market Bootcamp…
And it’s possibly your most important lesson.
Yesterday, Matt revealed some of the tools we use to identify strong, early-stage companies. But here’s the thing…
Strong private startups don’t always turn into profitable investments.
Which is why our goal today is simple:
Show you how to identify strong startups that could also hand you massive returns.
Good Business? Check!
At first blush, this might sound strange.
After all, if you invest in a strong, private company, isn’t it inevitable that it will turn into a profitable investment?
To answer that question, let’s look at Blue Apron (APRN), the meal-delivery service.
In 2017, the company filed for its IPO.
By any measure, Blue Apron was a strong business:
- It was the leader in a fast-growing market.
- It was run by seasoned executives and backed by world-class investors.
- And the year it went public, it generated close to $1 billion in sales.
Which helps explain why the company’s IPO was valued at $1.9 billion.
Good Investment? Not Even Close!
Given Blue Apron’s strength, you might assume that private investors who got in before its IPO made a fortune.
But that’s not the case.
You see, some of them invested when the company was valued at more than $2 billion. That’s $100 million more than its IPO valuation.
Meaning, on IPO day, instead popping bottles of champagne, these investors were sitting on an unexpected loss!
The reason they lost money is simple:
Even though the business was strong, it was overvalued.
Overvalued or Undervalued?
But this raises an important question:
How do you know if an early-stage company is overvalued or undervalued?
The answer to this question is simpler than you might think…
In fact, after you finish reading this essay, not only will you be able to protect yourself from suffering the same fate as those Blue Apron investors…
But you’ll put yourself in a position to earn more profits than you ever thought possible.
Let me explain how…
How to Make Money in the Private Markets
Before I go into the details, first let me show you how you earn a profit when you invest in a private company.
Unlike with stocks, you can’t just sell your shares and take your profits whenever you want to. These are private businesses, so there’s no active market for their shares.
Instead, there are two main ways you’ll earn your profits:
- The company goes public. When this happens, you can sell your shares on a stock exchange like the NYSE or the Nasdaq.
- The start-up gets taken over by a larger company. And if the takeover price is higher than the price you paid for your shares, you make a profit.
Where the REAL Money is Made
Generally, IPOs are the most lucrative outcome for investors.
But they aren’t very common.
In 2016, for example, just 103 companies went public.
The more likely scenario is that the start-up gets acquired.
As a point of comparison, the Institute for Mergers, Acquisitions & Alliance reports that, in 2016, there were 13,142 acquisitions.
103 deals versus 13,142 deals. That’s a big difference, and it’s an important difference…
It goes straight to the heart of the “10-bagger” profit strategy I’m about to show you.
Follow the Money
Now that you know that takeovers are where most start-up investors make their profits, you can dramatically increase your chances of making at least 10x your money.
Follow the money.
To show you what I mean, let’s look at the average price of a start-up acquisition. In other words, what are these start-ups worth, on average, at the time of a takeover?
According to PricewaterhouseCoopers and Thomson Reuters, most technology acquisitions take place below $100 million…
And the majority of these acquisitions take place for less than $50 million.
So, to increase your odds of making 10x your money, take one simple step:
Invest in early-stage companies when they’re valued at $5 million or less!
Obviously, there are exceptions to every rule…
But when you’re just getting started in early-stage investing, limiting your investing to start-ups that are valued at $5 million or less is a smart strategy to stick with.
Not only will it give you a higher probability of hitting a “10-bagger” during a takeover...
But as Matt will explain next week, it also gives you some important protections. More specifically, it’ll help prevent you from suffering serious losses!
To see how, be sure to check your email next Wednesday at 11 AM Eastern.