For the better part of 2014, Matt and I conducted an intense research project.
To identify a proven process for successful early-stage investing.
In order to accomplish this goal, we sought out the most successful venture capitalists and angel investors—and over the course of a year, we sat down with more than three dozen of them to gather their wisdom.
Collectively, these investors have backed more than 1,080 companies, and have generated several billion dollars in profits.
When people hear about some of the investors we met with, their eyes often widen and they ask us, “What’s the most valuable thing you learned?”
Well, we learned many valuable things, so picking just one is tough...
But here’s the one we often refer to as the most valuable:
We learned how to identify investments with the highest probability of returning 10 (or more) times your money.
“Private Market Math”
Before we dive into the details, let’s set the stage by looking at one of the differences between investing in the stock market and investing in the private market.
In the stock market, most individuals don’t set a “profit target” when they make an investment...
Instead, they buy a stock, hopefully it goes up 10% or 20%—and then they sell.
But when you invest in an early-stage, private company, it’s a different story:
You need to have a profit target in mind from the outset...
And to be a successful early-stage investor, your target should be at least 1,000%.
That’s 10 times your investment.
Simply put, it’s because not every company you invest in will be a winner.
That’s why you need to invest in a portfolio of start-ups—and that’s why you need your winners to return at least 10x.
You see, if you can earn 10x or more on your winners, even when you take the “losers” into account, your overall start-up portfolio will still provide you with sizable gains.
In fact, the average returns for a portfolio of early-stage investments is 27% per year...
That’s nearly 4 times higher than the average stock market return of 8% per year.
The “Ten Bagger” Dilemma
To be fair, getting a return of 10 times your money is no easy feat...
But during our research, we learned a simple way to dramatically increase your odds of hitting one or more of these elusive “ten baggers.”
Before we show you what it is, let’s first make sure you understand the general concept of how you get your money back in the private market.
You see, in the private market, there’s no central “stock exchange” where you can go to sell the shares you’ve invested in.
With private investments, you’ll get your money back in one of two ways:
1. When the company goes public via an Initial Public Offering (IPO), or
2. When the company is acquired by a larger entity
An IPO tends to provide the largest returns—for example, Facebook’s first investor, Peter Thiel, made an estimated 2,000 times his money on Facebook’s IPO day...
But the more common outcome is a takeover by a larger company.
And this is where you can increase your chances of making 1,000% returns. All it takes is a simple, powerful investment tactic.
Let’s see what it is...
“Every Battle is Won Before It’s Ever Fought”
One of the most enjoyable parts of our research was getting to know the personalities of the folks we interviewed—and seeing how their personality affected their investment strategy.
One venture capitalist, for example, had a background as a high-ranking military officer, and a deep knowledge of military history.
He’s the one who taught us the expression, “Every battle is won before it’s ever fought”—and he peppered our conversations with references to “storming the beaches of Normandy” and “the Battle of Little Round Top.”
But here’s what he meant by this expression as it relates to investing:
There are actions you can take before you make an investment that can determine your ultimate financial success—
In this case, before you invest, you can filter out potential investments based on their valuation. (“Valuation” is just another way of saying “market cap.”)
You see, despite what you read in the press about big-ticket takeovers like Verizon’s acquisition of AOL for $4.4 billion, the sales price for the vast majority of private company acquisitions is less than $50 million.
So if your goal is to earn 10 times your money on a start-up that might get acquired for $50 million, then you need to invest at valuations of $5 million or less.
Otherwise your chances of getting a 1,000% return go way down.
Just One Page in Our Playbook
This concept—screening out companies with high valuations—is simple, but it’s incredibly powerful.
It’s also just one of the lessons we teach students in our Early-Stage Playbook course.
In total, we walk you through more than 40 different screens and filters that enable you to quickly find the most promising private market deals.
And each lesson was taught to us by professional early-stage investors—investors who made their fortunes by backing private companies at their earliest stages.