I Hate Millionaires

By Wayne Mulligan, on Thursday, March 19, 2015

Some of the wealthiest people I know are surprisingly stingy:

They avoid picking up the tab at dinner...

They give lousy birthday presents...

And they never spoil their children or spouse with lavish gifts.

But as I’ve come to learn, this genetic “thriftiness” might give them a great advantage as investors:

In particular, it might be a major contributor to their success as angel investors.

One Rule for Investing Success

As you’re probably aware by now, we spent the better part of the last 18 months interviewing dozens of wealthy, early-stage investors.

And here’s one of the simplest, most powerful lessons they taught us:

Never overpay for an investment.

What’s it mean to “overpay” for an investment in the private market?

The same thing it means in the public market: if its price is too high relative to its business prospects, you’re overpaying.

In the public market, we use “market cap” to measure a company’s total value. In the private market, we do the same thing, but we use the term “valuation” instead.

And as we discovered from our research, if a start-up’s valuation is too high, the most successful investors have the exact same reaction:

They walk away.

What’s Considered “Too High”?

As you’ve learned from our past articles, early backers of companies like Facebook and Google made fortunes when those companies went public.

Facebook’s first investor, for example, made 2,000 times his money.

In his case, would it have made much difference if he’d paid a bit more for his shares? To be fair, no.

But I’ve got some news for you:

Most companies won’t turn into the next Facebook.

Luckily, you don’t need to invest in deals like Facebook to earn exceptional returns...

As we learned, historically, angel investors have earned an average of 27% per year – and that’s even without homeruns like Facebook.

Surprisingly, that’s nearly 4 times higher than the average returns of the stock market.

What’s the key to success as an angel investor?

Pay attention to valuations.

Here’s what I mean...

By The Numbers

As we’ve discovered, most successful early-stage investors target a return of 10 times their money. Not 200 or 2,000 times their money – just 10 times.

In other words, before they invest, they ask themselves, “Realistically, could I make 10 times my money on this deal?”

And this is where valuation comes into play.

If you’re investing in a private company that’s already valued at a hundred-million dollars, it would have to go public or get acquired for a billion dollars for you to realize a 10 times return.

Billion-dollar acquisitions are extremely rare. So are IPOs.

If a company is successful, it will most likely be acquired well before it reaches a billion-dollar valuation.

In fact, statistically speaking, most acquisitions take place for less than 50 million dollars.

The “Thrifty” Rule of Thumb

Based on the data above, here’s a good rule of thumb:

  • Since most takeovers and acquisitions occur below 50 million dollars…
  • And your target return should be 10 times your initial investment…
  • You should avoid investing in companies that are valued above 5 million dollars.

By focusing your investments on deals with valuations below that amount, you’ll give yourself better odds at hitting your target return.

Not only can this one simple rule dramatically improve your returns – it can also speed up your research process:

If an early-stage company has a valuation of more than 5 million dollars, walk away. It’s as simple as that.

Re-Capping The Angel Initiative

Before I sign off this week, I thought I’d review some of the important lessons we covered during The Angel Initiative:

When you combine those lessons with what you learned here today, you’re already standing on a solid foundation for safely stepping into the private stock market.

But we want to provide you with more than that...

We want to take your education even further.

That’s why, next week, we’ll be hosting a one-of-a-kind live training event.

It’s something we’ve never done before.

We’re going to give you unprecedented access to the research and to the professional investors we’ve been studying for the past 18 months.

Then we’ll bring you even further behind the scenes here at Crowdability:

We’ll show you a piece of technology that we’ve been quietly “beta testing” internally. It’s not quite ready for the general public yet, but we’ll give Crowdability readers a sneak peek next week.

Check your inbox on Monday, March 23rd at 8:00 AM for more details.

Until then...

Happy investing.

Best Regards,
Wayne Mulligan
Wayne Mulligan


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Tags: Angel Investing Early-stage Investing Valuation

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