- The mindset of a private investor…
- Will facial recognition put our accounts at risk?
- Where the EV market is really going…
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology.
Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
Thank you again to all the investors who showed up to my Day One Summit on Wednesday evening. It was a great time, and I was so excited to introduce the world of private investing to attendees.
I have an incredible sense of relief now that we’re live. Now my team and I can get to work. This is where it gets fun.
And this has been a long time coming. I’ve looked for a way to share my own experience as an angel investor with readers for nearly seven years now. But it just wasn’t possible.
Until earlier this year…
That’s when some key regulatory changes went into effect… enabling me to finally help regular investors enter this space. That’s a big win.
Because when we can get in on the ground floor on “day one”… in an exciting company… that’s when 100X-plus gains become not only possible… but with a large enough portfolio, they become likely. I’ve done it myself, and I will do it again.
This kind of investing is exactly how I have achieved the kind of returns that will ensure the security of my family for generations to come.
That’s why I’m so excited to get started with Day One Investor, my newest project.
If you weren’t able to tune in, there are just a couple of days left to watch a replay of the event. You can go here now to watch.
Wins versus losses in private investing…
Let’s begin with a question on overall gains and losses as a private investor:
Jeff, I’m registered for your Day One Summit. I look forward to learning more. However, I’d also like to hear some facts about your losses. I know losses aren’t something to brag about, but it gives an investor a much more complete set of facts when making an investment decision.
I’ve invested in eight startups. Only four have resulted in a return. Two were very marginal, but two of them were tremendous successes. Four were total losses. I’d like to understand your results in total, not just your home runs. I look forward to the Summit.
– Conrad M.
Hi, Conrad, and thanks for attending my Day One Summit this past Wednesday. I hope you received your answer there, but I’m happy to discuss this topic again in these pages.
I’m an active angel investor in over 260 private deals as of this writing. Many of those have been successes. I’ve been sharing some of those stories this past week.
I shared my returns like 111X on Bolt Financial… 54X on Bestow… 131X on JumpCloud… and 35X on Axiom Space. And the best part is that these companies are still growing and increasing in value. The final returns when there is an exit will be astronomical.
These are truly incredible returns. And they are merely a selection of the winners I’ve seen just in the last five years. I’ve invested in six companies that have gone on to become billion-dollar unicorns this year alone, bringing my total up to 12 unicorns over my history as an angel investor.
Yet it’s reasonable for readers to wonder about the flip side of this equation. I’ll be the first to tell you that not every private investment succeeds. In fact, it’s not uncommon for private companies to fail altogether.
Investing in the earliest stages carries inherent risk… And a business can fail for numerous reasons that are largely outside of the founder’s control. During my time as an angel investor, this has happened to me. Several times, I’ve seen the loss of most or all of my investment.
And you might be surprised that I would brag about my losses. Out of the 284 private companies that I’ve invested in during the last 10 years, 13 have shut down. 13 out of 284 is about 4.6%.
You might be surprised to hear me say that my loss rate is too low. My perspective on my own personal private investments is different than most.
If too small a number of my investments are failing, I am probably not taking on enough risk. I’m probably not investing in enough potential moonshot companies.
The key mindset as an angel investor is that overall portfolio returns are most important – not whether any single investment fails.
I don’t share this to scare anyone away from private investments. And I am going to work extremely hard to find investment opportunities that have fantastic risk-to-reward profiles.
But I want to make one important point. I will never “take a flyer,” gamble, roll the dice, bet, or do anything that even remotely resembles mindless speculation or gambling.
That is not what I do as an angel investor, and that is not what we’ll be doing in Day One Investor. We invest. Every recommendation will have a clear investment thesis, and a strong set of reasons that make for a compelling day one opportunity.
We’ll build a portfolio of high-potential private companies so that we reduce our overall risk and increase our overall portfolio returns.
Here is a quick summary of the right mindset that we should have as Day One Investors.
First, rational position sizing is absolutely key. Our positions in each company should typically only be a percentage of what we would normally put into a public small-cap stock. And we should only invest money that we can afford to lose in any single investment.
The good news is, we don’t need to throw our entire bank account into an investment in order to see amazing returns. If we’d invested a mere $500 alongside the earliest investors in Uber, for example, we’d have returned nearly $2.5 million. That’s the power of investing on “day one.”
Second, we should invest in a whole portfolio of private investments. It can be tempting to think that a certain exciting investment is “the one” and go all in. But this is not the way to success. Instead, we want to build a large, diversified portfolio over time.
Much like the experience you described having, a good number of these deals will provide a modest profit – perhaps doubling or tripling our investment. A few will fail completely. And then we will see the real “home run” investments with 100X or more potential.
But to ensure that we have exposure to the home runs, we need to invest in a large portfolio over time.
And that brings me to my third point. We should be prepared to invest in these private companies over a period of years. Especially in the world of technology, advancements are happening rapidly. Every year, we see new and incredible companies form. And each year has “hot” sectors where we see a boom in capital formation and technological advancement.
So it isn’t prudent to make all your private investments in year one and then wait a decade for them to mature. Instead, we want to invest over an extended period of time in the latest and most promising companies.
Then, as our portfolio grows and matures, we will begin to see exits that will allow us to harvest our gains and reinvest them into new opportunities. I kind of think of this as an evergreen fund.
Eventually your portfolio will deliver such returns that you’ll no longer need to inject any additional capital. Simply use the gains from previous exits and reallocate to the next batch of promising companies. And when we’re ready to retire, each year as the investments mature, we’ll enjoy the returns even more.
These are a few pieces of the mindset we need to have when entering the private markets.
And, of course, for those who join me at Day One Investor, they’ll have my guidance as we go through this process. I am looking forward to helping investors navigate this unfamiliar space.
We’re right to be wary…
Next, a reader wants to know more about the risks of biometric data:
Hi Jeff, I’m a longtime member of Brownstone Research and enjoy reading The Bleeding Edge daily. In your recent write-ups, you’ve mentioned The FaceTag and The Orb, two products that take our biometric data.
Isn’t letting these products scan our faces a security issue with so many apps that are now allowing us to use face identification to log in? Won’t letting them scan our face leave our bank accounts, brokerages, and social media accounts vulnerable? Thanks for all you continue to do.
– Jarod R.
Hi, Jarod, and thanks for being a member. And I’m glad to have you along for the ride as we cover the most exciting developments in The Bleeding Edge.
Privacy is an important topic to me and many other readers. And as I mentioned in those two recent stories, it’s coming under fire in new ways.
For new readers, The FaceTag is a social networking application under development that connects a biometric scan of users’ faces with their personal information.
Rather than exchanging phone numbers or emails, one person could scan another FaceTag user’s face with their phone and receive that information instantly.
The Orb, on the other hand, is a project distributing the Worldcoin (WDC) cryptocurrency for “free” in exchange for being able to record your retina and face. It will then use our data to train its artificial intelligence (AI)-powered facial recognition system.
I wouldn’t give my data to either of these projects. Neither has good privacy implications.
As for your question… it’s possible that this could pose a threat like you propose. Many people use Apple’s Face ID login method for the iPhone, for example, which scans our face in order to unlock our device. It’s very convenient, but we have to trust that Apple will not use our biometrics for any nefarious purposes.
If a hacker could gain access to our biometric data and match that to the digital credential our phone uses for our face, then they could gain access to our device and data. From my perspective, this is already a threat, but it is just one of many.
It’s one more reason I would recommend readers use two-factor authentication (2FA) for all of our most important accounts. No single authentication method will ever be perfect, but we can increase our security by requiring a secondary authentication when we log in.
I wish I could provide some silver lining, but I’m afraid reality is not kind in this regard.
The problem is that whenever we step outside and go into town, or get on a Zoom call, we are exposing our faces. Video surveillance cameras are everywhere, and much of that footage gets recorded and run through facial recognition software without our consent.
For example, I wrote previously about Clearview AI’s technology. The police are using that company’s massive facial recognition database for identification purposes. There’s serious potential for abuse if the system misidentifies someone who looks similar to another person. False matches have already led to wrongful arrests in a few cases.
Or imagine what a stalker could do with this technology – especially if the FaceTag has connected your face with your home address. That’s an extremely uncomfortable thought.
So it’s not hard to envision this technology being used for nefarious purposes.
As I’ve said before, using technology in an ethical way will be one of the greatest challenges that humanity will face in the years ahead. We want to remain vigilant and guide technology in the right direction as advances occur…
And the reality is that true privacy is nearly impossible unless we are willing to go completely off the grid.
The best way to fuel EVs…
Let’s conclude with a question about electric vehicle (EV) batteries:
Hi, Jeff, and thanks for being willing to answer questions. I have been trying to understand exactly where the EV market is really going.
We currently seem to be stuck on lithium-ion batteries. These have such limits for distance and charge time that I question their viability. I don’t believe the “forever/Jesus” solid-state battery (SSB) has ever really shown up, but I had a lot of hope for it.
Then there is hydrogen. Other than buses and some trucks, I have not seen much lately. And now I’m hearing a lot about ammonia as the next fuel. Hydrogen and ammonia (and to some extent electricity) lack a robust resupply infrastructure.
I guess I’d like to hear your thoughts on this whole subject. My investments are having trouble keeping up in this area. Thanking you in advance.
– Jim G.
Hi, Jim, and thanks for being a thoughtful reader. I enjoy getting to interact with my readers in these mailbag editions.
And the topics of clean energy and EVs are definitely popular here in The Bleeding Edge. You’re not alone in wondering what the next breakthrough will be.
As you’ve noted, lithium-ion batteries are the current standard for EVs. Lithium-ion batteries are established in the industry and continue to improve their energy density incrementally year after year. They’ve continued to fall in price, as well. Those are headwinds that any replacement will have to overcome.
Hydrogen is one contender. Some favor it for its lack of emissions and higher energy density compared to lithium-ion batteries. That means we can get more energy per unit of hydrogen than we can from an equivalent unit of energy in lithium-ion batteries.
But it has yet to gain much traction for a few reasons.
For one, the vehicles themselves aren’t very economical yet. And as you mentioned, there is very limited infrastructure in place right now for refueling. According to the U.S. Department of Energy’s Alternative Fuels Data Center, there are fewer than 50 public hydrogen stations nationwide. And nearly all of them are in California.
A bigger problem is that hydrogen fuel is extremely expensive to produce. It costs roughly $4.50 to produce a kilogram of hydrogen, which is the rough equivalent of one gallon of gas. That means we would see fuel prices well above $5 per kilogram of hydrogen.
Compare that to an average of $2.17 per gallon of gas in 2020.
And while hydrogen doesn’t release emissions, we currently use fossil fuels in order to produce the hydrogen. That negates its value as “clean” energy for the time being.
If we can find a way to cheaply produce hydrogen fuel without using any fossil fuels, however, we can be sure that investment in this space would grow rapidly.
As for ammonia, this alternative fuel has also been gaining more attention as many companies aim for low-carbon strategies, especially for boats and other marine vehicles.
Yet ammonia faces many of the same challenges for adoption as hydrogen. Creating “green” ammonia will cost two to four times that of regular ammonia. And some of the technologies involved are still in the experimental stages.
While internal combustion engines can use ammonia with some modifications, ammonia typically requires larger fuel storage and a dual-fuel injection system using diesel or hydrogen to help with the compression ratio.
Ammonia can also release nitric oxide emissions – responsible for smog and a contributing factor to acid rain – unless engines are carefully designed to limit that factor.
So both hydrogen and ammonia need more work before they’ll be able to gain a significant market share of EV fueling options.
There are, however, a handful of private companies making fantastic progress on solid state batteries (SSBs). I certainly agree that they have been a long time coming. But the breakthroughs are happening now, and I expect that we’ll start to see the technology commercialized within the next three years.
SSBs are particularly appealing because they will easily drop into the current electric vehicle designs. They are an easy replacement for the current lithium-ion batteries.
For this reason, it’s where there is a lot of private capital being invested right now. I think you’ll be happily surprised with what happens over the next two years. We’ll certainly be all over these developments at Brownstone Research.
With all that said, I’m excited to see the improvements and innovations that occur in this space.
And just to reassure you, the future of EVs is bright no matter which fuel option wins out. We’re already seeing a multi-decade shift in the automotive industry as EV adoption accelerates among consumers.
As we can see from the chart above… this trend is just beginning. That’s why I’ll continue to follow this space in my research and show investors the best ways to invest in this technology. You can go right here for my recent research.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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