Choosing Between Startups and Tech Stocks

Today we’re going to briefly compare tech stocks with startup investments. We’ve reached a point in the public market where many tech stocks are overvalued by what I would guess is a multiple that ranges  from 2x-to-10x. 

The valuations at this point are simply silly, as I wrote about a few weeks back. 

Let’s look at a few large tech stocks’ price-to-earnings (P/E) ratios. 

• • Amazon: 115
  • Tesla: 918
  • Zoom: 522

I’ve reduced my tech stock holdings about 90% over the last few years. I had held many of these stocks for up to 14 years. I may still miss a significant amount of upside — but I’m OK with that. The risks are too high at this point. I am increasingly focused on startup opportunities instead. 

I believe startups are by far the best way to access the tech and growth markets today. The valuations aren’t ridiculous — at the early stages at least. And most of their growth is in the future. If you want an idea of just how powerful early stage investing can be, read my piece about how Domino’s was a better investment than Google back in 2004. Almost nothing can beat an investment that’s made when valuations are low and growth is rising. And since initial public offerings (IPOs) keep happening later and later in a company’s growth cycle, startup investing is the only place we can find opportunities like that.

Sure, a lot of the startups we invest in will fail. But that’s to be expected. The goal is to get into some mega-growth opportunities very early — even if it’s only a small investment.

AngelList, in particular, is blossoming today. A lot of the opportunities that can be found there are simply too good to pass up. So that’s where I’ll be focusing most of my attention going forward.