I've thought for quite some time that rather than the broader overall market being allowed to participate in the possibility of crazy gains from technology startups, the rise of the VC financing model has resulted in the lion's share of gains (and losses) going to an elite group of well connected people, and once the easiest money is made, let the market have what's left over in a traditional IPO.
As you point out, there are still some examples of fantastic returns, but considering how the world has been transformed by startups, I don't recall reading very many stories of individual investors getting in early and making a killing, but I do recall reading plenty of stories of startups (that obviously needed significant funding along the way) growing into multi-billion dollar enterprises.
This is something you can believe only if you think the vast majority of startups are making these returns. The fact is the lions share of risk also goes to VCs.
If you gave an average investor the kind of deal flow that big name VCs have access to you’d fry their central nervous system.
YC, for all it’s prestige, has only had one startup actually IPO, and only recently. Can an average investor survive this kind of torture? Never knowing if maybe one day all the money they put down will actually net some return? Knowing that they will have to continue investing or else hang all their hope on what they’ve invested in so far?
There’s plenty of sure money to be made buying post IPO, be content with that.
> YC, for all it’s prestige, has only had one startup actually IPO, and only recently.
That may be perfectly consistent with my point - VC's typically provide multiple large rounds of financing, something that formerly would have required going to the public markets, and this can delay IPO's until companies are heavyweights and most of the big gains are in the bag.
An IPO is not the only way for VCs to make money. When a company raises money there is often a chance for the earlier investors to sell their shares to new investors. At the time time of the IPO they have already made a lot of money.
Isn’t that just a long-winded way of saying that early investors, who take on more risk, earn superior returns?
As for the barriers to the general public investing in risky startups, that’s a feature not a bug. Look no further than dotcom 1.0 or the present day ICO market to understand why.
Not really, with initial and intermediate funding now being covered by deep pocketed VC's, the public no longer has the chance to invest in earlier stages of the development cycle.
Regardless of whether this is good or bad, it is different.
This isn't really true. If you actually wanted to and tried to put in early stage money, you could. Lots of startups raise their first few hundred K from "friends and family" type rounds and are usually readily looking for small investors to write small (25k or even less) checks.
I would bet within a couple degrees of separation within your network you can find someone raising money for a project you're at least somewhat interested in. There are also platforms like AngelList that are making it easier to fund deals with small money.
How might an individual know about and do some baseline reasonable due diligence on these opportunities as identically easily as he could with a publicly listed stock?
And why do VC's bother going through all the work, if the outcome is no different than if they'd simply have left things be as they were, with these companies getting funding from the public markets?
You don't buy these companies to catch a temporary rising tide. Market timing is more often financial suicide, one of the worst mistakes amateur investors make.
You buy for the growth and long-term picture. If you believe in the growth potential, you buy in at an early opportunity.
ServiceNow's stock has gone up six fold in less than six years. Their revenue has climbed from $424m in 2013, to $1.93b in 2017. The last four quarters they've brought their burn rate down to meaningless while maintaining the growth, with immense gross profit margins that imply they'll likely become nicely profitable in the future.
That's a story not about rising tides, it's about the growth in the business and its future prospects.
Ask GE if rising tides lift all boats. Or AT&T, a functional, highly profitable business whose stock hasn't gone up in five years. Or Exxon, whose stock is down over five years. Or Procter & Gamble, which is still a thriving business, and whose stock also hasn't moved in five years. Those were all considered world-class blue chip stocks in the recent past.
Let’s not forgot Apple’s rise, fall, and post 2000 rise again. If you were young in the 80s, bought Apple, and planned to save it for retirement you would be sitting on a nice chunk right about now.
