Last week, a start-up called WeWork raised $1 billion.
This young company is now valued at about $21 billion… which means its earliest private investors are sitting on estimated gains of 2,000X their money.
That’s enough to turn $1,000 into $2 million.
Similar stories — early-stage private companies reaching multi-billion dollar valuations — are becoming more and more common nowadays.
In fact, since the beginning of 2017, a new start-up has entered the “billion-dollar club” just about every week.
Today, I’ll explain what’s behind this trend…
And most importantly, I’ll reveal how you can cash in on it.
WeWork: Shared Space
WeWork is a commercial real estate company.
Basically, it offers a flexible way to rent beautiful office space. Leases can be month-to-month, and the space comes furnished with everything from chairs and desks to fancy conference rooms and cold beer on tap. Simply put, it’s hassle-free.
Renters include everyone from freelancers who need an occasional desk, to fast-growing start-ups, to established corporations that are setting up shop in a new city.
WeWork’s modern approach to office space has helped it reach annual revenues close to $1 billion — and has caught the attention of major investors…
Private Market Is Attracting Capital
From T. Rowe Price to SoftBank, some of the globe’s biggest investors have fallen in love with this fast-growing private start-up.
And because they’re desperate for alternatives to the over-priced stock market, they’ve been happy to invest about $4.5 billion into it.
Meanwhile, all these billions in funding have led WeWork’s value to go higher and higher…
In fact, at $21 billion, it’s now more valuable than many of its publicly-traded competitors.
For example, look at Boston Properties (NYSE: BXP):
BXP is one of the largest owners and managers of office properties in the U.S. It generated $2.6 billion in revenue last year. And it’s worth $2 billion less than WeWork.
Historically speaking, it’s very unusual for a private start-up to be more valuable than its public counterpart. But nowadays, as private start-ups leverage technology or new business models to “disrupt” legacy industries, this phenomenon is becoming more common.
Private transportation start-up Uber, for example, is valued at $70 billion. That makes it more valuable than publicly-traded GM ($55 billion) or Ford ($47 billion).
And hospitality start-up Airbnb is valued at about $30 billion, making it more valuable than $20 billion Hilton.
The thing is, eventually, these start-ups will go public — which presents a problem for ordinary stock market investors:
Given how highly valued these start-ups are already, how are stock market investors supposed to make any profits on the IPOs?
Most likely, they won’t… but other investors sure will.
Returns Have Shifted
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.
As you can see with even a quick 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 200x their money. Not bad.
But after it went public, stock market investors made even more than that. They made about 600x their money, enough to turn $1,000 into $600,000.
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?
As it turns out, 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 nine-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.
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.
The conclusion here is clear:
More of a company’s value is being created when it’s still private.
Private Equity: Essential for Your Portfolio
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.
That’s why it’s essential that you have at least a small piece of your portfolio in private equity.
And that’s why, tomorrow, Wayne will introduce you to an intriguing investment idea:
With a single investment, it gives you access to dozens of private start-ups.
So stay tuned!