Early-Stage Playbook Lesson 1

Transcription

1 Early-Stage Playbook Lesson 1 [MATT] Welcome to Crowdability s Early- Stage Playbook. I m Matt Milner. [WAYNE] And I m Wayne Mulligan. [MATT] For a lot of you, this is probably your first step into the world of early- stage investing. As you re going to see in a few minutes, not only is early- stage investing exciting, but it can have a major impact, too. First of all, early- stage investors are critical in helping world- changing companies get started Without early investors, companies like Apple, Google, and Amgen wouldn t even exist. Our lives even our health would be pretty different without these companies. But just as important to you, early- stage investors can make fortunes - because they re investing in these companies when they re still private, when they re still on the ground floor. Facebook s first investor, this is a guy named Peter Thiel, he turned half a million dollars into 1 billion. Google s earliest investors made 3,000%. Investments like that could change your net worth overnight. [WAYNE] But those examples aside

2 Even if you look at the average numbers, professional early- stage investors have earned 27% per year. If you could earn 27% each year, you d double your money every 3 and a half years Over a 10- year period, a $25,000 investment would grow to more than $250,000. To put that in perspective for a second, if you invested that same $25k into the stock market, and you earned the historical average for stocks, in ten years it would only be worth $40,000. So keep in mind: historically, the returns from early- stage investing have absolutely demolished the returns from the stock market. [WAYNE] But make no mistake: investing in start- ups can be risky If you don t have the right framework, and the right strategy it s likely you ll wind up investing in the wrong start- ups over and over again. But it doesn t have to be that way. The professionals in this space use a special process Some of them have been using it successfully for more than 50 years. This process is there to minimize risk and maximize returns And this process is the reason they re able to earn average returns of 27%. So when we set out to create the Early- Stage Playbook, we made it our mission to learn about this process, and then translate it into the program you just enrolled in. We reached deep into our network and sat down for interviews with dozens of professional early- stage investors. These folks are known as Venture Capitalists or Angel Investors And these investors shared with us their time- tested strategies for finding and profiting from the most promising early- stage companies. The course you just started Crowdability s Early- Stage Playbook is the only place in the world you ll find this information all in one place

3 You can t find it in a book; you won t find it hidden somewhere in Google. This is the only place to access the Playbook of some of the world s top investors. And it can be used by anyone We ll show you how, by getting access to this Playbook, a group of college professors turned $70,000 into $355 million. We ll also show you how a professional chess player turned $500,000 into $1 billion using the very same strategies. And we ll introduce you to one of our business partners a guy who, in just three years, turned what probably amounts to a monthly paycheck for many of you, into far more than a million dollars. But to be clear, those are extreme examples and you don t need to earn returns like that to be a successful early- stage investor. While we ll always swing for the fences, what we re really shooting for are singles and doubles. We re aiming to earn 27% per year, year- in- year- out, in good markets and bad. That s our goal with this program. [MATT] I know what some of you might be thinking right now You re thinking that these professionals these VCs who earn massive returns - - they re probably financial geniuses, or they re rocket scientists But that s just not the case. Don t get me wrong: they re smart people. But they re no more intelligent than you. They don t have PhDs in finance or computer science. One of the most successful VCs I know studied English in college. So don t worry if you re not a finance expert or a technology guru. You don t need any fancy skills to be an early- stage investor. In fact, by the time you get through this course, you ll see that it s relatively simple.

4 It s definitely easier than trading options, or digging into a company s 10- K. You just need some good, common sense and you need some discipline: In fact, all you really need to do is consistently apply the step- by- step framework of the Early- Stage Playbook. [WAYNE] We have a simple objective with this course: To show you how to be a successful early-stage investor. By the time you reach the end of this program, you ll know exactly how to do three things: 1. Find and get access to thousands of early- stage deals 2. Quickly filter out the ones that aren t worth your time and 3. Dig into and invest in the ones that are worth your time. But before we go any further, let me make one thing completely clear: We have no financial relationship with any of the companies we ll talk about in this course None. It s as simple as that. We make our living by providing impartial, independent education. And speaking of education, let me tell you a bit about the course The course is broken out into 12 separate video lessons. These lessons easy to follow each of them is under an hour, and some are far shorter than an hour. And now might be a good time to show you how your online classroom works Here s the homepage for the Early- Stage Playbook... Here you can see the full outline of the course.

5 You might notice that you don t have access to all of the lessons right away. We did this intentionally. We don t want students blazing through the course in a weekend that s how you d miss a key concept and potentially make a bad investment decision. So each week, you ll receive an notification when a new lesson opens up. You ll click through from the , you ll land on our website, and you ll be dropped right into the latest lesson. Here s what a lesson page looks like A little lower down the page, you ll see additional course material. These are your bonus reports and case studies. These materials will show you how to take what you learn in this course, and put it into action. Once you ve finished watching a lesson and going through the materials, you ll be prompted to click the Take a Quiz button over here on the right. Here s a sample of one of the quizzes you ll see. All questions are multiple choice. They re only a few questions long and you can retake them as many times as necessary. There s a lot of other valuable material here, too So go ahead and click around Get familiar with the website and then get ready to dive into the rest of this introductory lesson. [MATT] We broke up the Early- Stage Playbook into two parts: The first part is the FOUNDATION And the second part is STRATEGY & TACTICS it s all about applying the foundation to the real world. In the foundational lessons, you ll learn all about private equity and early- stage investing. That s going to provide you with a basic toolset.

6 Then, after you wrap up the foundational lessons, you ll learn to apply that foundation to real- world investing In particular, you ll learn about the framework we uncovered that allows early- stage investors to consistently earn 27% per year. We call it the ASE Process. ASE is an acronym. It stands for Allocate, Screen, and Evaluate. It s a simple 3- step process for finding, filtering and hopefully profiting from high- quality early- stage companies. And finally, we ll wrap up the course by showing you exactly how to make an investment, exactly how the process works, and best of all how you get paid when one of your investments is a winner. So let s kick things off today by looking at what you ll learn in Lesson 1, the introductory lesson you re watching right now. 1. First, we ll give you a primer on Private Equity and specifically, we ll show you what it means to invest in private start- ups. We ll also show you how this is different from investing in the stock market, which is Public Equity. 2. Then we ll give you a quick history of early- stage, private investing 3. After that, we ll tell you more about the professionals in this space the investors known as venture capitalists, or VCs for short. 4. And finally, we ll introduce you to something called equity crowdfunding. Equity crowdfunding is a new form of venture capital this is what lets citizens like you invest small amounts of capital into private start- ups. [WAYNE] Let s get started by going over what we mean by private equity investing, and how it s different from investing in the stock market When we talk about investing in early- stage companies or start- up companies we re talking about investing in private businesses. So what do we mean by private businesses? Well, we mean any company that s not traded on a public stock exchange like the New York Stock Exchange or the NASDAQ.

7 Companies like Ford, Facebook and Google are all traded on a stock exchange. They re publicly traded. They have ticker symbols, are regulated by the US Securities and Exchange Commission, and can be bought and sold by anyone, at any time. The way they became publicly traded was by going through a process known as an Initial Public Offering, or IPO. This is when an investment bank like Goldman Sachs or JP Morgan helps a company raise a large sum of money by selling a stake in the business to thousands of individual shareholders. Once a company is public, new investors can step in and buy & sell shares. But before a company goes public, it s privately held. The only people who own its shares are its founders, its early employees, and sometimes, early investors. When a company is private, it doesn t have a ticker symbol, it s not regulated by the SEC, and up until recently, only wealthy people who had a direct relationship with the company were permitted to own shares. For example, when Facebook was first getting started when it was still a private business the company needed money to help it grow. It received that seed capital from a wealthy investor named Peter Thiel. Thiel is what s known as an Accredited Investor. That means he has a net worth of at least $1 million or, that he earns more than $200,000 per year. Being accredited gave him the legal ability to invest in private businesses. Furthermore, Thiel had a pre- existing relationship with Facebook s founders. He already knew them. These two rules the need to be accredited, and the need to have a pre- existing relationship were put in place by the SEC in The rules were meant to ensure that only sophisticated and wealthy investors could invest in high- risk start- ups. But the rules have recently changed due to new government regulation called the JOBS Act we ll explain more about the recent law change in a moment. But again, so we re clear, what we ll be talking about in this course is how to invest in early- stage, privately held, start- up companies. [MATT]

8 So now that you know what you ll be learning, we thought we d tell you a couple of quick stories these are stories about the birth of early- stage investing. And you know, when you look back on it, it s pretty shocking how much wealth has been created in this tiny area of California that used to be known for fruit, not for finance. You see, once upon a time, the area we now call Silicon Valley was just a scenic part of San Jose, California it was covered in orange groves. But in 1957, a group of engineers left their cushy day jobs to go start one of the first venture-backed start-ups: it was called Fairchild Semiconductor. At the time, most electronics used semiconductors made from a chemical element - - it was called germanium. But the guys from Fairchild proposed using something more cost- efficient, instead The material was called silicon. So they set up shop in Mountain View, California, they went to work building their new transistors and before you know it, they had 12,000 employees and more than $100 million in revenues. Based on the early success that Fairchild had, a bunch of other transistor companies set up shop right around the corner. All of these companies used silicon, too... And ever since then, the area s been called Silicon Valley. [WAYNE] You know, all these technology companies were born in the Valley but originally, the investors who backed these companies the Venture Capitalists, or VCs for short - - were from the East Coast. More specifically, the venture capital industry was born in Cambridge, Massachusetts. The first venture capital firm was founded in 1946 by Georges Doriot it was called American Research & Development Corporation, or ARDC for short. Doriot was a business school professor, and he established ARDC to provide capital to soldiers returning from World War II, so they could set up their own businesses.

9 In its 25 years of existence, ARDC invested in more than 150 start- ups. One of its first major successes was a $70,000 investment into Digital Equipment Corporation or, DEC that ultimately became worth $355 million. Venture capital firms are critical to the world of start- ups. Without specialized funds dedicated to investing in high- risk, high- potential opportunities, the world probably wouldn t be where it is today. You see, entrepreneurs in risky industries like technology, healthcare and biotech don t have the luxury of walking into a bank to apply for a business loan. For one thing, banks don t understand these types of businesses. For another, these businesses are highly speculative. You wouldn t want your bank taking funds from your savings account and betting it on a high- risk biotech company that s trying to cure cancer. Therefore, specialized investment funds, run by specialized managers, are critical for our technology industries to get started, survive and thrive. [MATT] Now that the venture industry has had more than 60 years to evolve, it s become pretty sophisticated and pretty huge. Nowadays, VCs invest $30 billion a year. Some of these VCs focus on specific sectors For example, one fund based here in New York, Union Square Ventures, only invests in software start- ups. Other funds just focus on healthcare start- ups. And other types of venture funds just focus on start- ups at certain stages of development For example, VCs like Kleiner Perkins, Benchmark, Sequoia these guys mainly invest in later- stage companies that already have millions of dollars in revenue. These are called growth stage VCs. At the other end of the spectrum, certain funds only invest in companies at their earliest stages. The early- stage funds are called seed funds they provide the initial seed capital that gets a company off the ground. Over the last 10 years or so, seed funds have gathered huge amounts of steam

10 They ve figured out that, sure it can be risky to put money into a company that s just getting started but the financial returns can be enormous! And you know there s another trend we should mention, too Nowadays, hundreds and hundreds of technologies and services are available to help start- ups get off the ground either for very low cost, or in many cases, for free. Twenty years ago, before all these services were around, a start- up would need at least $1 million to get its business launched. Today a company can get started for as little as $100,000 sometimes even less! What this means is that for the first time ever, companies in need of seed capital can skip professional venture capitalists and they can go directly to individual investors instead. These individuals are known as angel investors. Angels invest anywhere from a few thousand bucks to a few hundred thousand. And, surprisingly, they invest just as much capital into start- ups as venture investors angels invest $30 billion a year. Why do they invest so much? Well, #1, because they enjoy it as you re going to learn in the Early- Stage Playbook, being an angel can be incredibly exciting But #2, if they build their investment portfolios the right way if they use a real system they can get returns that demolish the stock market. Speaking of which, now s probably a good time to tell you about the people that contributed to this course. Let s start by telling you why we interviewed 30 different venture capitalists and angel investors to create this program [WAYNE] Matt and I have been involved with start- ups for almost two decades. We ve both been successful entrepreneurs, and both of us have advised, mentored, and invested in dozens and dozens of other peoples start- ups. But frankly, we made most of our money as entrepreneurs by starting and growing our own businesses, and occasionally, by selling them to bigger companies. So when we sat down to build the early- stage playbook, we asked ourselves:

11 Who are the absolute best people to teach Crowdability s students how to consistently make money by investing in start- ups? And actually, the answer was pretty straightforward: The people who ve already done it, over and over again! That s why we spent the better part of a year speaking with dozens of venture capitalists and professional angel investors Folks who ve made their living and their fortunes by investing in start- ups. To us, nothing makes more sense than finding the most successful early- stage investors in the world and then learning how to copy what they do. For example, if you want to be a great value investor, you should read about Warren Buffett you should try to copy every move he s made. If you want to get rich investing in commercial real estate, you should study Sam Zell he s responsible for three of the largest real estate IPOs in history. And if you want to be a successful early- stage investor, you should learn the ropes from professional VCs like the pros we brought together for this course! These people have made literally billions of dollars investing in start- ups. Peter Thiel made a billion dollars on his Facebook investment alone. Jim Breyer from Accel is worth over $2 billion. And Michael Moritz from Sequoia is worth over $3 billion. What s even more impressive is that all these billions represent just 20% of the profits these men have generated. Let me explain You see VCs don t usually invest their own money They invest other peoples money kind of like how you invest in a mutual fund, and the manager of that fund whether it s Fidelity, Vanguard or somewhere else will manage your investments for you. It s the same thing with a venture fund. Now, the way VCs make their billions is pretty simple:

12 They charge their investors something called carried interest, or carry, for short. Carry is essentially the VC s share of the profits And here s how it works Let s say that over the course of 5 years, the VC invests a $100 million fund into a bunch of different start- ups, and in total, the successful start- ups in the bunch end up being worth $300 million. So the VC fund tripled its money. Not bad. Well, the first thing the fund does is it returns the $100 million. Now they re left with $200 million in profits. As their share of the profits as their carry the VC generally earns 20% of those profits. So in this case, the carry would be $200 million in profits x 20% or $40 million. Not a bad way to earn a living. But the important thing to note here is that VCs only make the big bucks when they earn a profit. This is fundamentally different from a stockbroker a stockbroker gets paid to trade your account! Whether he makes or loses money for you, he still gets paid! It s a different story for a VC A VC is incentivized to become a MASTER The better he learns his trade, the more money he can earn and the best earn billions. This incentive system creates some great venture investors And these are the guys sharing their expertise with you in this course. [MATT] So to quickly re- cap what we ve gone over up until now So far, you ve learned about the difference between public equity the stock market and private equity

13 In this course, you ll be learning about private equity. Then we went over the history of the venture industry all the way from Silicon Valley s early days as an orange grove, to the massive impact and importance it has today. We also looked at the different types of venture funds, and explored why angel investors have become such a key part of the private equity ecosystem. But now it s time to dive into the next generation of angel investing and this is where you come into the picture You see because of a new set of laws, for the first time in over 80 years, investors like you will be able to invest in privately held, early- stage companies. The law that made it possible is called the JOBS Act. Congress passed the JOBS Act in 2012 to create you guessed it jobs. What they realized is that new jobs in the US aren t created by big companies like General Motors; they re created by small businesses and by start- ups. So Congress figured out a way to get more new companies off the ground: They d make it easier for start- ups to raise capital. So that s what the JOBS Act is all about. There are two key components of the JOBS Act you should be aware of: 1. Title II 2. Title III Title II of the JOBS Act focuses on what s called General Solicitation. This is what makes it legal now for private companies to advertise that they re raising capital. In the past, the only companies that could tell the world they were raising funds were companies going through the IPO process. But now, all companies can do it This is why you can hear about investing in the next Facebook, even if you don t have a relationship with that company. Then there s Title III Title III of the JOBS Act focuses on what s called equity crowdfunding.

14 Equity Crowdfunding is what allows everyday citizens regardless of their income or net worth to invest in start- ups, and to get equity, or ownership, in exchange. And instead of doing it the old- fashioned way where a small handful of people would each invest $50 or $100k with crowdfunding, MANY people invest as little as a few hundred dollars that s what puts the crowd in crowdfunding. These changes are pretty revolutionary To put it in perspective, consider the fact that there s 100 million individual investors in the United States, and these people control more than $28 trillion in assets. If they transfer just 1% of those assets to early- stage investing, that s almost $300 billion in new investment capital going towards start- ups. Today, between VCs and angel investors, only $60 billion is invested into startups each year. So, with equity crowdfunding, we re talking about the potential to allocate 5 times that amount That means 5 times the number of new businesses getting started and 5 times the number of jobs. And for you, it means getting access to one of the most profitable investments in history. Keep in mind that some of the final regulations around equity crowdfunding are still being worked out. When you check out the Course Materials section of our website, you ll see a report called Equity Crowdfunding 101 that ll cover all the details for you. And we ll keep that report updated as things develop. But for now, the most important thing for you to know is how revolutionary these new laws can be for start- ups, for the country, and for your investment portfolio! [WAYNE] So that wraps up our first lesson. Again, we wanted to use this first part of the course to get you familiar with the Early- Stage Playbook, our website, and the history of early- stage investing. We went over a lot, so let s quickly review 1. Course Structure First we went over the basic structure of the Early- Stage Playbook. We re going to break the course up into two parts: Foundation and Strategy. First you ll learn the basics of early- stage investing, then you ll

15 learn the process the pros use to find, fund and profit from start- up opportunities. 2. Private Equity Then we dove into the concept of Private Equity and how it s different from Public Equities, or the stock market. You learned that up until very recently, it was illegal for private companies to raise money from just anyone. They were only able to raise capital from wealthy investors or as they re known, accredited investors who they already had a relationship with. 3. History of Venture Capital Then we went into the history of early- stage investing, starting with venture funds backing technology companies that put the silicon in Silicon Valley. 4. Evolution of VC and Angel Investing We also looked at how the venture industry has evolved over the last 50 years, with venture funds specializing in particular areas, and angel investors playing a larger role in the ecosystem. 5. Equity Crowdfunding And finally, we talked about the new law known as the JOBS Act. This is the law that opens up this exciting asset class to all investors. This is a lot of information, so if anything isn t clear, think about reviewing this lesson again before moving on. But when you re ready, we have two fun pieces of homework for you before you dive into Lesson 2. First, you should take your Lesson 1 quiz. If you don t have time to finish a particular quiz, don t worry about it: we ll save your progress for you. And if you need to retake it a few times, that s fine too. Your second piece of homework, and this one really is fun, is to go into the Lesson Materials below and watch the video we link to. It s an entertaining movie called Something Ventured. It s a documentary about the history of Venture Capital. It paints a really vivid picture about the industry and if you re anything like us, it ll get you very excited to be involved! [MATT] Well, that concludes the first lesson of the Early- Stage Playbook. Thanks for joining us.

16 We ll see you soon at the next Lesson.