In the news, we frequently hear about companies going IPO. We get excited! Often times, it's a company providing a product/service we frequently use ourselves. It's awesome. Everyone else loves it too! And now you finally get to be a shareholder too? Alas, reality kicks in, and we get upset to find other institutions get first dibs on the IPO. You'll have to wait until the IPO is launched on the market to buy the stock. It's fine. I'm still early, right?
Guess what? You may shocked to find even if you were able to get it at the IPO price, you're late. In fact, you're very late. The best valuations went to early stage investors long ago. Those investors are building generational wealth, and you're their exit liquidity. Here's why.
The first investors in the company are often investing into a business that is more of an idea. They're called "angel investors," and they're typically investing in what is called a "pre-seed round," or informally a "family & friends round." Since this is the point of highest risk, these investors get the most generous terms meaning a very low valuation. Almost always their investment is on a "SAFE" note. Simple Agreement for Future Equity. And yes, it's actually fairly simple, what they're betting on is the company will be worth more in the future. So if the company is valued at $1m in a pre-seed round, and in the next investment round if it is valued at $2m, the angel investors who invested at the $1m valuation win. It's actually slightly more nuanced than that, but let's keep it simple.
So now the company gets its pre-seed investment and builds its minimum viable product. It picks up traction, people love it, and now the company needs more money to scale. At this point, they're in the "seed stage," looking for investors that will provide them funding to help them scale and refine their offering. They're still likely unprofitable (maybe even no revenue), but the business shows a lot of promise, hence why they need the funding.
Fast forward, they get their funding, they scale, they refine, they're hitting all their milestones, people are loving what they've built, but it's still not fully monetized, so they're not profitable, and need more funding. Now they go into "Series A" where they're likely to get more venture capital than angel investors and for bigger dollar amounts.
Things continue going great, and they rinse and repeat this cycle into Series B, Series C, Series D, and maybe even Series E. Along the journey, they've managed to find their product market fit, they've properly monetized, and are even likely turning some profit. It maybe took 10-15 years to get there, but they made it!
And now the time has come to really get big. Time to go IPO. Time to get access to a lot more capital. Time to reward employees. And guess what? Time to reward all their investors up until this point! After having their investment tied up for 10-15 years, those investors are ready to cash out! How do they cash out? They sell their stocks when the company goes IPO. At this point, a 500x+ return isn't crazy for the earliest angel investors. Even if you invested just $100, at that rate of return it could be $50,000. Now just imagine the numbers when we're talking about investing $1,000 or $10,000. It's insane! It's where millionaires are printed! It starts getting into generational wealth territory.
I have good news and bad news. I'll start with the bad news. Typically early stage investment opportunities like what I described are gate kept to the wealthy in the US who either make $200,000 or have a net worth $1,000,000. I know, it's super unfair the wealthy are the ones who get to become wealthier.
However, I have good news -- there are exceptions! Some companies file paperwork with the SEC to seek exemption from those gatekeeping requirements and are actively raising funding on platforms such as Wefunder for as little as $100!
Now, of course, it is worth noting these investments are risky. But it also does give you an opportunity to get some outsized returns if you hit the right companies. Not financial advice, but my contention is angel investments should be part of your investment portfolio along with stocks, mutual funds, crypto, real estate, etc.
More and more companies such as Substack, Replit, and Mercury have opted to raise this way, and I thought it was the best pathway for my startup, Media3 Labs too. We're building Scoop3, an onchain podcast player connecting fans to their favorite podcasters and each other. We wanted to give the opportunity for our users to not only be a part of the journey from the beginning but also be able to provide them the potential to be an owner too. And we hope you join us!
But before I signoff, I want to leave you with this: IPO is exit liquidity. Not generational wealth. Get in early and be the first to dance with profits!
