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Crowdfunding Investing - How Peter Thiel Makes 4,000% Return | How to Make Money - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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If you think 15% returns on stocks are good,
stay tuned because I’m going to show you
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how to find investments that earn double that
on average and as much as 4,000% for single
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investments.
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By the time you finish this video, you’ll
have my top two steps for finding the best
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deals in equity crowdfunding investing.
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In fact, I used these same steps when I worked
as an analyst for venture capital and wealthy
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investors.
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We’re talking crowd investing today on Let’s
Talk Money.
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Joseph Hogue with the Let’s Talk Money YouTube
channel where we’re creating the financial
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future you deserve.
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I want to send a special shout out to everyone
in the community, thank you for taking a part
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of your day to be here.
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If you’re not part of that community yet,
just click that little red subscribe button.
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It’s free and you’ll never miss an episode.
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I’m excited about this video.
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This is a world I used to live in but I don’t
get the chance to talk about it much anymore.
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This is something you rarely see in the mainstream
investing news and you’ll never get an inside
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look into the process.
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I’m going to start with a quick look at
crowdfunding investing, what it is and why
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you need these investments in your portfolio.
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Then I’ll reveal two of the most important
steps I used to find the best investments
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for the venture capital firms I worked for.
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These are two of the steps I share in Investing
in the Next Big Thing, How to invest in startups
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like an angel investor.
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In it, I give you all the tools I developed
over more than a decade as an equity analyst
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and working for VC firms so I’ll leave a
link to that in the video description below.
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I’m going to reveal the two most important
steps to analyzing any equity crowdfunding
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deal but let’s start with a basic idea of
crowd investing and why it could be the most
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important investment you ever make.
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Investing in startups is nothing new.
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Peter Thiel was one of the first private investors
in Facebook for about a penny a share in 2004.
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When the company went public in its 2012 IPO,
Thiel made $2 billion or about 40-times his
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money on that ONE SINGLE INVESTMENT!
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And that’s far from the exception in the
world of venture capital investing.
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Mike Markula became the first outside investor
in Apple in 1977 with a $250,000 stake that
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gave him a third of the company.
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Just three years later when the company issued
shares, HE MADE $203 MILLION!
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But you can’t get into this kind of investing.
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The government says you can’t.
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Unless you have over $1 million net worth
or make over $200 grand a year, you can’t
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invest in companies until they go public on
the stock exchanges.
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That is until the 2012 JOBS Act.
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This act was designed to make it easier for
small businesses to get funding and give regular
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investors access to this kind of opportunity.
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With this new law came the equity crowdfunding
websites like EquityNet, CircleUp and WeFunder.
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These sites act as the broker, with early-stage
companies posting on the platform for investors
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to review.
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The process of investing is surprisingly simple
so I don’t want to spend too much time here,
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instead I want to get to those two keys to
analyzing the crowdfunding deals.
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Because when I say equity crowdfunding investing
could be huge, I mean HUGE!
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Accredited investors make up just 5% of the
population of our great nation.
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That means another 58 million households that
can invest in these deals.
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Research by Willamette University on more
than 1,200 early-stage investments over 15
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years showed an average return of 160% over
any four-year period, that’s a 27% annual
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return.
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That’s almost triple the average annual
return on stocks and six-times what you’ll
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earn on bonds.
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In fact, look at what that average return
on startup investing means to a portfolio
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of $10,000 over 20 years versus the average
returns in stocks and bonds.
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That investment in stocks is barely a blip
on the graphic next to the $1 million created
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in startup investing.
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So I know you’re excited.
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You want those 27% returns, don’t you?
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Let’s go back to that survey one more time
and I’m going to show you why you absolutely
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must watch the rest of this video.
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Just over half those 1,200 startup investments
ended up returning less than the original
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investment.
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In fact, in my experience as a VC analyst,
more than a third of these deals return no
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money at all.
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Turning a startup into a million- or billion-dollar
business is risky and most new businesses
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fail.
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Just one-in-ten of these deals accounted for
90% of the returns.
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Getting those triple-digit returns in crowdfunding
investing, finding the next Facebook or Apple,
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means being able to weed out those nine-out-of-ten
investments that will lose your money.
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This isn’t sitting in your PJs watching
CNBC for a hot stock tip.
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This is the kind of investing that creates
generational wealth.
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That means having a process for finding those
winners and knowing how to invest.
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The first thing you need is a quick checklist
to weed out the losers, the startups that
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have little chance at being successful.
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As a venture capital analyst, you’re taught
to be absolutely ruthless.
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You’re investing millions of other people’s
money and in an industry where so many investments
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flop, you have to be an uncaring SOB or you’ll
lose money.
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That means developing an uncompromising process
for picking only the very best startups in
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which to invest.
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One of the most common reasons startups fail
is weak management.
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In fact, I know a lot of VC analysts that
spend almost all their time studying management
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of a company before making that investing
decision.
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A billion-dollar idea is worthless if the
entrepreneurs behind it don’t have what
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it takes to get the job done.
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So if you see any of these warning signs in
your potential crowdfunding investing deals,
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just run the other way.
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Nobody on the team has any industry experience.
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Management should have somebody on the founding
team, staff or at least in an advisory role
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that knows how the industry works.
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It’s not enough to be a good manager.
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Nobody on the team has finance experience.
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Maybe this is just my prejudice as a finance
guy but I want to see someone at the company
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who understands the numbers.
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It’s ok to be a dreamer but put a number
on it for me.
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Management has unrealistic assumptions of
market share, that’s the amount of the market
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they think they can sell against competition.
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You might have to do some quick math here
but if management says the market for their
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product is $100 million and they project $10
million in first-year sales, that means 10%
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market share.
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Most startups see low single-digit market
share, like two to three percent max, so anything
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above that may just be wishful thinking.
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Finally here is if management believes there
is no competition for the company’s product.
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That’s just lazy market research on their
part.
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You may have an innovative product for an
underserved niche but there is always competition.
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Startups and entrepreneurs are horrible at
the numbers.
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Honestly, some of the financial projections
I got from entrepreneurs looking for funding
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were like comedic relief so there’s also
a couple of warning signs you can look for
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in the financials.
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First if there’s no financial statements
and projections at all.
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Even the earliest stage company should have
projections on costs, a review of money spent
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to date and sales estimates for the market
size.
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One warning sign here that won’t apply to
all startup investments but maybe a little
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more so to crowdfunding investing is if no
sales are expected within three years.
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There are some industries, especially pharmaceuticals
where you’ve got years of product development
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and testing, but for most startups I want
to see plans for sales in a few years or sooner.
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The company may not be turning a profit yet
but I want to see money coming in the door.
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You should also compare the projected costs
for things like marketing, administration
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and other operational items against the financial
statements for competitors.
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Any company that has stock issued has to file
annual financial statements so you should
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be able to get a few of these to check against.
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Startups might see faster sales growth but
they’ll also likely pay higher percentages
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of those sales to marketing and administration
versus those established companies that have
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efficiencies of scale.
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Using just these seven points is going to
help you weed out a lot of those crowd investments
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that have no shot at success.
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After you’ve narrowed your list of potential
investments, it’s time to put a price on
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that startup to make sure the return is there
on your money.
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Most analysts have their favorite method but
I’ve found the best is using a blended approach
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with two or three methods.
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A big part of this is going back to those
sales estimates from the company and coming
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up with your own realistic estimates.
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I’ve seen a lot of entrepreneurs try to
talk investors into funding simply by the
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size of the potential market.
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It’s usually an attempt to avoid a realistic
valuation so they argue that the size of the
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market in the billions will support a solid
return and you shouldn’t worry about how
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much you’re paying.
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That’s me calling bullshit because YouTube
doesn’t like me saying bullshit.
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The first way you can value a company is by
comparing it to mergers and acquisitions or
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M&A deals in the industry.
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The fact is that the vast majority, like three-out-of-four
successful startup investments you’ll make
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will be companies that get bought out, not
companies that make it to an IPO.
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So finding how much other companies are paying
for this type of company is very important.
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You can usually get a good list of acquisitions
just by typing in Google the name of the industry
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plus ‘M&A’ or ‘acquisitions’.
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A lot of VC firms will even publish lists
of acquisitions with averages paid per sales
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and earnings.
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What you’re looking for is how much those
companies were bought for relative to their
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revenue or sales.
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So if I paid $500 for a company making $100
in sales each year, I paid $5 for every dollar
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of sales.
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Since most startups still aren’t profitable
by the time they get acquired, measuring this
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on sales is something you can do for any company.
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You want to put together a list of at least
five to ten acquisitions that were made in
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the last year and for companies as similar
to your target investment as possible.
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Then you’re going to take all these transaction
values per revenue and get an average.
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For example, in the analysis here I did when
Pinterest was raising money, I compiled a
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list of seven acquisitions in the social media
space.
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It turned out that companies were paying on
average $8 for every dollar in revenues and
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$61 for every dollar in EBITDA which is earnings
before interest, taxes, depreciation and amortization.
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When I applied that number to the projection
of $2.8 billion in sales I got an estimated
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valuation of $22.8 billion.
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On the valuation of the company at the time,
getting that $22.8 billion a few years later
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would have been about a 29% annual return.
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The second method to estimate your return
on crowdfunding investing is going to be comparing
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the company’s value against competitors
with publicly-traded shares.
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This is similar to that M&A method but you’re
looking for how much investors are willing
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to pay for companies in the industry.
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So here you’re looking for similar companies
with stock.
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You find this on any online investing site,
Yahoo Finance or Morningstar by looking for
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other companies in the industry.
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You then put together your list of the market
cap, the company’s stock valuation, relative
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to sales just like in the last method.
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A couple of important notes here.
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You see that I find the average, median, high
and low values in these lists.
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That’s to give you a better idea of what’s
fair and what might be an outlier.
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Here we see that at the time, investors were
paying 16-times Facebook’s sales while they
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were only paying an average of 7.7-times for
other social media companies.
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Clearly it wouldn’t be right to use Facebook’s
valuation to another social media site unless
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that site had the same advantages as Facebook.
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I also used another measure here which was
stock price per monthly active user, or MAU.
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This is something you have to develop as an
investor, an insight into the important measures
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within an industry that are going to help
you compare and value investments.
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So using the multiple of 7.7-times sales investors
were paying for similar companies and using
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estimates for future sales on Pinterest, we
came to a valuation of $21.8 billion or a
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return of about 27% on the current investment
offer.
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It turned out that both of these methods,
the M&A and the Comparables approach, gave
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us similar valuations and estimates for return.
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It’s great when that happens because it
gives you more confidence in the future return
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on the investment.
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Most of the time, they aren’t so similar.
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When that happens, you can take an average
of the two or decide which is a better estimate.
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If that average valuation means a solid return
in a couple of years then you might just have
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a go on your investment.
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I don’t want you to think these are the
only two steps that go into analyzing crowdfunding
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investments but they will put you way ahead
of other investors in putting your money to
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work.
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You’ll still have a few duds, a few investments
that pay nothing, but you’ll avoid most
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of the bad investments and will find enough
that multiply your money by a factor of ten
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or more that you’ll average out to 30% and
higher returns.
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If you are serious about getting into this
world of venture capital and angel investing,
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check out that book Investing in the Next
Big Thing.
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I share the exact process I used to value
startup companies for venture capital firms
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from researching the market to an investing
strategy that puts your money in the best
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deals.
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I’ll leave a link to the book in the description
below and will answer any questions you have
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in the comment section.
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Join us in the Let’s Talk Money community
by clicking on that subscribe button.
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We’re here Mondays and Wednesdays with the
best videos on beating debt, making more money
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and making your money work for you.
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If you’ve got a question about money, just
scroll down and ask it in the comments and
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we’ll answer it in a video.
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