Editor’s Note: Welcome back to Jeff Brown’s prediction series. Over the next several days, Jeff will share his biggest predictions for the new year. Today, Jeff discusses the state of private markets and why next year could be “a great time to build.” Read on…
Van Bryan (VB): Jeff, let’s about the private markets. And to start, let’s check in on one of your predictions from last year. You predicted that it would be a record year for crowdfunding raises, i.e., private deals open to all investors. How did that turn out?
Jeff Brown (JB): I wish I could give you a definitive answer on that one, but the jury is still out. Last year, about $500 million was raised in crowdfunding deals, which was a record.
And at the moment it looks like about $400 million has been raised via Reg CF deals through November. And that’s the key, that’s not all crowdfunding raises, just the Reg CF deals.
The larger crowdfunding deals happen under Reg A and Reg A+ deals. As much as $75 million can be raised now. So, if the Reg A/A+ deals top $100 million, then 2022 will be another record year. If not, I’m certain it will be very close.
We’ll be working through the data in January and making sure we have an “apples to apples” comparison for total crowdfunding deals each year. I’ll plan on sending out an update in The Bleeding Edge once we know.
Either way, it was a great year for crowdfunding despite the terrible economic conditions, inflation, and volatile public markets.
It’s worth taking a moment to step back and look at how far the crowdfunding industry has come over the last five years.
In 2020, Regulation CF raises brought in only $216 million. In 2019, it was just over $100 million. 2021 and 2022 were remarkable years for the industry as we look back in comparison.
VB: Why do you think crowdfunding raises have seen such elevated levels recently?
JB: It comes back to an important regulatory change that happened in the spring of 2021.
Longtime readers will know, but the original crowdfunding raises were made possible thanks to the JOBS Act from 2012. It opened private investments to everyday investors really for the first time.
But the big problem was that there were strict limits on how much a company could raise. For regulation CF raises, it was just over $1 million ($1.07 million). That might sound like a lot. But for most companies, it just wasn’t worth the trouble.
They could easily raise more from venture capital, and $1 million only meant that they’d have to be out fundraising the moment that the Reg CF closed because they’d need new capital within 6 – 9 months.
The result was that we saw fewer companies going the crowdfunding route. And the few that did were often very low quality. That’s why I didn’t do much with private investment recommendations prior to the crowdfunding changes that were made in 2021.
This was always a point of frustration for me because I wanted to share the single best investment strategy to build generational wealth that I know.
But all the changed last spring. The caps were raised for all types of crowdfunding deals. Companies raising via Reg CF could now raise $5 million through crowdfunding in every twelve month period. That changed the entire dynamic.
A $5 million raise is on par with a respectable seed or seed plus round in venture capital. Crowdfunding suddenly became a realistic option for most companies.
VB: This regulatory change was the catalyst for you launching Day One Investor, your private investment research service. Day One just completed its first full year of operation. How do you think it’s going so far?
JB: I’m thrilled with the progress we’ve made there. This is how I invest my own capital as an angel investor. We now have thirteen companies in our portfolio. Steadily, we’re building a very respectable private investment portfolio. This was always the plan.
When I launched that product, I said that private investing is the best way I know to build generational wealth, the kind you pass down to your children and grandchildren. That’s not hyperbole. But to do this the right way, we had to approach this market with the right strategy.
The biggest mistake most investors make when they approach this market is that they might invest for a few months and then lose interest. Or maybe they’ll deploy too much capital into one or two companies and assume they’re “set.” That’s not a recipe for success.
To do this the right way, we’re building a portfolio of fifty companies over the next five years. We’re going to be very sensible with our position sizes.
We do that because some of these private companies won’t succeed. Not only is it possible that some of these companies will fail, but we should also expect it.
In fact, I would argue that if we don’t have a handful of failures, we aren’t swinging hard enough for the moonshots. That’s exactly how I think of my own private portfolio.
But the benefit of building a portfolio is that if a few go under, it doesn’t really matter. Because it only takes one or two “homerun” private investments—think 10X or even100X-plus returns— to drive the bulk of our overall portfolio returns.
That was the basic proposition for Day One Investor. It’s a disciplined, patient style of investing. And I’m thrilled so many subscribers wanted to take that journey with us.
VB: Can you give readers an idea of what to expect next year?
JB: I think we’ll have another great year in private investments in 2023. And the weaker market in the first half of the year will play to our advantage.
Over the last two years, many private companies were fetching outrageous valuations. And many in the VC space were happy to deploy capital at these inflated levels. The idea was that if they passed on a deal, the company could simply raise capital somewhere else.
Those days are done. Private companies are going to get very realistic with their valuations in future raises.
And the upside is that we can invest at far more attractive valuations compared to a “hot” market. We may have to work harder to find high quality deals, but the effort is worth it, and the deals are out there to be found.
As I look ahead to 2023, I think high-quality private investments could even act as a safe haven for a lot of investors.
VB: Most people wouldn’t associate private companies as a “safe haven” investment. What do you mean by that?
JB: You’re right. Most investors would probably think of precious metals or Treasurys as a more traditional safe haven. And private companies are a more asymmetric style of investing.
But what I mean is that private investing—by its nature—is a long-term investment proposition. Whenever I invest my own capital as an angel investor, most of the time I do it knowing I’ll be holding for a few years.
The exception would be if the company is an acquisition candidate, which actually happens quite often. But, generally speaking, with most investments that we make, we’re assuming that we’ll be holding for years as the investment grows in valuation.
So, what I mean is that we can place an investment in a private company and then forget about it. While most public companies will struggle for at least the first half of next year, our founders will just get to work on their product or service.
They really won’t be negatively impacted at all by the volatile market conditions, or even a market crash. The valuation in the company won’t change.
And I actually think next year could be an amazing time to build. Once a private company is funded, it really doesn’t care about the economy over the next six or twelve months.
We know the economy will eventually improve and the public markets will return to health. And companies can build their products, relationships, distribution channels, and refine their go-to-market strategy during that time. And once we do see improved conditions, the business will be able to flourish.
I find this style of investing really freeing. We don’t have to worry about timing our exit. We don’t need to look at the daily fluctuations of a stock. It’s the purest form of “set it and forget it” investing.
VB: Any particular areas you expect to target for new private investment recommendations next year?
JB: One of my areas of focus next year will be to expand our portfolio in Day One Investor into industries we don’t have exposure to yet. I mentioned the importance of building a portfolio. But it’s not just the number of companies in the portfolio. We want our portfolio to be diversified across several industries. We’re off to a good start so far.
We have two companies in the consumer goods space. We have two companies in what we could think of as the real estate and architecture design industry. We have a handful of Web3 companies. We also have exposure to cybersecurity and telehealth.
I’d like to continue to diversify. Specifically, I’d like us to gain some exposure to private biotech, gaming, automation technology, companies that employ artificial intelligence, future transportation, robotics, and hopefully even an early stage semiconductor company.
That’s just for starters.
But of course, any high-quality company at a reasonable valuation is worth our consideration. And the reality is certain sectors naturally see increased levels of investments in certain windows.
So we may make two or three exciting investments in a specific sector during one twelve month window, and then might not invest for years in the sector.
What we’re doing is so exciting. It’s empowering, interesting, and we get to be part of what will become some incredible success stories.
I’m grateful that I have the opportunity to share these kinds of opportunities with my subscribers.
VB: Thanks, Jeff.
JB: Of course.
Editor’s Note: Check back tomorrow for our next prediction from Jeff Brown when we’ll discuss the crypto markets. What does the collapse of FTX mean for the industry? Where will the market go next year? And what will happen with NFTs in 2023? All that and more tomorrow.