Last week, Wayne and I dropped a bombshell on you:
We showed you why every investor today (including you) needs to allocate at least some of their money to the private markets.
This is new territory for most folks…
Which is why, in our article last week, we explained one of the fundamental rules of successful early-stage investing: you have to build a diversified portfolio!
But now that we’ve introduced you to the basics, we can start sharing the more exciting stuff…
Like how to identify the very best early-stage deals to add to your portfolio.
The A.S.E. Process
If you’re a student in our Early-Stage Playbook course, you’re already familiar with the “A.S.E.” Process.
This is our proprietary three-step system for finding and funding the most promising early-stage private companies.
Each letter stands for a step in the system:
“A” is for “Allocate”
This step helps you determine how much of your total investment portfolio to put into early-stage deals, and how much capital to put into each deal.
“S” is for “Screen”
This step helps you take hundreds of early-stage deals, and quickly filter them down to a small handful that you’ll dive into more deeply in Step 3.
“E” is for “Evaluate”
This step is where you do a deep dive into each deal, looking for certain attributes that, statistically speaking, winners share.
In his article last week, Wayne introduced you to Step 1 (Allocate) and explained why it’s so important…
So now we’re going to take a look at Step 2 (Screen).
An Easy Way To Screen
Forbes recently reported that more than 500,000 new businesses get started in the U.S. every month.
It would be impossible to do deep research on so many potential deals.
That’s why it’s so important to screen.
Screening is all about quickly filtering out the good deals from the bad, so you’re only looking at the best ideas, from the best entrepreneurs, at the best prices.
To be clear, you’ll still need to do research on the deals that pass your screen. But this process will help you cut through all the clutter and speed things up.
Here are 3 filters you can use to screen for potentially profitable start-up deals:
- Team — The founders should have “domain” experience (in other words, direct experience in the same sector as their new business), start-up experience, or technical experience. If they have none of the above, say “No, thanks!”
- Valuation — For seed-stage companies, valuations should be $5 million or less. If valuations are higher than that, it’s unlikely you’ll earn 1,000% on your “winners” (which is what you need to earn in order to make early-stage investing worthwhile).
- Capital Efficient — If a start-up requires millions of dollars for inventory or transportation of physical goods, it’s not “capital efficient.” This makes it more prone to run out of capital. As a rule of thumb, such start-ups are more risky.
If a company doesn’t make it through each one of these filters, screen it out and move on!
Get Ready To Evaluate
Now you’re familiar with the basics of the first 2 steps of the “A.S.E.” process:
Allocate and Screen.
Tomorrow, Wayne will introduce you to the final step in the process: Evaluate.
This step is where you do a deep dive into each deal that’s passed your screen — and determine whether or not it has the potential to be a great investment.
This is where early-stage investors make their profits — so stay tuned!
Happy Investing
Best Regards,
Founder
Crowdability.com
