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Why you really didn't invest in Amazon or Facebook or...

Written by Scott Crumpler on Friday April 26, 2019

As a startup consultant, I spend a lot of time talking to folks with a little extra money in their pocket, a self-assurance born out of earning their way into a comfortable life, and (more often than not) a story about "the one that got away".

It's always a sad tale of missed opportunity that often involves failing to make an early investment in one of the huge tech giants that were once small enough to take a decent bite out of and are now enormous-- having made other investors into billionaires. Maybe you've found yourself looking at the stock price of Amazon or Netflix or Facebook and thinking about the money you could have made if only you'd have invested early. Well, here's why you didn't.

You've probably got your reasons for not taking action, and they might be justifiable (or, hell, maybe even the truth). But looking at the winners after they've hit big and bemoaning a missed opportunity for riches is much easier than spotting a winning startup when it's at an early stage. And most of the investors who made those monster gains didn't just pick Amazon or Facebook or Netflix when they were investing.

Most investors miss out on the "explosive growth" opportunities for just a few reasons.

A statement like the one above will probably invite a lot of comments, and that's fine. But in my experience, here's what it often comes down to:

  • You didn't have the money.
  • You didn't have the vision.
  • You didn't have the courage.
  • You didn't have access to the opportunity.
  • You tried before and didn't win big.

Sure, that list leaves out a lot of individual factors, but when it comes to stories of sour grapes about not investing in the big winners, the real reason you didn't invest usually relates to one or more of the above. Don't feel bad. I've missed out on my share of opportunities, too. But let's look at each on of those bullet points, and then maybe ask yourself if it isn't something you can't change before the next opportunity comes along.

Lack of Money

Amazon - $958 Billion Market CapitalizationThat's the hard one. If you don't have enough money to get in the game, it's hard to feel anything but regret if you recognize the potential of a startup and just can't afford to be a part of it. But do you really not have the money? When many of these giants first went public they were trading at just a few bucks a share. You might not have been able to buy in for thousands of shares, but if you'd made investing in your future a priority chances are good that your earning power was strong enough to support a small investment.

With the SEC's regulation of equity crowdfunding, there are now lots of opportunities to invest in startups at very low entry prices before they even get to an IPO stage, but more on that in a bit.

If you want to be the guy who seizes the opportunities for massive growth potential, you have to start by planning ahead. You have to have money on-hand when a good investment offering comes along or else you may miss out. That might mean making adjustments to your discretionary spending in order to put a little aside, or it may mean structuring your current investment activities to accommodate the need to make a quick move when the right investment comes along. Bottom line: if you don't have money on-hand, it's hard to get in the game.

Lack of Vision

Snap Inc - $3.4 Billion IPOWho would have thought that Snapchat would become such a viral success as a mobile app? It's a simple video messaging app that puts stupid graphics over your face. Where could the monster value be in something like that, right? Well, investors with real vision didn't look at that app and think about whether it was something they would ever use. They looked at the most lucrative audience of smartphone users (which represent billions of dollars in revenue) and considered whether it was something that audience would respond to. And then they took a calculated risk to invest in a concept that leveraged the social communication that is so important to that audience. Obviously, it paid off. Snap Inc raised more than $3 billion in their IPO, and their current market capitalization (as of publication) is more than $14 billion.

Investing in startups and early-stage companies requires vision. There is just no way around it. It's great if you like the product a company is developing, but you have to see beyond what you like and what the market is like now. Investing in startups is a long play and you have to have a sense of where the market is going. In many cases, it's not that hard to determine, either. Facebook and Twitter had already well-proven the growth of social media and mobile apps long before Snapchat came along. A look at the massive growth of mobile ad spending could have told you all you needed to know about revenue potential. So all it really should have come down to is a question of user acquisition and retention. i.e. Does this app have users, can it gain more, and can it keep them engaged?

That's vision. And you can have it, believe it or not. Just look beyond yourself. Look for companies with products or services that are innovative and that appeal to a valuable audience. Think about the potential for the product to evolve and expand upon the initial concept. How could this product make money? Will people still be spending money on this a year from now? Is that likely to continue? These are the questions visionary investors are asking when they look at a startup investing opportunity.

Lack of Courage

Let's face it. Investing in startups and early-stage companies requires more risk than other investments. You can analyze the company, the market, the leadership, and the product (and you should), but in the end there is still a risk that the company just won't take off. If you want to be one of the guys who wins big by investing early in one of these explosive growth companies, you have to be comfortable with the possibility of losing, too. That's where the courage to invest in a startup comes from-- the confidence you get from having the vision and the willingness to lose if it doesn't pan out. The winning investors with track records of investing in successful startups have the courage to take that shot. If you have the money to get in, and you recognize the value of the product in the marketplace, and you still don't invest, that may tell you all you need to know. There is no glory in throwing money away on bad investments, but if you don't have the courage to take chances, you're probably never going to be the guy with the explosive growth success story.

Facebook - $16 Billion IPO

I turn down multiple job offers each year that would pay me well just to be a cog in a corporate marketing department, because I value the freedom and opportunity that comes from working for myself and with other companies to achieve success. And there is certainly a price to be paid for that. I don't have the job security that corporate employees have, and working with startups and small innovators can be volatile. I've seen more than a few flop, but that's a risk I'm willing to take because I know that the big ideas that take the market by storm tend to come from the small, innovative teams. That's what I mean by courage, and you have to have it if you want to invest in startups with the potential for giant growth.

Lack of Opportunity

This one isn't your fault. Up until 2016, if you were an American citizen and you wanted to invest in a private company, you had to be an accredited investor. That means you needed to be worth at least a million dollars or earn at least $200k per year. If you didn't fit that bill, you couldn't get into the seed funding game. Alas, that means you would have missed out on any opportunity to invest in Facebook or Instagram or Snapchat or any other game-changing company that was looking for seed funding. And while the SEC was looking to protect the little guy from high risk investment, it also served to ensure that only the wealthy could reap the rewards of having vision and courage. The little guys were shut out. But since 2016, that hasn't been entirely true.

There is now an SEC-regulated form of investment offering known as Title III or Regulation Crowdfunding. Think of it like Indiegogo or Kickstarter, but when you back a company, you don't just get a perk or a special discount on a product, you get actual shares of the company. This type of investment offering is available to non-accredited investors, and there are hundreds of these offerings registered with the SEC every year. All offering details are required by the SEC to be hosted on a third-party web portal, and they can be an excellent place for accredited and non-accredited investors to discover lean, innovative startups to invest in.

I first became involved with Title III offerings when I consulted for Jinglz Inc in late 2017. They'd adapted the use of facial detection capabilities in mobile devices for the verification of video ad views, and they were getting ready to launch a Reg CF offering on StartEngine. I helped them devise the go-to-market strategy for their technology, produced the offering content, and worked on the promotion of the campaign. Over a three month period, that offering raised close to a million dollars and now just a bit over a year later they've announced the launch of their ad platform and the start of generating revenue. Investors bought in to that company for as little as $100.

Proctor360's online testing platform prevents cheating. Their OPO is active on StartEngine.While Jinglz was seeking the maximum allowable raise of $1,070,000, companies in the seed funding stage don't actually have to seek that much investment via Title III and these opportunities can be even more attractive to investors. In fact, right now I'm an advisor for a very innovative tech startup called Proctor360 based in the Washington D.C. area that have a provisional patent filed for the use of 360° webcams in online testing platforms. They're just about to wrap up their own Title III investment offering, and they decided to take a very measured approach. Rather than dilute early investor share value by chasing the maximum allowed, they looked at the minimum amount they'd need to raise for a small manufacturing order of the hardware they've designed and then decided on a very conservative maximum raise amount that would help them produce more and accelerate growth without taking on too many investors at once. For every investor that gets in on a deal like this, they have a much higher liklihood of watching the share price move higher through subsequent funding rounds and consequently the value of their investment. (Incidentally, Proctor360's offering is about to close, so here's your chance to show some courage and vision. Act fast.)

Thanks to the JOBS Act's Title III provision for Regulation Crowdfunding, lack of access to seed investing opportunities isn't nearly the challenge it used to be for non-accredited investors. But you have to take the time, as with any investing strategy, to do some research. There are many Reg CF portals hosting offerings. StartEngine.com is the biggest, but biggest doesn't mean best. Explore them all and look for the companies with innovative products in lucrative markets that have experienced teams behind them. That's exactly why I got involved with Proctor360-- the founders are veterans of the computer-based testing industry (the CEO as an operator of live testing centers and the COO as the founder of another very successful online testing tech company), the market itself is worth 42 billion dollars and growing, and their product solves a problem that industry is facing right now. Those are some metrics that just SCREAM promising.

Lack of Fortitude

Yup. So you bought some stock in a company before it hit big, aaaaaand... it never hit. Guess what. That happens. In fact, it happens most of the time. It's why early stage investments are often at much lower share values than companies that have already generated revenue, gained market share, or shown profits. If you want to invest in startups and position yourself to take part in their explosive growth, you have to stay in the game. Not every seed investment or early stock buy is going to hit big. Losing once shouldn't mean that you pack up your marbles and go home. At least not if you ever want a shot at the major gains that can come from betting early on a winner.

The smart startup investor accepts the risk when he invests, knowing that the company might not pan out, and he makes his investment based on that contingency. And if one doesn't pan out, he certainly doesn't quit. He analyzes the situation, determines whether it was a failing on his part to see a critical problem, a failing on the company's part in staying on course and delivering a product, or simply the effect of market forces that were beyond either's control. Armed with that information, he approaches his next investment opportunity with more experience and wisdom.

I talked about courage before, but it means nothing if you're only committed to rolling the dice once.

So what does it all mean?

I'm not your financial advisor, I'm not your lawyer, and I'm not your priest. I can't tell you whether you should be investing in startups and early-stage companies or not. You need to figure that out for yourself. But if you've ever kicked yourself for not investing in Amazon or Netflix or Facebook when you see where their share prices started and how monumentally they've grown since, now you know why you probably didn't pull the trigger when you could have. There is a lot more that goes into sound investing, and every investor has to make decisions using their own criteria for success. But flying at 30,000 feet these key points probably don't seem far from the inner truth behind most Why didn't I? questions when it comes to missed opportunities. The only real question now is where you go from here.

This article was originally published on LinkedIn on April 26th 2019.

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