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A New Asset Class: Start-ups & Early Stage Companies

What do Facebook, GoPro, Twitter, Walmart, Microsoft, Chipotle have in common?  All of these businesses are now publicly traded multi-billion dollar companies.  Before September of 2013, the first chance that 99.9% of investors would have had to invest in these companies would have been their IPO.

But everything you knew about investing completely changed in September 2013.  This is when the 80+ year old ban on General Solicitation for Private fundraising was lifted.  The Jumpstart Our Business Startups Act (JOBS Act) now allows entrepreneurs and business owners to raise capital to launch or grow their businesses online – without going public.  But, what does this actually mean?

Let’s use Microsoft as an example.   Several private investors bought into the company for less than a $5 per share, depending on how early they got involved. A little later, then-obscure Microsoft issued shares at $21 in an initial offering in March 1986.  After nine stock splits, that 1 share became 288 shares with a present-day value of $7,200.

If a person was fortunate to have invested while Microsoft was still private, at say $5 per share, those same 100 shares ($500) would be worth over $28 million.  Even at the IPO price of $21 per share, 100 shares would be worth $7.2 million.  Now, with general solicitation being rolled out, Microsoft could advertise its private offering on the internet, which means you, your friends, and I would have all had access to the deal.

But you say, Microsoft is a “unicorn”, and there are only so many companies that ever become as big and valuable as Microsoft.  So, let’s look at another end of the spectrum, which happens more regularly, and see how investments there can work out.  “ABC Company” is a start-up with a strong team, traction, social proof, and large total addressable market.  They have bootstrapped their business for 8 months, have good trajectory, and decide to raise capital online.  Say the company is raising $600,000 on a $5 million valuation (there are thousands of similar private fundraises happening right now).

Fast forward 5 years when ABC Company is sold for $50 million.  Here is how that investment played out for the early investors:

  Abe Nixon chart

Here is a summary of the additional impacts that most people don’t think about and likely never make it into major news outlets, i.e. all the other positive economic ripples that are created by this event:

  • Investors who backed these entrepreneurs realized ~10x ROI (Sure beats the S&P 500 12% average)
  • There were likely 50-150+ good paying jobs created (Yep, we need more good jobs)
  • The Founders and First Employees became Millionaires in 5 years (Kinda beats most normal jobs)
  • These New Millionaires will then start and invest in more companies (Success Seeds Success)
  • Other employees learned how to build a successful company and will then go on to start new companies and create even more jobs
  • Capital got invested into Main Street and it worked out fantastically for everyone

There are already private funds and syndicates being set up around this ecosystem.  If I were a betting man, I would bet there will eventually be multiple, well known, publicly traded vehicles to capitalize on this NEW ASSET CLASS.

Stay tuned for more from Abe on this topic

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The Sapling Fund LP (www.SaplingFund.com)  targets best of class, early stage companies with a 3x-15x ROI profile on a 5 year horizon. It invests both capital and strategic mentorship into portfolio companies. Our target Sapling companies have a strong team, strong traction, strong social proof, strong scalability, and usually a multi-billion dollar total addressable market. Targets also typically leverage technology to create major, disruptive improvements in the marketplace.   Specific verticals of interest are:  Internet of Things, Healthcare Innovation, and FinTech.  The Sapling Fund LP team seeks to multiply the growth trajectory of great businesses using data, technology, mentorship, our strong network of relationships, and smart capital in early stage funding rounds less than $1M.

Abe Nixon is a General Partner with the Sapling Fund LP.  He specializes in Early and Growth Stage Venture Capital.  As an expert in early/growth stage business due diligence, funding, and growth strategy, he has reviewed more than 10,000 business plans, and consulted with hundreds of companies ranging from startups to billion dollar companies.  He also consults with private accredited investors and institutions.  One of Abe’s core missions is to improve the world through the support of great entrepreneurs, business owners, and private funding sources.  He believes that innovation and private enterprise are fundamental keys to sustained growth and prosperity of the US economy.

Abe NixonAbe Nixon

Abe Nixon is a General Partner with the Sapling Fund

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