Early-stage investing could be life-changing. This is we at The Financial Star pay particular attention to early-stage stories. New IPOs, microcap companies, especially the ones that have to do with ESG and tech — investors who play these opportunities right might reap immense rewards.
Take Beyond Meat, for example. After its initial public offering in May 2019, it soared 257% within a couple of months.
If an investor had put $10,000 into BYND at $65.75 (its closing price on the first day of trading), he or she would have seen their position go up to over $35,700 in about two months.
Even despite the volatility that followed that peak and the pandemic plunge, Beyond Meat is up over 90% since its IPO.
This is just one example of early-stage investing. But this area is one of the world’s best to be in.
Why? Because otherwise, it wouldn’t attract some of the world’s biggest names and smartest money.
I’m talking about venture capitalists. Companies like Andreessen Horowitz that manages over $20 billion in early-stage ventures… and that invested early in today’s household names like Facebook, Airbnb, and Lyft.
Or take Sequoia Capital… at one stage or another, it invested in companies that are now worth over $1.4 trillion…
Clearly, these titans of early-stage investing are doing something right.
Below, we will tell you what investment strategies they use in achieving these immense results.
Strategy 1: Look for Home Runs
How would you feel about losing out on two out of every three investments? Pretty bad, right?
But that’s how venture capital works. About 65% of all deals don’t work out, and when they fail, equity investors could lose everything.
And they often do.
How do you respond to that?
By having complete conviction in your next investment. Venture capitalists know that for their system to work, they need home runs—so they look for them.
In other words, they need to believe that an investment has a high chance of being a home run.
In practice, it means that investors should be able to answer this question: what needs to happen for this company to be worth 10x its current value?
How will it get there? And most importantly, how probable is it?
If they have belief and conviction, they will put their money at stake. If it turns out a home run, it’ll pay off for a lot of investments that don’t work out.
So, the lesson here is to look for investments that can realistically deliver a 5x or 10x return.
Strategy 2: Diversification Works
Investing is risky, you know that. But with early-stage investing, understanding this point is critical.
A venture capital firm like Andreessen Horowitz would make hundreds of investments, if not thousands, to spread its bets.
This is the art of venture capital. They need to have total conviction that any of those hundreds could be the next unicorn…
But they must control their instinct and NOT invest all of their capital in any of their deals.
This is the best approach for investors.
Venture capitalists always have cash available for the next great deal.
Other investors should view their portfolios in the same way.
Even though they must believe in a 10x return—or better—diversification is key.
The biggest funds, run by the most famous capitalists, do that. They do it for a reason: it works.
As a result, lesson number two is this: investors should never put all of their capital in one or two investments. They would do better by always having some “dry powder” as liquid and available capital is called in the finance industry.
When you have “dry powder” available, you will be able to deploy it fast when an opportunity appears.
Strategy 3: Look for Growing Trends
Even though picking companies for venture capitalists is important, they also pay attention to what’s going on outside the company itself.
And trends in the global markets are always on their radar.
A stellar company working in a declining industry has a lot of headwinds working against it.
Think about an innovative tobacco company. Regardless of how good its products are (and let’s not discuss whether they can possibly be “good” at all), it will face so many roadblocks on its way a lot of investors would prefer to just move on to something else.
But a company working in a growing trend like ESG gets a lift whenever the whole area has momentum.
This is why The Financial Star is focused on ESG. It perfectly fits the venture capital strategies of the most successful funds.
First, there is plenty of choice. So you can always build a diversified portfolio.
The whole ESG industry is growing. By 2025, total ESG assets under management could total $53 trillion.
Second, there are home runs focused on ESG and tech. For example, Tesla is the top holding in one of the largest ESG ETFs, iShares ESG Advanced MSCI USA ETF (USXF). And it has already become a home run, having soared by almost 10x in three years.
Keep these strategies in mind, and we wish you investment success.
On our side, we will continue bringing to your attention some of the most interesting investment stories and companies worth putting on your radar.
Thank you for your loyal readership,
The Financial Star team