Early stage investing is where the real money is made, and with the passage of the Jobs Act, the average person can now reap the rewards formerly restricted to angels and VC’s. We sat down with Netcapital’s CEO, Jason Frishman, to talk about private capital markets, the new investment frontier.Coreen Kraysler, CFA | CFO ValueSetters January 19, 2018
Q. Jason, why should someone consider investing in private companies?
A. It’s so hard for the average person to make money investing in the public markets. Early stage investing is where the real money is made. Snapchat is a great example; the company IPO'd at $24 and now sells for less than $16, while the early stage investors made more than 1000x their original investment. This is true of virtually any tech company that has gone public in the last five years. It is a lot more realistic that a $5 million company can become a $50 million company than it is for your mutual fund investment to increase by 10x. Also, it’s a more intimate way to invest; you get to pick a company you can follow and feel like a part of, almost as if you have a personal relationship with the CEO . Of course, you have to have the proper risk tolerance.
Q. What advice would you give to someone considering investing in a private company?
A. You have to have the right expectations and a high tolerance for risk; we would encourage everyone to read more about that on our website, netcapital.com. It’s also best to diversify. If you want to invest $5k in Netcapital offerings, my advice to you would be to invest $500 in 10 companies or even $250 in 20 companies, as opposed to $2500 in two. And that’s what makes what Netcapital does so special; there is no other way on earth to build a properly diversified portfolio of private investments on a $5000 budget!
Q. Why is it better for a company to list on the Netcapital portal rather than NASDAQ?
A. With this new regulation, a company can get a lot of the benefits of access to the public markets without the massive regulatory burden.
Q. Why are companies waiting so long to go public nowadays?
A. In addition to the cost and regulatory burden, it is hard to make a compelling case for why a company like Uber should go public, when they can just go to Saudi Arabia and get a $3.7 billion placement. Also, many smaller tech companies hope to be purchased by Google, instead of going through the arduous and expensive process of going public.
Q. What are the key drivers of a successful internet offering?
A. There are four key drivers of a successful internet offering. The main driver is social proof. The company needs to be able to create momentum and the best way to do that is by starting with people they already know. For early stage companies, the most likely investors are those who already know, trust, and like the entrepreneur. You want to have that spring coiled, so that when you turn your offering on, you are already able to generate excitement. The second driver is that your value proposition needs to resonate. What you do needs to matter to someone. The second most likely person to invest in your company is someone who likes what you are doing, wants your company to exist, and wants to take credit for making it exist. The third driver is the ability to leverage affinity networks, like-minded people who care about who or what you are. Finally, the press is key, and this is the trickiest part. It is ideal if your offering is mentioned in the press with a specific call to action, with what to do to invest.
Q. In your experience, have you found that investors prefer certain types of businesses over others?
A. People ask me this question all the time. It doesn’t matter; if you are a good entrepreneur, you will be able to make it work, no matter what business you are in. The ability to make it real and tangible to investors is how you translate excitement into investment.
Check out what Jason and his team are up to on netcapital.com.
Coreen Kraysler, CFA