How to Find The Next Twitter

By Wayne Mulligan, on Friday, November 8, 2013

What year is it?

That’s what I heard when I picked up my phone yesterday.  It was an old friend on the line, someone I used to work with on Wall Street.

“Umm, 2013?” I replied.

“Good, just checking – because based on this Twitter IPO, I thought it was 1999!”

Twitter (TWTR) had just gone public. By mid-day, it had already doubled from its $26 per share IPO price.

My friend is a banker. He’s a great guy, but he can be narrow-minded in terms of his focus: his singular perspective is how big his bonus gets if the market for tech companies heats up.

At Crowdability, we have a different perspective. We spend our time trying to figure out how we can help you and our other readers find “the next Twitter.”

Could a company like Twitter be raising capital on one of the equity crowdfunding platforms right now? Could you have the opportunity to own a piece of it for only a few thousand dollars?

While it’s an exciting thought, and it’s certainly possible… the truth is, you’d have to be pretty darn lucky to stumble onto something like that.

That being said, we can tell you about a way to own stock in companies like Twitter before they go public.  I’ll show you how in just a second…

But first, I think it’s important to understand why it’s so unlikely that you’ll be able to consistently find a company like Twitter while it’s raising its first round of capital.

A Needle in a Haystack

Finding “the next Twitter” is actually more difficult than trying to find a “needle in a haystack.”  It’s like trying to find a needle in a stack of other needles.

There are hundreds, if not thousands, of companies out there right now that share the same characteristics as Twitter – mass-market product, big network of users, advertising supported, etc.

And most of them will end up in the “start-up graveyard.”

It’s difficult – in fact, it’s borderline impossible – to formulaically go about creating a business like Twitter.  Twitter’s founders could try to do it again for the rest of their lives; it’s unlikely that they’d be able to create a company of similar scale.

Venture Perspective

But this does raise the question: If it was so difficult to predict whether or not the idea behind Twitter would work out, why did Twitter’s early investors feel so confident investing hundreds of millions of dollars in the business?

In my opinion, it’s based on two factors:

1.Twitter wasn’t their only investment.  As we always say, if you’re going to invest in early-stage companies, you need to diversify.  That rule doesn’t just apply to individual investors; it applies to multi-billion dollar Venture Capital funds too.  Like you, they need to have a portfolio of investments – because for every “Twitter,” they’ll also have 7 or 8 losers.

2.The VCs didn’t invest in Twitter when it was an idea on the back of a napkin.  They didn’t even invest in Twitter when it had a few thousand users. Twitter raised its first major round of financing – $5 million – when it already had 300,000 active users. That’s a big user base for a new company!

Chances are, a deal like Twitter would never have ended up on an equity crowdfunding platform. By the time Twitter was a proven concept, the business was too far along and needed too much capital. It’s unlikely that individual investors could have gotten access to this kind of deal.

Or could they have?

Pre-IPO Investing

There are three ways you could have invested in Twitter before the company went public – which, based on the current stock price, would have earned you a 100% to 300% return, depending on when you invested.

1.Secondary Markets – There are several services out there that operate secondary markets for shares in private companies.  Two of the most well-known are SecondMarket.com and SharesPost.com.

Both maintain markets for popular private stocks. You could have bought shares in, say, Twitter, Facebook or LinkedIn before they went public.

However, participation is limited to accredited investors only.

2.Funding Portals – Some of the crowdfunding platforms act as a “private banker” for early employees of later-stage tech start-ups.  Many employees at these companies are given significant amounts of stock – it’s meant to incentive them, and to make up for less-than-market salaries. Sometimes these employees want to “cash out” a portion of their stock before the company is acquired or goes public, So they’ll sell their shares at a discount on one of the crowdfunding platforms.

Matt wrote an article several weeks ago about how Microventures (one of the high-quality portals we cover) was doing just that.  They also had Twitter stock for sale last year – from what we heard, at about $19 or $20 per share.  Buying that stock would have created a 37% return on the IPO price, and a 149% return based on the current price.

Again, this type of opportunity is reserved for accredited investors only.

3.Business Development Company – But there’s also an option for non-accredited investors to own pre-IPO stock. Investors who don’t have a $1 million net worth can buy shares in private companies indirectly by investing in a what’s called a “Business Development Company,” or a “BDC” for short.

BDCs are formed in order to invest in private companies, but since the BDC itself is publicly traded, anyone – accredited or non – can own it, and thus participate in the upside potential of promising technology companies.

One of the more popular BDCs is a company called GSV Capital Corp (GSVC).

In fact, GSV Capital owned Twitter stock before Twitter filed to go public. If you had owned shares of GSV, you would have seen them double in price in the months leading up to Twitter’s IPO.

Don’t Sweat It

So don’t kick yourself if you miss out on “the next Twitter” while it’s raising equity crowdfunding.  Let it go, but keep an eye on it.  Maybe it’ll turn up on a platform like SharesPost, a funding portal like Micro Ventures or in a BDC like GSV Capital.

Remember, while the returns for these later-stage investments might not be as great, you’re also much less likely to see your investment go to zero and you’re still ahead of public-market investors.

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

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Tags: Equity Crowdfunding Crowdfunding Venture Capital Education Early-stage Investing Twitter IPO Angel Investors

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