The private equiteer
All for one and one for all
22/11/2021 Edit — Visualisation 2 changed to reflect Draper Esprit’s name change to Molten Ventures.
Earlier this year the term ‘Retail investors’ reverberated across the world’s (financial) media outlets. Whether described as heroes, rebels or clueless crusaders, as a force they successfully upended the status quo in public markets with the Gamestop saga. The headlines might have faded, retail investing is still very much alive and growing¹.
So who is this elusive retail investor? — If you don’t know chances are you’ve never looked into actively investing yourself. It is likely you are invested in the public markets, at the very least through your company pension. The main difference? A retail investor takes an active approach to investing, whereas your company pension is invested on your behalf by professional investors. Beyond pensions there are a whole wealth of passive investing possibilities. If active investing sounds like something you want to be doing have a look at this short starters guide: 9 links to NOT get rich quick. Below I dive into the topic of one of the bonus links provided in that post…
…private equity markets
It might be the SPACs or the fact private equity under management is expected to continue showing double digit growth, whatever it is, ‘private equity markets’ are an area of the global investment arena which is ‘heating up’.
Put simply private equity are shares in companies that are not traded publicly. You might have heard of private companies that intend to float onto the stock market, also referred to as an Initial Public Offering or IPO. Perhaps you have even heard of companies intending to ‘go private’. The most famous example being Elon Musk tweeting about taking Tesla private (the Securities and Exchange Commission -SEC- wasn’t happy).
Before a potential IPO, bearing in mind plenty of companies never float, there is a need for private capital to operate. And where Private Equity (PE) firms usually buy up entire companies, venture capital (VC) firms invest in new(er) ventures for smaller stakes. Be these startups or scaleups, it remains on the far riskier end of the investing spectrum. Usually the only way of getting a return on investment (ROI) is either through seeing a company IPO or ‘exit’ (acquisition of the business). Nonetheless it is the one area of private equity markets that has been heating up most in recent years; VCs have already poured in $361bn into startups in the first half of 2021 (which constitutes 230% growth on the full year of 2020).
So what makes being a venture capitalist attractive? Well for one VCs have so far outperformed all other asset classes².
‘Fortune favours the brave’ — Latin proverb
Considering the skyrocketing of this type of investing, some might argue this is a bubble that is going to pop. While others are saying this is part of a larger shift from public to private markets. Public markets have grown from $68 trillion to $91 trillion in the span of just under 3 years. A lot of capital is flowing into the markets (who are all these rich folks?), for one because these have become more accessible thanks to technology. So the latter analysis might prove valid; with so much capital invested diversification across private and public markets is more likely to occur.
With Freetrade you could actually invest in the publicly traded shares of a venture capital firm that itself has invested VC money into Freetrade.
Does tech make money flow ‘privately’?
In short, yes, through equity crowdfunding platforms. Besides retail investors, VCs, whether as firms or acting as retail investors themselves, are investing more and more through such platforms. And it makes sense to look for great investment opportunities in the private equity markets, not least because the ‘Big Five’ (Amazon, Alphabet, Apple, Meta & Microsoft) plus Tesla already make up roughly 8,5% of the value of all publicly traded assets ($10.7 trillion³ out of $91 trillion). As in, public investment opportunities are finite and only so many lucrative investment opportunities might be available.
While apps like Genuine Impact might assist retail investors with the vast amounts of data that exists for publicly traded stocks, making data driven decisions in startup investing is a lot trickier. A lot will be based on context, exploratory due diligence and indeed forecasting without proper benchmarks. VCs have their own tools and will need to have their ears close to the ground besides having a neck for spotting true innovation and product market fit. For retail investors it is only recently that crowdfunding platforms have grown into a force to be reckoned with, meaning information provision by companies that pitch for your money has significantly improved.
A retail investor in a VC world
Being a retail investor in this space also means keeping up with the opinions on this form of raising capital, as well as staying close to startup ecosystems. I believe the startup founder perspective is best summarised in this extract from a blog post by one of the Monzo founders:
It is probably the slowest, hardest and most expensive way to raise money.
If you’re struggling to raise VC funding, it’s almost never a good fallback option.
But it is useful, I think, for deepening the engagement you have with your early customer base or community, especially where you want to get them involved in product or brand development.
And while some VCs actively invest through such platforms others dissuade companies they invest in to raise funds via this route.
All with all, equity crowdfunding is viewed positively and I am passionate about it because of what it means for financial inclusion; this form of investing has democratised access to venture capital.
So let’s have a look at some key figures from my own portfolio as a ‘private equiteer’ (sounds more posh than crowd investor?):
- Frome June 2015 to October 2021 I’ve invested in 258 businesses
- 15 of these have since failed
- 4 had an unsuccessful exit; meaning shares were sold at (much) lower value
- 3 had a successful exit; meaning shares were sold at higher value
- sold shares in 3 further businesses at higher value, one gained 26x its original value, another roughly 20x — in 2 out of these 3 business I still own shares, 1 was sold via the Seedrs secondary market (see more info in footnote 3)
Before you imagine me enjoying my riches, the vast majority of my investments (72%) did not exceed £25. In short it is money spread over a longer period that a) I wouldn’t really miss and b) I actively sought to save elsewhere.
Believe it or not the (potential!) returns is not what made me start investing in startups, through Crowdcube and Seedrs (more basics on crowdfunding here, 2017). It was mainly driven by curiosity and a search for knowledge. I started off with such small amounts and although I’ve become bolder I continue to only put in money I know I won’t miss. Just as a reminder why I say ‘money I won’t miss’:
- these investments are illiquid; very hard, if not impossible, to sell before the business is either sold or floats onto a public stock market⁵
- these businesses are more likely to fail (statistically) than to succeed
Scared of losing your money? That is where diversification comes in, if you start off with this type of investing diversification is even more important than when invested in public markets. I personally believe that the insights I’ve gained from investor updates over the years, and the positive effect it has had on me as a professional also have some monetary value. That said, I do not want to end up in the red, so through diversification I make sure that several investments will pay for all (and more) of the investments I’ll make over time.
So unless you are bold (crazy?) enough to buy $8,000 worth of the next cryptocurrency that enjoys a bull-on-steriods run (and exit in time!):
It might well be worth having a look into investing small amounts in a few startups from time to time. Starting with £/€10 here and there doesn’t take too much effort as long as you see it as an educational journey; both from an investing skill and general knowledge point of view. Will you ‘get rich’ in the next 400 days doing it? Highly unlikely. Then again, it took Warren Buffet 44 years from his first investment to become a billionaire, and it wasn’t just public shares that made him one.
¹ = A user friendly stock trading app like Freetrade had 50,000 users in January 2020, growing to 300,000 in December that year to 700,000 in June 2021. And they’ve recently celebrated hitting 1 millions users (Oct 2021).
² = The below table shows returns per asset class, per given time period:
³ = Table showing the value of the 6 most valuable global companies:
⁴ = A great app to look at if you’re starting out with investing in the public markets (and are UK based) is Genuine Impact.
⁵ = Although not all business that raise money on the platform allow you too trade their shares on Seedrs’s secondary market, it does allow for the selling and buying of shares in company that aren’t actively raising funds.
Crowdcube is also in the process of testing its secondary marketplace Cubex.
