Don’t get me wrong…
I love a big juicy steak.
But if I ate steak all day… every day…
I’d probably get sick of it.
What’s one thing I’ll never get tired of?
Cashing In Big…On One Of My Startup Investments…
That will never get old!
But before you can have that sweet taste of victory in your mouth…
And if you don’t have a deep network to tap into…
Or the expertise to spot startups with potential…
You’ll probably never be successful in this space.
That’s why I started my service Angel Investing Insider––to give those just starting their journey…
Access to hot startup deals and the best foundation of education around.
I hope one of your startup investments lands you a massive payday!
Now, if you’re wondering what exactly to look for…
In a successful exit plan…
I’ve put together this quick little guide to help you out.
But to experience an exit, you first need to start investing in startups that are primed for success.
You see, angel investments are different from other types of investments like public securities.
When you invest in the stock market, you have the option to buy or sell at any time. This type of investment is “liquid”.
But, when you invest in early-stage companies like startups, you don’t have the option to sell when you feel the time is right. You need to make your assessment, invest, and then stick along for the ride.
There isn’t a market willing to buy your shares. And usually, selling shares of these companies is restricted by law.
This is why exits are always on our minds. Angel investments are long-term investments. You can’t just go and sell when the rain clouds appear. The only way to complete your investment and get a return is through an exit.
Is this a bad thing?
This added constraint and unique investor-investee relationship are what make the risk and reward on seed investments so high.
That’s why seed investments have a greater return potential than any other type of security.
To make this work to your advantage, you will need to be diligent, informed, and know everything there is to know about exits.
An exit is your opportunity to cash-out.
After searching for your startup, assessing it, investing, and waiting, an event will come where the company is going to change drastically and you will be able to sell your shares.
This usually takes 3-5 years, but can take up to 10. Again, this is a long-term investment and requires patience.
This exit event can come in many shapes and forms. This includes Initial Public Offerings (IPO), acquisitions, and even bankruptcy. More on this below
If everything goes according to plan, an exit will yield huge returns. I’m talking 20x to 100x your initial investment.
Now, let’s explore the different types of exits, why they happen, and how they affect you, the angel investor.
The first and most desirable, type of exit is an Initial Public Offering or IPO.
Only companies that have established themselves within a market and garnered significant success and attention can reach an IPO.
When a startup “goes public” it sells shares to the public through investment banks and stock exchanges. Here, any investor can buy stock and become a partial owner.
An IPO is usually the finish-line for seed investors. This is the golden opportunity to sell your shares and reap huge profits.
However, some investors actually choose to keep their shares and stay tied to the company hoping for more money in the future. This is very case-specific and depends on your goals as an investor.
Most of the time, if a company you invested in reaches an IPO you will be joyously ready to sell your shares and enjoy the fruits of your labor.
An IPO is one of the longest routes to a successful exit.
A more common (and still very desirable) type of exit is an acquisition.
When your startup is acquired, it is purchased by a large company that either wants its technology, intellectual property or wants to seize its market share.
Whatever the reason, an acquisition usually translates into a hefty return for a seed investor.
Here’s how it works.
When a startup’s value is high enough, business suitors are bound to come knocking. A negotiation takes place and assuming everything goes well, the startup is sold. The buying company purchases the startup and takes over its operations.
Because you, an angel investor, are a part-owner in the startup, your ownership needs to be purchased. This is when you can sell your stock in the company.
Usually, the company’s valuation at the moment of acquisition is much higher than it was when you invested. A high exit-valuation means a big return for you, the early-stage investor.
An acquihire (acquisition + hiring) is when a startup is purchased for its team.
This usually happens when the buyer is interested in the team behind the product rather than the product itself. The buyer is paying for talent.
When the startup is sold, employees will be transferred to the new company, usually with lofty hiring bonuses.
Acquihires can still be profitable exits for angels. A benefit to investors in this type of exit is that it usually takes place earlier than a normal acquisition.
In a normal acquisition, a startup needs years of experience and success, solidifying itself as a market leader. But, in an acquihire, a startup only needs to show the competence of its team.
There are a few less common types of exits to be aware of. These are usually less desirable than IPOs and acquisitions.
One last thing to understand about exits is the distribution waterfall.
A waterfall refers to the order in which investors get paid back.
This only applies to low exits that don’t generate big profits for shareholders. When there isn’t enough money to go around, the most important people get paid first.
Here is the most common structure of a distribution waterfall:
Now you can see that there is a hierarchy of exits.
Angels need to invest with an exit strategy in mind, but not every exit is a good one.
An IPO exit is uncommon but usually extremely profitable. Acquisitions are faster and more common and still have incredible return potential.
The majority of all startup exits take time, and you need to be prepared to play the long game. Don’t worry, the wait will be worth it because a successful exit off of a seed investment has the biggest return of any investment around.
Risk-tolerance and patience are essential traits for an angel investor. The path may be difficult, but the rewards create wealth unlike anything else.
Understanding exits is as important to angel investors as deal flow. The best way to achieve a successful exit is to invest in a startup that has all the markers for rapid growth and stability.
Our angel investing community, Angel Investing Insider, gives our members access to startup opportunities that are hand-picked by experts.
Not only will you have the opportunity to invest in these companies, but you will have access to the rest of the AII resources. This includes online classes, video lessons, and an angel investing community.
When it comes to buying and selling stocks, it’s all about… timing, timing, timing.
But when is the right time to make a move?
If you’re new to investing or you’ve been trading for decades, it’s always important to add new tools to your trading toolbox.
Today, I want to discuss one simple tool that I use to help make every major decision in my portfolio.
Let’s dive in.
You’ll hear me mention the 200-day moving average a lot when I talk about breakout stocks.
This metric is the average price of a stock over the last 200 days.
The chart below offers a performance breakdown of the SPDR S&P 500 ETF Trust (SPY), a fund that tracks the broader performance of the S&P 500. Yesterday, the SPY closed just above $306.45.
The 200-day moving average sits at $299.89 (represented by the orange line).
Most of the time, it makes sense to be bullish when stocks are trading above the 200-day moving average and bearish when they trade below that level.
When prices cross above the 200 days after being below, it’s time to flip the switch and go from bearish to bullish and vice versa.
Moving average crossovers can also give strong buy and sell signals.
When a shorter-term moving average crosses over a longer-term one, it is usually a sign that the trend has reversed, and it is time to trade in the direction of the short-term moving average. Depending on your preferred time frame, I suggest watching the 50- and the 200 day for longer-term trends and the 20- and 50-day for intermediate trends.
As you can see in the chart below, I’ve now added the 20-day moving average (the red line). It is still below the 200-day moving average, but that gap is narrowing.
For ultra-short-term trades in the options market, consider tracking the 13-period simple moving average (SMA) and the 30-period SMA on the hourly chart for my signals to purchase put or call options on stocks and Exchange Traded Funds.
When you apply these rules to the broader market, in addition to providing trade setups for the indexes, it can set the tone for all your trades at that moment.
When the shorter average has crossed above the longer one, be bullish.
When it crosses below it, it’s time to be bearish.
Moving average crossovers are simple, clear signals that can help you take some of the emotion out of trading.
You trade on the crossover and not on what you think might happen.
There is another way to use the 200-day moving average that is rarely going to give a signal, but you need to monitor it anyway.
When markets are screaming down like they were in March, you should be enjoying some fat profits from the shorts you established or the puts you bought as markets turned negative, and the prices fell below the 200-day moving average, and a bearish condition was established.
In the most recent down move that happened around March 20 with the SPDR S&P 500 ETF Trust trading between 305 and 310. The index eventually reached as low as 218 before rebounding higher back to the current level.
This provided traders using the 200-day MA opportunities to make huge profits as markets collapsed.
Worst case, you used the index crossing over the 200 days a stop loss and exited all your long positions, saving you a ton of money as prices collapsed.
The problem is that if you follow the 200-day moving average rule strictly, you are going to miss some long term moves when bear markets bottom.
The SPY prices just moved back above the 200-day moving average last week, and the 50 day still has not crossed back over the 200 day yet. (Below, the 50-day SMA is marked in red).
While there have been numerous opportunities for short term trades using the hourly price bars, long-term investors following these rules have missed an enormous rally.
In fact, they have missed gains of about 40% if they just owned the index.
There is one thing you can do involving the 200-day moving average that can keep you from ever missing a significant bear market bottom again.
When less than 20% of stock traded on the NYSE exchange are above their 200-day moving average, the bottom is close. It may not be exact, but most of the time, this represents a buyable long-term bottom in the stock market. It has worked in every recent significant pullback in the markets in past years, including the Great Financial Crisis and the dips in 2012 and 2016.
This indicator gave a strong buy-in late 2018 right before stocks reversed course and ripped higher.
In Mid-March, the indicator once again signaled a bottom in stocks. If you just bought the SPY ETF, you have gained 40% since then.
If you bought stocks that were still above their 50-day moving average, you would have been buying stocks like Zoom (ZM) and Regeneron (RGEN) that have led the market higher.
Switching your mindset to a more bullish move and taking 20- and 50-day SMA crossovers would have put you into stocks like NVIDIA (NVDA), Shopify (SHOP), and Spotify (SPOT) while everyone else was still waiting for the end of the world.
Most of the time, moving averages and moving average crossovers are momentum and trend indicators that can help set up for continuation moves in the market and individual stocks.
Most of the time, prices above the 200 day SMA are bullish.
Prices below the 200 day are bearish.
When markets are collapsing, the 200 day becomes a counter-trend indicator that allows us to wring the fear out of investing and get us back into stocks when everyone else is panicking.
The number of stocks trading above the 200 day should be in your investing toolbox.
It is like having a generator in the garage for emergencies.
You are not going to use it often, but when the time comes, you’ll be really happy to have it.
May marked my biggest trading turnaround in 2020 – flipping my account from a $50,000 loss to a gain of over $150,000!
It’s nice to be back on the green team…
(I took a little time to celebrate with my daughter on a quick boating trip.)
The bulls are in full control at the moment.
However, I still have a longer-term bearish outlook.
But before I tell you about it, let me break down some of the key developments I saw last month…
As I believe they’ll be even more relevant to your trading now…more than ever.
As markets rebounded off the bottom, I found myself in a difficult position.
Like many of you, I didn’t believe in the rally. Yet, the gains to be had were too much to pass up.
So, how do you work both directions at the same time?
Credit spreads are risk-defined directional bets where I know exactly how much I can win or lose at the outset. Iron condors are a variation of this where I take both a bullish and bearish bet at the same time, on the same stock.
When I trade, I want the flexibility to create a balanced portfolio but still take advantage of specific stock setups.
How do I do that?
Well, let me give you an example from May.
During the month, I found a sweet setup with Paypal (PYPL) for my Bullseye Trade of the Week. This was a long (bullish) play.
Looking at the various stocks in the market, I selected the Nasdaq 100 ETF QQQ as a bearish play.
One thing you may not be aware of – Raging Bull Elite members get some pretty special stuff. We provide them with a channel that not only includes extra facetime with the gurus, but some amazing content as well.
This past month, I actually got a chance to interview the heads of Sorrento Therapeutics.
If you hadn’t heard, Sorrento Therapeutics is a biotech company working on treatments for COVID. Their stock saw a lot of action in the month, and I wanted to know whether it was warranted.
Overall, I believe that biotech companies like Amgen (AMGN), Gilead (GILD), and the like are in an excellent position to grow during an economic downturn. If some of the new vaccines that use RNA technology end up working, it could open up a whole new category of medicine.
Of the big names out there, I’ve been trading Gilead (GILD) the most. However, I dabbled into some broader companies like Johnson & Johnson (JNJ) throughout May.
You probably could name a list of the stay-at-home stocks right now: Amazon (AMZN), Netflix (NFLX), Zoom (ZM), Telodoc (TDOC), etc etc.
Thing is – not all of them are great companies.
For example, Zoom Communications has already shown they can turn a profit. Any growth they experience pads their bottom line.
On the other hand, Telodoc hasn’t reached profitability yet. In the long-run, they may never get to that stage.
Yes, the smaller stocks do offer some great trading vehicles. But that’s all they are, trading vehicles. I wouldn’t want to drop my retirement on any of these companies.
That’s part of why I continue to play big cap stocks like Amazon and Netflix more often than the little guys. On top of that, these larger names have higher liquidity in the options. That means I give less away to the market makers and get tighter spreads.
Even with years of trading myself, I always go back to the fundamentals. Engraining these into my brain keeps them fresh and on the right path.
That’s why I’ll say this – whether you’re a new trader or one with years of experience, it never hurts to brush up on the basics.
One great way to do this is The Profit Bridge. This package delivers both education and trade setups, with something for everyone.
Better yet – let me tell you about The Profit Bridge.