Start the conversation
Thank you for joining the Startup Investor community. Please enjoy your free report below.
It's time to talk about everything that's playing out on the global stage right now.
Crisis. Pandemic. Recession. A few months ago, who could have guessed these would be words we'd end up hearing on a daily, even hourly, basis?
The fact is you never know when a novel event like COVID-19 could come along and rattle the global economy. But that doesn't mean we need to panic. This crisis will pass eventually – and in the meantime, I'll be here to guide you through whatever may come.
I'm going to tell you the complete truth – so it might sound a bit scary at times. But by the end of it, you'll know what's happening, what's coming next, and what to look for in private companies right now.
We have a lot to cover… so let's dive right in.
Coronavirus: Just One Piece of a Larger Puzzle
Like I said, a few months ago, most people wouldn't have believed a storm of this magnitude was coming. But maybe we should have seen that something was coming.
If you look at the big picture, things have been slowing down in the public markets for a while now. Some of the biggest private companies that were planning to go public – like Airbnb and Palantir Technologies – decided not to proceed once they saw their peers – Uber, Lyft, Peloton – get slashed to pieces on the trading floor. Some outcomes were even worse. Remember what happened to WeWork?
Luckily, most angel investors don't lose too much sleep over price fluctuations post-IPO. After all, by the time a company goes public, its earliest investors have typically made their money back – tens, hundreds, or even thousands of times over.
But while all this doesn't directly reflect what's going to happen next in the stock market, it certainly means something when it comes to investors' overall optimism. In this case, a decade of startups putting outsized focus on "growth at all costs" had already sown seeds of doubt that began to sprout in 2019. Think about it this way – when all the biggest companies are afraid to enter the public market, what does that say about the market?
Keep in mind that all this was going on long before COVID-19 took the stage. And the impact of the virus on the stock market is not just evident – it's staggering. So it's no big surprise that the vast majority of publicly traded companies are getting clobbered.
Why the Stock Market Matters – Even for Private Companies
To put it simply, an inhospitable IPO environment could lead to a "traffic jam" in the startup funding life cycle. When more and more huge companies decide to hold off on their public debuts, they're essentially keeping more venture capitalist (VC) dollars tied up in illiquidity. That couldmean that there's less capital floating around for the smaller fish.
Most angels prefer to invest in the seed round – the first round of financing a startup completes – in order to get the most equity per dollar. (More on how that works here.)
But eventually, every startup in your portfolio will need more money. And if VCs aren't investing in Series A rounds, that could spell trouble for a lot of fledgling companies. In many cases (though not all), a startup that can't make it to the next financing round is one that makes investor money disappear.
Why You Don't Have to Worry
I get it – a lot of scary ideas are floating around here. See, I wanted to make sure you know exactly what the worst–case possibilities are, especially since we have no idea what will happen next with COVID-19.
But now let's refocus on the bigger picture… because despite all these looming storm clouds, we are going to be OK. In fact, this could be a better time than ever to start honing your angel investing skills. Here are a few reasons why.
1. Angel investing is a long-term commitment. In 2020, we've watched the world get turned upside down. And it's just getting started. In an official statement earlier this week, U.S. President Donald Trump estimated that the effects of coronavirus on our economy and society could persist through July or August. If he's right, that's eight months of chaos we'll end up dealing with.
But if you invested in a startup today – or even six months ago – the odds of an exit within that time window are minute. A typical angel investment takes two to 10 years to yield a return; the average holding time is 3.5 years. By the time your portfolio companies reach maturity, the effects of this crisis are likely to be long past.
2. Many VC funds will continue to operate like normal. It can take months to years to fill a venture fund completely – $20 million is about the smallest size you'll see, and the average is well over $100 million. Right now, there are many funds in varying stages of completion – and many that are already full.
The managing partners of these funds aren't just going to sit on their hands while this all plays out. Their funds are effectively already raised. And with deal terms on track to improve as the market adjusts, they may be even better prepared to deploy that capital to startups in need.
3. Deal terms are likely to improve. This experience is going to be a reality check for startups as they head into their next funding rounds.
I'm already seeing this happen… and it's a good thing. For the past few years, investors have had to deal with startup founders raising money at unrealistically inflated valuations.
But now more than ever, they're going to need to justify every penny that goes into their valuations. I suspect a great deal of them will find they can't quite justify that $50 million ask before they've earned any revenue – which means they'll have to raise cash at a lower valuation. Just like with real estate, stocks, and groceries… the best time to buy is when the price is low.
If you ask me, this could be one of the biggest turning points in angel investing history. The stars are aligning for good, solid companies to emerge from the crisis as titans – potentially producing enormous returns for their investors.
But only those investors with a proven strategy are likely to pick the right deals. Without a data-driven, analytical approach to due diligence, the odds of rushing into subpar deals is so much higher. In conditions like these, it's sink or swim.
Which is why I'm here. Between my decades of experience and my research team's meticulous attention to detail, we have this process nailed down pretty well. We've even boiled it down to a simple algorithm we call the 1,000x Formula.
It's an elegant, refined system – and yet it's so incredibly easy and accessible that anyone could use it. And in times as uncertain as these, it's more important than ever to lean on logic and rational thought.
And in the age of COVID-19, there's one particular part of my process that I want to highlight now.
Some startups – startups with very particular qualities – are shielded from many of the problems that are steamrolling bigger, public companies right now.
Find startups with these qualities, and you could sidestep a lot of the agony, stress, and loss that traditional stock market investors are dealing with every day.
Here they are.
Quality No. 1: Find Startups That Are Nimble
When a gigantic company's manufacturers in China shut down, that's a big problem.
Take Nike, for example. It produces somewhere near a billionpairs of shoes each year – accounting for nearly 60% of its annual revenue. If its main manufacturing plants shut down for three months… it's going to have trouble finding another that can support that same output.
Compare that to Allbirds, the startup shoe company that makes stylish, sustainable sneakers from merino wool. Allbirds sells a million pairs of shoes a year, give or take. It's a lot easier to find a factory that can produce a million units than it is to find one to produce a billion.
What this really boils down to is agility. A private company with small needs in comparison to its publicly traded counterparts can move quickly in times of crisis.
This applies to overhead costs as well. Nike employs more than 75,000 people; Allbirds has less than 200 on its payroll. When a crisis like COVID-19 forces people to work from home, having a small, nimble staff is a huge relief.
Quality No. 2: Find Startups That Are Mostly Online
This one's easy. Many startups fall into one of these three categories: B2B (business to business – think enterprise software solutions); D2C (direct to consumer – like Allbirds, HelloFresh, Rothy's, Bombas, Grove, and more); and software (everything from Airbnb to Slack and beyond).
Companies like these make well over 90% of their sales from the Internet. They don't rely on people showing up to shop at brick-and-mortar locations. Not only does this mean that they have a better shot of maintaining sales during a mass quarantine… but it also reduces overhead costs substantially. And that means they can last longer with the cash they already have on hand.
Some startups already work remotely these days, so I imagine a large number of them have been virtually unaffected by this crisis – at least in terms of business. Some companies are even seeing their sales grow right now. Software, meal delivery services, fitness apps, and more are getting a boost as consumers hunker down at home.
Quality No. 3: Find Startups Run by Visionaries
It's a bit of a cliché, but it's true: Hard times make us tougher.
Think back to the Great Recession of 2008 and 2009. American households lost roughly $19 trillion of net worth in late 2008. The unemployment rate skyrocketed, the real estate market collapsed, and many, many people lost their homes and livelihoods.
Companies of all sizes suffered too. Businesses shut down every single day. It was truly a dark time, felt not just by Americans but by people and institutions around the world.
It was also incredibly fertile ground for innovation, disruption, and new hope.
Against all odds, visionaries from all walks of life managed to build businesses that grew into today's biggest companies. Uber and Airbnb, for example, were both founded in 2008.
Github, Cloudera, Square, Slack, Dropbox, Glassdoor… these are all companies that took their first steps during the Great Recession. They were able to do so because each of them solved major problems affecting huge markets. This is the time when small ideas die and big ideas rise to the top.
Every single one of those startups ended up with valuations well over $1 billion. Some remain in the tens of billions, even today. Needless to say, they all produced life-changing returns for their earliest investors as well.
Incredible stories like those are exactly why I believe that this is the perfect time to get started as an angel investor. I will say that doing your due diligence is more important than ever in times like these – but a startup that has what it takes to persevere through a global crisis might just have what it takes to join the "unicorn club," too.
The key is having the right tools to know which deals are worth considering, like the 1,000x Formula I mentioned earlier. It's an incredibly simple yet highly refined algorithm built upon my three core angel investing philosophies. It takes just a few minutes to use… and so far, it's never let me down. Every single startup featured on the Angels & Entrepreneurs Network passed the Formula with flying colors. Just click here for more on that.
My advice? Be careful, stay safe, and protect yourself… but don't let your life come to a screeching halt. You might miss out on something amazing.
Until next time,