Invest Early, Win Big

The earliest stages of a company - long before it is public - is often where we see the most explosive growth. Those only focusing on traditional stock market investments will miss out on this growth, but private investors who support a company from its very beginning will not. The early investors of Apple, Pinterest, and Facebook know this all too well.

Apple’s transformation from a garage startup to a global technology powerhouse is well-documented. In January 1978, the company secured an initial investment of $518,000, followed by additional rounds. When the company went public in December 1980, Apple had created tremendous wealth for its early investors. Between 1978 and 1979, Apple’s net income grew from $793,497 to $5,072,812 (Source: Fast Company).

Pinterest’s creator, Ben Silberman, approached private investors and angel investors valuing his company at $2.5 million. In just four years, Pinterest was valued at $3.8 billion increase of 152,000% for seed investors. David Rose, founder of Gust and author of the Guide to Making Money and Having Fun Investing in Startups, reflected on the tremendous growth Pinterest saw before the company was traded on the market “As you can imagine, angel investors…who had the foresight (and faith) to participate in that initial-funding round, have done very, very well.”

Rose’s book also highlights a similar growth pattern for Facebook. The public-market investors who bought Facebook stocks at the IPO price of $38. Those who invested at the seed stage would see a value increase of 76% by the time of IPO, resulting in a difference of 2000 times between seed and IPO investors.

For all three companies, some of the largest years of growth occurred long before they were publicly traded. This means most of the wealth created for their investors happened before the average person knew about the companies or could invest in them.

However, if contributing to the early success of a future major company (and reaping years of major wealth growth from it) is not compelling enough, becoming an angel investor is backed by two additional positives: diversifying your investment portfolio and recent favorable investing conditions.

Diversifying Your Investment Portfolio

Diversification is a fundamental principle of sound investing, and angel investing offers a unique avenue to achieve this. While traditional investments like stocks and bonds have their place in a portfolio, angel investing and venture capital (VC) presents an opportunity to diversify into high-growth assets (aka by investing in startups).

Monique Maddox, CEO & Founding Principal of Macrame Technologies and Minnesota angel investor started for this exact reason, “I started [angel investing] because I wanted to diversify my retirement portfolio. I had maxed everything else out, [and] saw this as an opportunity.”

By allocating a portion of one’s portfolio to early-stage investments, investors can capture opportunities in high-growth sectors such as technology, healthcare, and renewable energy that are not yet exchanged on the stock market.

On the flip side of this, by taking a portfolio approach and diversifying your investment strategy you can also use more traditional investments, like stocks and bonds, to balance out the risk, illiquidity, and longer time horizon that comes with early-stage investing.

Forecast Calls for Favorable Investing Conditions

The current early-stage investing landscape is ripe with opportunity. According to Pitchbook’s index of how founder or investor-friendly the investing climate is, a sharp reverse occurred in mid-2022 to the favor of investors. Things such as  liquidation preference, deal terms, and investor sentiment are reflected in the Pitchbook Index. As seen in the graph below, an upward-sloping index means the climate is investor-friendly.

[source]: PitchBook data

Additionally, historical data supports that VC returns outperforms the market, which makes sense given the risk involved. High risk, high return.

[source]: Maureen Austin, David Thurston, William Prout, “Building Winning Portfolios Through Private Investments,” Cambridge Associates, August 2021. Data is from 12/31/2020.

Comparing the returns of the US VC Index to the S&P 500 reveals that venture capital has delivered returns that exceed Public Market equivalents over many periods. It is important to remember early-stage investing is a long term investment. Investors should plan on a 10 year investment timeframe. And as with all investing, historical performance does not guarantee future returns.

Favorable conditions, including rapid technological advancements such as Artificial Intelligence and innovation out of necessity as our society faces major challenges, signal an investor-friendly environment for early-stage investing.

Start Today

You don’t need to be Marc Cuban to be an early-stage investor. The unique dynamics of venture capital are waiting for you. Join Minnesota’s most active angel network, Groove Investment Group and start looking at Minnesota’s hottest startups. Reach out to learn more about getting started at Mickayla@groovecap.com.