100 shares of Walmart stock, purchase back at their IPO in 1969 would have cost you $1,650.
More than 50 years and 11 stock splits later, those 100 shares are now 204,800.
With Walmart trading at around $140/share today, that $1,650 investment in 1969 is now worth a cool $28.67M (not including dividend payments).
That’s the power of early investing.
The good thing about public companies like Walmart is, if you missed investing in 1969, you could have invested in 1970, 1971…or 1980.
If you were alive, that is.
But with startup investing…
If you miss your opportunity to invest in an early round of fundraising, you may never be able to invest again.
While many early-stage startups do indeed go on to raise future rounds, they’re often reserved for accredited or institutional investors (high net worth individuals)
When their round closes…will they ever raise money again? Will you be eligible to invest in those future rounds?
That I don’t know, but it doesn’t matter to me –– I’ve already invested in both companies.
Don’t get me wrong…being an early investor comes with its share of risk.
But the excitement and return potential are unmatched.
Why Are Early Invested Dollars So Powerful?
We talk a lot about early investing and the wealth-creating power of startups. By now you probably know a thing or two about buying equity, the different stages of funding, and exits.
But what really makes early investments so powerful?
We will go beyond the buzzwords and one-liners and break down things like valuation, Regulation Crowdfunding (Reg CF), risk and reward, and dilution. Then, we will look at some lesser-known startups where early investments really paid off.
Your Slice of the Pie
A company’s valuation at exit is the same for all investors, regardless of when they invested.
The thing that sets one investment apart from another is the valuation at the time of investment. Almost always, the earlier you invest, the lower value of the company. With early-stage investments, you can get more shares per dollar spent.
Investing $1,000 at a company’s IPO will get you fewer shares than if you invested the same amount early on during a Reg CF round.
This is because the more developed a company is, the higher the valuation, and thus the lower the risk. Safer bets don’t give returns like risky ones (more on this in the next section).
The best deal will always come in the earliest rounds. Let’s keep things simple and say you paid $2 per share. Your $1,000 got you 500 shares, and now you own 1% of the company.
For the company to exit, usually more rounds of funding are required. This means the startup will sell more shares.
This is when dilution comes into the picture.
The more shares the company sells, the more owners there are. Your 1% ownership shrinks down to a tiny fraction. But worry not, this isn’t a bad thing. The new rounds help the company to grow in value which makes your shares more valuable.
Even with dilution, it pays off to arrive early.
It’s All About Risk
So now we know that investing earlier gives you more shares for less money. But exactly why and how does this work?
It’s all about risk.
We could get into game theory and the psychology of risk, but instead, let’s just focus on two simple principles — risk-return tradeoff and risk/reward ratio.
According to Investopedia:
“The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor will accept a higher possibility of losses.”
In early-stage investing, there is lots of uncertainty. There is a decent chance that you will lose your investment, but you will get incredible returns if it succeeds. The earlier you invest, the higher the risk, and thus the higher the reward for the same amount of money.
The risk/reward ratio shows how much an investor can earn for every dollar he or she risks. A ratio of 1:3 means that you are willing to risk $1 for the possibility to earn $3.
What makes early-stage investing so attractive and so powerful are the insane ratios we work with. Many angel investors aim for risk/reward ratios of 1:10 minimum.
In early-stage investing, you will even see ratios of 1:20, 1:50, or 1:100 on really successful startups. You just can’t find risk/reward ratios like this anywhere else, other investments just don’t come close. This is why private equity is considered one of the best vehicles for wealth creation.
If we both invest in the same startup, but at different times, we will see very different potential earnings. If I invest at the seed stage, I may have a risk/reward ratio of 1:50, whereas you invested several rounds later with a ratio of 1:7. This is because usually shares become more expensive over time and because there is less risk in investing in a more developed company.
You Might Not Get Another Chance
Another reason to invest early is that you may never get another chance to invest.
For many companies, a successful Regulation Crowdfunding round is all it takes. By raising upwards of $1.07 million through a single crowdfunding round, many startups get enough money to scale right into an acquisition. If a company exits before doing another round, you lose your chance.
And the most obvious reason to invest early is that you legally won’t be able to invest later. Even now, post-JOBS Act, you need accreditation to invest in startups outside of Regulation Crowdfunding.
This means that the every-day investor only has this one shot at investing in a startup. Luckily for them, they can invest at the earliest stages, getting huge upside potential.
Early Investments That Paid Off
I’ll spare you the, “If you had invested $1,000 in Facebook” spiel.
We all know that in any big startup, those who invested earliest have the most to gain. So, let’s look at some startups that you probably don’t know about.
Here are some recent and interesting examples of when it really paid off to invest early.
The Very Good Food Company
The Very Good Food Company is a FoodTech company that designs, develops, produces, and distributes a variety of plant-based meat products.
On the equity crowdfunding site, FrontFundr, The Very Good Food Company raised $600,000 in a seed round. Just two years later, the company went public on the Canadian Stock Exchange.
Those early investors who got in during the seed round did so for $0.12 per share. On the day of the IPO, shares closed at $1.31. That’s nearly an 11x return. Investors who put $1,000 in could sell their shares during the IPO and walk away with a clean $10,920.
HelloMD is a digital healthcare platform for the cannabis industry. It is the largest marketplace of cannabis consumers in the world. It has been called the “Amazon of Cannabis.”
After bootstrapping, HelloMD did a RegCF round that raised to the limit of just over $1 million. Next came a Reg D round for accredited investors that raised another $2 million. Since then, the funding tally has gone up to a total of $8.5 million.
Now, HelloMD has secured a valuable partnership with Emerald Health Therapeutics to expand its patient program as well as a joint venture with Tetracann to break into international markets. To top it all off, the company just launched a virtual service for senior patient care to better reach customers during COVID-19.
They haven’t crossed the finish line yet, but things are going incredibly well for HelloMD. Since the Reg CF round, the valuation of the company has gone through the roof, making early investors’ shares much more valuable.
Knightscope uses self-driving technology, robotics, and artificial intelligence to develop autonomous security robots.
On equity crowdfunding website SeedInvest, Knightscope first raised $150,000, then six months later raised $1.1 million, then two years later raised $20 million.
The company broke records on SeedInvest and its astronomic growth has benefited investors greatly, especially the early ones.
Knightscope is now in the process of its IPO via Regulation A+. Its ticker symbol KSCP has already been reserved on NASDAQ. Given the company’s momentum and valuation, when the IPO process completes, investors will be able to sell their shares for incredible returns.