Legacy Research Group

Chris: Why are the returns so potentially life changing for folks who get in at the pre-IPO level?

Jeff Brown: It has to do with the relative valuation of where we enter an investment in a company. Let’s use a really simple example. Let’s take Apple.

Today, when you’re talking about a trillion-dollar company, for it to go from $1 trillion to $2 trillion, that is a huge move. It requires an extraordinary change in their business, which, generally speaking, is highly unlikely. It would take years and years to unfold, just for the stock to double from where it is today.

But when investors are investing at a $5 million valuation, as opposed to a $1 trillion valuation or a $10 million valuation, the game is completely changed.

Just to keep the numbers simple, let’s take a number like $10 million. You invest in a $10 million valuation. If that company grows to just $100 million in valuation, that is a 10x return. If it grows to a $1 billion valuation, that’s 100x return. And if it grows to a $10 billion valuation, that’s a 1,000X return on your investment.

I’ve seen that happen. I’ve had it happen myself with my own private investments. Those types of returns are just not something you can get with mature, large, publicly traded companies. So that’s why the asset class is really so incredible.

Chris: Jeff, I believe there’s been some rule changes at the U.S. Securities and Exchange Commission (SEC) that have allowed ordinary folks to have more of a chance at these early-stage companies. Could you talk a little bit about that?

Jeff: Yes. In fact, that is something that not only have I been waiting for, but I’ve been engaged in the industry, with companies that are involved in the crowdfunding space, as well as meeting with policymakers in Washington, D.C., about the need to change the regulations to give normal investors an opportunity to invest in these private companies.

And so, just at the end of last year, there was a major change, that was great for all investors. It was a change to the SEC’s crowdfunding regulations.

Basically, they lifted the cap on something called Regulation Crowdfunding, or Regulation CF deals, from $1 million to a $5 million cap. That means a small, private company can raise as much as $5 million every 12 months. This is a radical change from what we had before.

The challenge I had before was if there’s only a $1 million cap, there’s really not a lot of, essentially, liquidity or access for my subscribers. It was just too small. The same problem existed for early-stage companies. Raising $1 million doesn’t even get them 12 months of runway.

So what ended up happening, the distortion in the market was that these small companies that were fantastic – great founders, great technology, great biotechnology – they didn’t see it as a viable path because it just didn’t give them any additional runway. So naturally, they would gravitate towards the venture capital (VC) route.

So until these changes happened, it really was holding back the market.

The other thing that happened is they opened up and expanded the scope of what’s referred to as a Regulation A or A-plus crowdfunding raise. This has increased the amount promising companies, that might be a little bit later stage, can raise on an annual basis. It has created a completely new path, in terms of capital formation and fundraising for fantastic companies.

I was literally waiting for these changes to be made, and for the industry to swing in a way that could enable me to launch a product like this, Day One Investor.

Chris: Jeff, I know a lot of folks might be thinking that usually, the types of people who invest in the pre-IPO stage are wealthy venture capitalists (VCs). They’re insiders, they have some connection… or very large amounts of money to get in.

Is that the same for people who subscribe to Day One Investor? Or how does that work? What kind of capital would they need to get involved in the deals you’ll be putting in front of them?

Jeff: Well, that’s the great thing about these new regulations. They are open and available to non-accredited investors. Generally, as a rule of thumb, with most Regulation CF offerings and most Reg A offerings, the minimum level to invest in any single deal is usually about $100. That’s what I love about this space. It’s not about large checks. It’s actually about a larger number of smaller checks, a larger number of small investments.

Our goal with Day One Investor, and the goal of all of my subscribers should be to build up a portfolio over time of these small investments. That way, within that larger portfolio, you’re going to have a few outliers, large companies that turn into the next Uber, the ones that become multibillion-dollar companies.

It’s those companies that will drive the overall portfolio returns of Day One Investor. These are the types of investments that enable generational wealth.

Chris: A lot of people try to get in on these deals on IPO day. For instance, there’s been some big IPOs lately. Take Lyft, the Uber competitor. Snowflake was another big one.

Why not just wait for IPO day, plonk your money down when they become available in the public markets?

Jeff: This is a really interesting question. The answer is 20 years ago, that was actually true. Amazon went public at roughly a $437 million, not billion, valuation. 20 years ago, we could invest at the time of the IPO, a day after the IPO, or five days after the IPO, and still have ridiculous returns ahead of us.

But what happened completely distorted the market. With interest rates being artificially reduced down to zero, large private capital, smart money flooded into the private markets. And all of these exciting private companies, instead of going public in the hundreds of millions of dollars valuation, they stayed private for 10 years, some of them for 20 years.

And they’re going public at tens of billions of dollars of valuation. In fact, one of my favorite private companies, a company called Stripe, which I’m sure you know well, a FinTech company in the payment space, that company is still private, and it’s worth more than $100 billion.

Chris: Wow.

Jeff: So all these venture capitalists and private equity have been essentially hoarding all of these investment returns for themselves… and then dumping these shares onto the market at IPO at ridiculous valuations.

So, the idea of buying in the day after the IPO, or even on the IPO day, just doesn’t make any sense anymore. The valuations are too high. They will almost certainly result, at least in the short term, in capital losses, which I wouldn’t want anyone to see.

And there’s very little investment return, upside potential, after that because they’ve already seen their best growth years.

This distortion in the market is really something that must be corrected. And the best way I know how to do that is by getting my subscribers in at these low valuations, $10 million, less than $20 million. That’s where we can really stack the deck in our favor and basically adopt the same playbook as these venture capitalists and high-net-worth individuals and family offices.