This is Part 3 of a 3-Part Adventure. To read Parts 1 and 2, start with our post below from July 17.
You know how male peacocks flash their bright colors to attract the ladies?
A short, tanned guy was walking towards me on Fifth Ave. Stuffed into the chest pocket of his suit jacket was a bright green polka-dot handkerchief. But it wasn’t the size of an everyday handkerchief. It was the size of a tent. And it was flowing out of his pocket like molten lava. This guy was peacocking.
I caught a snippet of conversation as he walked by me. “Ten-bagger,” he barked triumphantly into the phone. “Made ten times my investment.”
Huh. Probably a hedge fund guy. I modified my opinion: he wasn’t trying to attract women; he was trying to attract money.
The Closing Window
As I watched him head south on Fifth Ave, past Tiffany and towards Gucci, I thought about my own efforts to earn a good multiple on an investment. If you’ve been reading this column the last two weeks, you’ll recall that I was considering making an investment in GameCo, a private, early-stage company that I’d discovered on an equity crowdfunding platform.
I’d already done my homework and concluded it was a great company — good team, good business model, good competitive position, good product.
Then I’d spent some time with one of my friends — a successful venture capitalist. He’d pointed out that great companies don’t necessarily make great investments.
Now, as I walked across Central Park back to my brownstone on the west side, I glanced at my watch and realized that the window for making an investment in GameCo was quickly closing; I had to make a go/no-go decision by the end of the day.
Making a List and Checking it Twice
Back at home, using my new “great investment” checklist, I dove into how GameCo stacked up as an investment. By the end of the day, here’s where things stood:
- Valuation: Despite GameCo’s relatively high valuation, I believed I could make 10x
- Size of Market: GameCo was going after a huge and growing global market
- Timing: GameCo was well positioned to take advantage of major trends
The Portfolio Factor
Were there other questions to ask, other risks to consider? Sure. But in early-stage investing, you’ll never be able to answer every question — and hopefully, the possibility to earn an outsized return will reward you for the risks.
Crucially, this wasn’t the only early-stage investment I was planning to make. My plan is to build a portfolio of these investments — dozens, perhaps hundreds over the coming decades. A few will likely return 10x or more. Many others will return zero.
So while I believe passionately in the merits of each investment I make, I’ve made my peace that not all of them will be financial winners.
GameCo Here I come
Once I decided that GameCo was a solid investment, I logged into the equity crowdfunding platform that had posted it as a deal. Time was running out, but I still had to finish the last step of my investment decision process: dot the i’s and cross the t’s.
If all was good, I’d be ready to initiate the online investment process and wire my funds.
So here’s what I did…
Be a Follower
If you’ve read our whitepaper on the 10 COMMANDMENTS OF CROWDFUND INVESTING, you’ll recall that when you see well-known and successful investors putting their money into an investment, it’s worth considering trying to invest alongside them.
Never follow blindly, but if you like the company anyway, this stamp of approval should make your decision that much easier.
When I looked at who else was investing in GameCo, it seemed I’d be in good company. Investors included Peter Thiel, a co-founder of PayPal as well as the first angel investor in Facebook; David Bonderman, the billionaire founder of TPG Capital, one of the most respected names in the private equity industry; and Yuri Milner, a well-known businessman who also invested in Facebook, Twitter, and Spotify.
Could I be a follower? Definitely.
So far so good.
Who’s Down With PPM?
Next I reviewed the Private Placement Memorandum (the “PPM”), a legal document that outlines the details of the investment.
For example, I read about the exact type of securities I was buying. With early-stage investing, you’ll usually be buying equity — that is, direct ownership in the company. Other times, you might be buying something called convertible debt. We’ll explain more about these terms in a later post.
In the case of GameCo, I was buying equity — and all the details of the investment seemed pretty standard.
No Fees Please
The last thing I looked for was any fees — and I soon found some: the equity crowdfunding platform that had posted the GameCo opportunity would earn a commission on my investment, as well as an ongoing “management fee.”
The commission compensated them for identifying the deal, getting access to it, and structuring the investment and legal documents. The management fee compensated them for their ongoing responsibilities — for example, ensuring that I’d get a check promptly if GameCo turned into the next Google and went public, or was acquired in a multi-billion dollar deal.
No one likes to pay fees, but I determined that these particular fees were small enough, and my potential return was great enough, that they wouldn’t deter me from investing.
So I took a deep breath, signed the online documents, and wired my funds.
I’d officially invested in my first equity-crowdfunded deal.
In the coming weeks and months, we’ll be writing about other potential investments that are posted on equity crowdfunding platforms, highlighting specific features of the deals that are important to understand.
If you have a specific topic you’d like us to address, please email us at email@example.com.
Thanks for joining us!