Van’s Note: Van Bryan here, Jeff Brown’s longtime editor. On behalf of Jeff and the entire team, we wish all readers a Happy New Year.
Today is our last prediction edition of The Bleeding Edge. Over the past two weeks, Jeff and I have discussed everything from 5G and AI to a “manufacturing renaissance” and the “golden age of biotechnology.” If readers missed our previous conversations, please catch up right here.
And remember, we want to hear from you. Did you enjoy Jeff’s 2021 prediction series? If so, write him a note by clicking right here.
For our last conversation, Jeff and I sat down to discuss an emerging technology poised to hit the mainstream in 2021. We also discussed investing in private technology companies and a “backdoor” way to invest in pre-IPO companies.
Van Bryan: Jeff, we’ve reached the end of our conversation about your predictions for 2021. I appreciate you taking the time.
Jeff Brown: Of course. I’m always happy to do it for our readers.
Van: For our last day, we’re going to discuss a few different topics. You mentioned you have one more technology prediction for 2021. And we’re also going to discuss private tech investments and the market for initial public offerings (IPOs). Where would you like to start?
Jeff: Let’s start with that final technology prediction. It has to do with augmented reality (AR).
Van: Can you bring new readers up to speed on AR?
Jeff: Augmented reality is a technology that displays graphics so that they appear to be floating right in front of you. So imagine you put on a pair of augmented reality lenses, and you see text or graphics floating a few feet in front of your face.
I got to try one of these AR devices from a company called Magic Leap back in 2019. I put on the headset and booted up an AR game. Literally, before my eyes, a hole opened up in the wall and evil robots crawled out of it. The point of the game is to shoot the robots with a controller you hold in your hand. It was extraordinary.
Van: You’ve been following AR for years. What’s the prediction for next year?
Jeff: Here it is: I predict that 2021 is the year that AR hits the mainstream. I predict there will be at least two commercial launches for AR eyewear. And the launches will come from two well-known companies.
Van: Any thoughts on which companies those might be?
Jeff: Definitely Samsung and Facebook. Both of these companies have been developing this technology behind the scenes. And it’s finally time for the reveal. It will probably happen in Q4 as we get closer to the holiday season.
Google is another possibility. But the real wild card is Apple. I’m not sure if Apple will launch an AR headset in 2021 or 2022. But I’m convinced it’s coming.
Van: Apple is mostly known for making iPhones. Would an AR product launch be out of character for Apple?
Jeff: Not at all. In fact, I think it would be a perfect product launch for Apple. And we’re already seeing some early signs of it.
All of the iPhone 12 Pros, for instance, have advanced light detection and ranging (lidar) detectors in them. This is the technology that helps the phone measure the dimensions of its surroundings. And that’s what enabled the AR applications on these iPhones.
So maybe you could overlay a couch on your iPhone screen to see how it would look in your living room. And then there’s the immensely popular Pokémon Go game. The game overlays Pokémon onto the users’ view of the real world.
Pokémon Go AR Game
Source: The Pokémon Company
I know we might think this is just a kid’s game. But this is big business. When the game was launched in 2016, the number of users was 50 times higher than expected. The servers used to support the game literally crashed.
But now AR is going to make the leap from our phones to AR eyewear. And like I said, Apple would be a great company to launch a product like this.
The pieces are already in place. This year, Apple has transitioned to using ARM-based microprocessors in its laptops – the M1 chip. That was a huge architectural change. Similar chips could be designed specifically for an AR product.
Like I said, you can call Apple a wild card. But it would be a tremendous launch for Apple. And it will stun the market.
And, of course, there are investment implications as this trend picks up speed. I expect stocks involved with 3D sensing technology would do very well in the years ahead.
[Van’s Note: Exponential Tech Investor readers can catch up on one of Jeff’s favorite AR companies right here.]
Van: Great stuff, Jeff. We’ll keep an eye out for that.
Let’s turn to another subject: private investments. Readers have been asking you for years to make regular recommendations for private technology companies. But – with a few exceptions – you’ve held off. Is 2021 the year that changes?
Jeff: You’re right. It’s been a popular request from readers.
Most readers know I’m an active angel investor. At last count, I’ve invested in more than 140 private technology companies. Readers might even know some of these, like the popular cryptocurrency exchange Coinbase.
And I’m actively learning more every year. Back in February, I actually attended an invite-only weeklong class at UC Berkeley School of Law. It was a great experience. I dug deep into early stage investing and many of the nuances with other private investors.
Jeff on campus at UC Berkeley School of Law
So investing in private companies is really in my wheelhouse. And I’d love to publish research on private investment opportunities. But I’ve held off. And there’s one important reason why.
These types of investments are almost exclusively for accredited investors and high-net-worth individuals. Regular investors are effectively locked out.
Van: What about Regulation A or Regulation Crowdfunding (CF) private deals? Wouldn’t that be an avenue for retail investors to invest in private companies?
Jeff: These Regulation CF or Regulation A or A+ deals were introduced as part of the Jobs Act of 2012. But unfortunately, this did almost nothing to address the problem.
Reg CF deals have been restricted to a $1.07 million raise annually. For an early stage tech company, that’s not enough money to do anything meaningful. And usually, 600–700 investors have been able to hoard the entire $1.07 million investment opportunity.
Reg A or A+ deals are potentially much larger. They have been able to raise as much as $20 million or even $50 million, but these kinds of raises are very rare.
The costs of conducting a Reg A are almost the same as an IPO – about $1 million – and the Securities and Exchange Commission (SEC) filings are about the same. Annual filing requirements are also onerous, which is why most companies don’t go down this route.
Don’t get me wrong. Some good companies do take this route. But they tend to be the exceptions.
So the reason I haven’t made these types of recommendations is because I haven’t found enough quality private investments open to retail investors.
But there was some good news on this front in 2020.
Van: What was that?
Jeff: What happened is that the SEC raised the cap on regulation CF deals from $1.07 million to $5 million. And that changes everything.
Like I said, $1.07 million isn’t enough capital for an early stage company to really do anything meaningful. But $5 million? That’s a respectable raise. A lot of seed round raises are about that size.
[A “seed round” is one of the earliest rounds of funding for a startup. Private investors who invest in a seed round are rewarded with equity in the business.]
Regulation CF is now a real option for private companies looking for funding.
Most people don’t know this, but a lot of venture capitalists invest in companies on terms that are very unfair to the founders. But these entrepreneurs have put up with it because they historically had no real alternative.
That would change with a crowdfunding deal like this. The terms would be much better for the founders. So I expect more private companies will look to go this route.
And this is a huge victory for regular investors. It levels the playing field. It means that normal investors would be able to invest small amounts into a basket of private companies.
Investors could choose to invest $500, $100, or even just $50 in each company and still have the potential for 100x, 1,000x, or even 10,000x returns over the course of five or 10 years.
Van: Really? 10,000x returns starting with just a few hundred dollars? That’s really possible?
Jeff: It is. Remember, a seed round is when the company is at its absolute smallest.
When Uber held its seed round in 2010, the company was valued at about $5.4 million. And as a public company, Uber recently had an enterprise value as high as $97 billion. So that means Uber grew 1.7 million % from its first funding round until now.
Nobody knows the exact returns the initial seed investors got if they held on this whole time. I would estimate it was somewhere in the 100,000% range. But what we know for sure is that it was an amazing return.
Now, of course, that’s a real standout example. Not every private investment turns out like that. Some returns will be okay. Some investments will fail completely. But none of that matters if a private investor finds even just one of these standout companies – like Uber.
So that’s why one of my rules is to build a basket of early stage companies and let the numbers work for you.
[Van’s Note: Recently, Jeff shared an “Online VC Academy” with members of our lifetime program, Brownstone Unlimited. Unlimited members can access that here.]
Van: Does this mean that 2021 is the year when you’ll finally publish regular research on these private companies?
Jeff: It’s something I’m actively looking at. I don’t want to reveal too much right now. But let’s just say that readers should be on the lookout in 2021.
Van: We’ll keep an eye out, Jeff. For now, let’s move on to our last topic: IPOs. They’ve been on fire in 2020. Wouldn’t you agree?
Jeff: Absolutely. This was really a banner year for IPOs. There were 489 IPOs this year that raised a combined $154 billion.
Longtime readers know this, but there is an “IPO backlog” right now. There are so many exciting technology companies that have been staying private for years. And this has created a backlog of companies that are now finally going public.
In essence, these companies are like a champagne bottle. All this pressure has been building for years. And now, finally, the cork has popped, and they are all lining up to go public.
What’s interesting is that a lot of these IPOs were put on hold with COVID-19 and the economic lockdowns. But then this wave of IPOs came back with a vengeance around September.
And I’ll give you one final prediction for 2021.
I predict we will see record levels of capital raised from IPOs in 2021. It will surpass even the incredible numbers we saw this year.
Van: Does that mean readers can look forward to any IPO recommendations next year?
Jeff: Well, there’s really been one big problem with investing during an IPO right now. And that is that these IPOs are listed at a certain price, but when they open for trading, the share price leaps to incredible valuations.
I recently saw this dynamic firsthand.
I recommended that readers of my Exponential Tech Investor service try to buy shares in an exciting artificial intelligence company when it IPO’d earlier this month.
The stock was priced at around $42. But when it started trading, the stock immediately jumped above $100. Investors never had a chance to invest at a reasonable valuation.
And this is happening everywhere. Airbnb, AbCellera, Snowflake… these are all recently public companies. And each time, when the stock began trading, it soared past the original IPO price. Sometimes it starts trading two or three times higher than the original listing price.
One of our secrets for success is that we only invest in companies at a reasonable valuation. That’s how investors can stack the odds in their favor.
But at these levels, I can’t recommend any of these companies. The valuations are simply too high.
Van: So if investing on IPO day isn’t an option, what’s the solution? Or is there one?
Jeff: There is a solution. And it’s an obvious one. Investors can buy pre-IPO shares.
Van: Easier said than done. Pre-IPO shares are typically reserved for large institutional investors.
Jeff: That’s right. In a traditional IPO, retail investors are typically locked out of pre-IPO shares. But there is a way to do things a little differently. There is a way to invest in pre-IPO companies from your brokerage account. It’s with something I call a “pre-IPO code.” And it’s open to all investors, accredited or not.
Van: A “pre-IPO code?” Can you expand?
Jeff: Let’s leave it there for now. But I’m going to be sharing a lot of research on this idea in the coming weeks, starting tomorrow. I believe it could be one of the most profitable investing techniques of 2021.
Van: Sounds good, Jeff. I’m looking forward to another year.
Jeff: I am too. I think readers have a lot to look forward to.
Van’s Note: This concludes Jeff’s 2021 prediction series in The Bleeding Edge. If you enjoyed these interviews, let Jeff know by writing to us right here.
And be on the lookout for future editions of The Bleeding Edge. As Jeff said, he’s uncovered a way to invest in companies before they go public. He calls it a “pre-IPO code.”
What is the “pre-IPO code?” And how can retail investors take part?
We’ll have all the answers in the coming weeks. So be sure you keep reading.
Have a Happy New Year’s Eve, and Jeff and the team will see you in 2021.
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