Stock Market: Rest in Peace

By Matthew Milner, on Wednesday, October 5, 2016

I’m about to leave for my honeymoon!

Next week, my bride and I are flying to Sydney, Australia, then we’ll make our way to Byron Bay and the Great Barrier Reef.

Friends gave us suggestions for hotels, but we think it's more fun to rent cool apartments.

To find these apartments, we use an Internet start-up called Airbnb.

Airbnb might sound familiar to you. It was in the news last week. You see, private investors are fighting over who gets to invest $850 million into it.

Let me tell you what’s going on with this high-flying start-up…

Then I’ll show you why it could lead investors like you to huge profits.

The $30 billion Start-Up

Airbnb is a hospitality company. It competes with traditional hotels.

Its founders suspected that travelers would forego hotels if it were easy and inexpensive to rent our other peoples’ apartments for a few days at a time.

And boy, were they right:

Today, 100 million people have signed up to rent Airbnb’s 2.3 million listings. (By comparison, Hilton and Marriott have just 1.5 million rooms combined.)

And after raising $4 billion from private investors, Airbnb is valued at $30 billion.

To put that number in perspective, Marriott is worth $26 billion, and Hilton is worth $23 billion.

In other words, Airbnb is already worth more than its publicly-traded competitors.

Eventually it’ll go public. But given that it’s valued at $30 billion already, how are stock market investors supposed to make any profits on it?

Most likely, they wont… but other investors sure will.

The Gains Are Going To Private Investors

To explain, let me show you a fascinating chart…

As you can see below (compliments of venture firm Andreessen Horowitz), over the last ten years or so, there’s been a shift in the type of investor that captures the largest returns.

The grey portion of each bar chart reflects the profits captured by public stock market investors…

And the orange portion shows the profits captured by private investors.

public 8

As you can see with even the quickest glance, for many years, public investors reaped the lion’s share of a company’s returns. But starting around 2004, that started to change.

To see what I mean, look at Microsoft (NASDAQ: MSFT).

When it went public in 1986, Microsoft’s earliest private investors made about 200 times their money. Not bad.

But after it went public, stock market investors made even more than that. They made about 600 times their money.

As the chart reflects, prior to 2004, public investors also did well in other fast-growth tech companies like Apple, Oracle and Amazon.

But look what’s been happening since 2004:

Time and again, from Google to LinkedIn to Twitter, early private investors made hundreds of times their money—and meanwhile, public market investors made just a tiny fraction of that.

What’s going on here?

The Two Trends Crushing Stocks

Two recent trends are making it less profitable to invest in the stock market—and more desirable to invest in the private market.

Trend #1: Staying Private Longer – In the year 2000, the average amount of time between a company being founded and going IPO was 6 years. Today, that number is closer to 10 years.

Those four extra years allow a company to build its business—and its value—dramatically.

Airbnb is a great example. At eight-years-old, it’s already worth $30 billion.

In markets of old, Airbnb would have gone public years ago, back when its value was far lower. But in today’s world, it might not IPO for years.

Trend #2: Raising Money Privately – Private companies today have less pressure to IPO. If they need growth capital, they can access it in the private market.

You see, from hedge funds to mutual funds, the world’s most prominent investors are piling into the private markets so they can capture the biggest gains.

Investors in Airbnb, for example, include venture capitalists like Sequoia, and mutual funds like Fidelity.

In fact, so many professional investors are chasing private deals that Airbnb had to ask its existing investors NOT to participate in its latest $850 million round!

The conclusion here is clear:

More of a company’s value is being created when it’s still private.

Join The World’s Top Investors

Here’s the bottom line:

The stock market can no longer provide you with the type of financial growth you’ve become accustomed to. By the time a company goes public, private investors have already sucked out all the big gains.

Historically, this would have spelled disaster for individual investors like you—that’s because for the past 83 years, only wealthy individuals and institutions were granted access to the private markets.

But because of a new set of laws known as The JOBS Act, now you can invest in companies while they’re still private—and now you can capture the big gains.

If you've already signed up for our webinar tonight, you'll hear about an exciting fast-growth private company in just a few hours.

Just like Airbnb, it’s raising money from private investors like you…

But unlike Airbnb, it’s on the cusp of its IPO—which means its private investors won’t have to wait long to grab their profits.

Happy Investing.

Best Regards,
Matthew Milner

Founder
Crowdability.com

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