Editor’s Note: Welcome to Week 2 of your Private Market Bootcamp! During the month of July, we’ll be sharing this powerful investing system with you, for free. This system can help you find and fund high-potential startups when they’re just getting off the ground — and can put you in position to pocket huge gains when their value skyrockets.
Last week, I introduced you to one of the great mysteries of startup investing:
Most startups have zero track record or operating history. So how in the world can we identify their investment potential?
That’s what you’ll learn about in today’s Private Market Bootcamp.
After reading this essay, you’ll be able to tell if a company has home-run investment potential…
Even if it’s a tiny startup just getting off the ground!
The Most Obvious Reason Startups Fail
Startups are a strange animal.
Essentially, they’re tiny new enterprises in search of a good business model.
The thing is, identifying a good business model can take a lot of time.
That’s why the longer a startup can stay in business, the greater its odds are of succeeding — and the greater its odds are of delivering big profits to investors like you.
So how can we determine whether a startup has what it takes to stay in business for a long time?
Let’s take a look…
Avoid These Startups!
CB Insights, a prominent research firm that focuses on the private markets, recently performed a detailed study about why startups fail.
Some of the factors it identified won’t surprise you — for example, creating a useless product, or doing lousy marketing. But one factor is so obvious that it’s often overlooked:
The startup runs out of money!
As it turns out, this finding is echoed again and again in similar studies, whether from the Small Business Administration (SBA) or Harvard Business School.
And for investors like us, here’s the bottom line about this insight:
Since running out of money is the most fundamental reason startups fail, we should avoid investing in the startups that are more likely to run out of money.
And Here’s How To Predict It
Given this knowledge, in 2013, Wayne and I set out to do a study of our own.
Our goal was clear:
Identify the factors that could indicate whether a startup had a higher or lower chance of running out of money — even if it was a tiny company, just getting off the ground.
Our study eventually became a multi-year research project:
We traveled across the country to interview dozens of top venture capitalists. We hired former investment bankers from Citicorp to evaluate data. And we recruited Columbia University MBAs to build financial models and run regression analyses.
And what we discovered was shocking…
Our team eventually identified about two dozen statistically significant indicators that could tell us whether a company had a higher or lower risk of running out of money.
For example, we discovered that a startup’s investors are a powerful indicator.
Specifically, if a startup raises part of its “seed” round from Venture Capitalists — as opposed to exclusively from individuals like you — it’s 63% more likely to raise additional funding later.
And since a well-funded startup will stay in business longer, that means it’ll have more time to identify a good business model — and a higher chance of handing you a big return.
And here’s another indicator we found:
If a startup has high fixed costs, it’s at greater risk of running out of money. For example, hardware startups — the type of companies that build physical products — have relatively high fixed costs. And these high costs make them riskier.
Sure, some hardware companies will become successful. But statistically speaking, their high fixed costs correlate to a higher risk of going out of business. That’s why you’re generally better off investing in software startups.
These examples are just a small sample of the two dozen statistically significant indicators our team identified.
And before we make a startup investment, we evaluate every one of them.
For the Biggest Returns, Follow a Quantitative Approach
What you just learned about is one of the secrets to successful early-stage investing…
By following a strict quantitative approach to making investment decisions, you can avoid investing in the types of startups that are more likely to run out of money…
And put yourself in better position to earn huge returns!
In tomorrow’s essay, Wayne will show you even more ways to evaluate a startup’s potential.
In particular, he’ll show the best way to ensure that your investment can return at least 1,000%.
That’s 10x your money.
So stay tuned!