First Stage Investor

The New and Much Cooler 1%

The New and Much Cooler 1%
By Andy Gordon
Date November 12, 2018

Editor’s Note: In the print edition of our monthly newsletter (which should be hitting your mailbox any day now), there was an error in the link to invest in 20/20 GeneSystems. If you’re still interested in investing, you can click here to do so. We regret the inconvenience, and we’ll try to make sure it doesn’t happen again.

About the two tech startup recommendations we sent you on Friday…

A brief glance should tell you that these are high-caliber startups. That can mean many things. If nothing else, it signifies outstanding technology along with outstanding execution.

I hope I’m not telling you anything surprising. This is what you signed up for, right? No big deal.

But here’s the thing…

It is a big deal.

Sometimes even I forget that not many investors have the opportunity to make these kinds of alpha investments in the high-tech space.

Young, exciting, high-growth and high-upside tech companies are hard to find among publicly traded stocks (more on this in a second). And that’s the playground for 99% of everyday investors.

It’s only going to get worse for this 99%. The good news is it’s going to get better for you, the 1% who have embraced crowdfunding.

The public stock market and the private equity crowdfunding market are two ships passing in the night…

Deal flow is increasing on the portals we use; quality and quantity are both rising.

That’s in stark contrast to what is happening in the public stock investment space, where the number of new and exciting tech companies listing on public exchanges is stagnant.

The number of venture-backed tech companies that have joined major American public exchanges peaked in… 2014. Some 275 startups had initial public offerings (IPOs) that year. As we approach the end of 2018, we’re off that mark by nearly 100.

It doesn’t look like the overall numbers are going to improve much. Sure, there are some megasized startups like Uber and Airbnb that say they’re launching IPOs in 2019. But as long as huge amounts of private capital continue to flow into the coffers of late-stage companies, startups that IPO will remain on the low side.

Which means it won’t be easy for investors looking to find alpha returns in the public markets.

One place they should look?

Among the small group of tech companies that have recently IPO’d, the returns have been good. These are the highly sought-after “young, exciting, high-growth and high-upside tech companies” I’ve been talking about.

So far this year, stocks in this cohort are up around 22%. The S&P 500 itself is showing gains of just half a percent. The tech companies comprising the S&P 500 are doing better. They’re up 9.9% for the year.

That tells me that young, exciting, publicly listed tech companies are still in high demand, and that you can build an alpha strategy around them.

It’s not a bad strategy. But it doesn’t hold a candle to ours…

We’re investing in these same promising tech companies but at much earlier stages. Think about it for a moment…

If investors are happy with the gains they get from investing in companies that have recently IPO’d, just think how much happier they’d be if they had invested in these companies in their early stages.

Of course, what we offer goes way beyond “beating market returns.” Our upside aims for 10X with a “stretch objective” of 25X to 100X.

The trick with going after such high upside is limiting downside through deal flow and research. By the time we’re through vetting the startups we’re interested in, we know them better than the founders do (at least that’s how we feel). 

The recommendations you get are the companies that impress us the most and meet our high standards. What you don’t see?

It’s the investment-worthy companies that probably would have been recommendations a couple of years ago but now can’t quite make it to the very top of our lists because of the higher level of competition.

That’s what improving deal flow does!

It’s our way of democratizing the highest-reward alpha strategies. In our view, 1% is not nearly enough investors taking advantage of this strategy.

And that’s a shame.

Invest early and well,

Andy Gordon

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