Your 2017 Battle Plan

By Wayne Mulligan, on Thursday, December 29, 2016

This is the last time you’ll hear from me in 2016.

By the time I write to you again next week, it’ll be a brand new year. And I want to help you begin preparing for it right now...

That’s because 2017 promises to be a big year for investors.

And not just because we have a new administration in Washington...

But because this will be the first full year that all investors can put their money into private, early-stage companies.

Now, I understand that this might sound exciting. A full 12 months to invest in—and hopefully profit from—some of the hottest early-stage companies in the country.

However, if you don’t take the time to prepare yourself—if you don’t have a strategy in place before you invest—then you could lose a great deal of money.

So before we enter 2017, I wanted to equip you with a time-tested “battle plan” that will not only protect your downside, but potentially increase your upside as well.

The A.S.E. Process

If you’re a student in our Early-Stage Playbook course then you’re already familiar with our proprietary three-step system for finding and funding the most promising early-stage companies: The A.S.E. Process.

Each letter in the name stands for one of the three steps in the overall system.

We discovered this system during a multi-year research initiative we recently conducted.

The goal of our research was to meet with and learn from some of the top early-stage investors in the country...

And tease out their methods for finding the most promising start-up companies.

But as we quickly discovered, the secret to their success didn’t just involve looking for certain types of companies, or doing deep research on a company’s product or management team...

I mean, they did those things too, but the most important part of their strategy didn’t involve the companies at all.

You see, as it turns out, the most important step in their overall process was the first step—the “A” step. Which stands for Allocate.

Asset Allocation Plan

You see, before you make your first private equity investment, you need a plan.

More specifically, you need a plan for what’s called asset allocation.

This plan will dictate:

  1. How much total capital you’ll invest into private, early-stage companies overall.
  2. How much capital you’ll invest into each deal.

This allocation plan is the single-most important part of early-stage investing.

By setting it up correctly from the start, you’ll ensure that you never suffer big losses—and you’ll increase your chances of maximizing your gains.

Here’s how it works...

How Much Should You Invest into Start-ups?

First you need to determine how much of your overall portfolio you’ll put into start-ups. You see, investing in early-stage private companies is a higher-risk, higher-return opportunity than more traditional investing.

And it also tends to be “illiquid”—meaning that you can’t just turn your shares into cash when you want to.

Therefore, you should only be investing a small portion of your overall portfolio into private deals.

How much should you invest?

Well, based on research we conducted that included an analysis of academic studies and real-world investment results, we came up with a simple “Rule of Thumb”:

  • Take your age and subtract it from 80. Then divide the result by 2.

That gives you the maximum percentage of your overall portfolio you should put into private deals.

For example, let’s say you’re 55-years-old.

80 – 55 = 25.

25 ÷ 2 = 12.5

In other words, if you’re 55-years-old, the most you should invest into private equity is 12.5% of your investable assets.

So if you have a portfolio worth $100,000, you might decide to invest 12.5%, or $12,500, into start-up opportunities.

But to be clear, that doesn’t mean you should invest $12,500 into a single deal. In fact, one of the golden rules to protect your downside and maximize your gains in the private market is diversification.

Diversification is Key

How many investments does it take to be considered “diversified”?

According to research studies—and based on in-depth conversations with our network of professional early-stage investors—you should aim to build a portfolio of at least 25 to 50 early-stage deals.

So, continuing the example from above, if you plan to invest $12,500 into your private market portfolio, you should invest $250 to $500 into each deal.

If you “fall in love” with a particular deal, you might be tempted to put in more—but we’d urge you not to.

With private equity, you need to stick to a system. As soon as you start breaking your own rules, you open yourself up to more risk, and you decrease your odds of investment success.

Here’s Why...

The reason for this is simple...

In a typical early-stage portfolio, about 70% of your investments will either go to zero or breakeven. Meaning, more than two-thirds of your investments will not be profitable.

However, give the high returns of profitable early-stage investments, your winners will ideally more than make up for your losers.

Remember, according to multiple studies, the average return of a profitable early-stage investment is roughly 260%. And oftentimes, these investments can return far more—Facebook’s first investor made 2,000 times his money when the company went public.

However, you can’t expect to make 10 investments and have the statistics play out perfectly.

It’s like flipping a coin...

When you flip a coin you have a 50/50 chance of landing on heads or tails.

If you flip a coin once and land on heads, it doesn’t mean you’ll land on tails on the next flip.

However, if you flip that coin 100 times, there’s a very good chance that you’ll have flipped heads just as many times as you flipped tails.

It’s the same thing with early-stage investing...

In order to get the math to work out, you have to invest in many, many companies. Hence why diversification is so important.

Get Ready

So before the new year begins, start to put your early-stage investing battle plan together now.

First, figure out how much of your overall portfolio you want to put into private deals as a whole...

Then figure out how much you want to put into each deal.

Finally, once you begin making investments, stick to your rules! Don’t get overly emotional or greedy—that’s the fastest way to lose money in the markets.

Happy investing... and happy new year!

Best Regards,
Wayne Mulligan
Wayne Mulligan


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Tags: Private Equity Asset Allocation

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