- When do we take profits on private investments?
- “Removing cash is a disaster waiting to happen”…
- Meet the company “flinging” payloads into space…
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.
Before we turn to today’s questions, though, I’d like to spend some time on what has unfolded this week.
The S&P 500 was down as much as 6% at one point this week… The Nasdaq had also fallen over 6%. And cryptocurrencies followed suit. Even bitcoin had sunk nearly 7% as of yesterday.
But as I write this, everything has bounced back above where we started the week!
Of course, much of this market uncertainty is tied to the events in Ukraine.
After weeks of political posturing, Russia launched attacks on several major cities and airports across the country on Thursday. Videos of missiles and explosions near Kyiv are already appearing online, sharing visuals of the invasion in real-time.
It seems crazy that this sort of thing is happening in 2022. And sadly, I believe that things will escalate.
Russia was never happy with the post-Cold War settlement. Putin not only wants to renegotiate those terms, but he also wants to begin the process of restoring Russia’s past Imperial borders.
Equally concerning, or even more so, is that these recent events are a precursor to a much larger plan that involves Russia’s ally, China.
Specifically, I’m keeping an eye on China and Taiwan. I’m not saying that China will invade Taiwan. But I have predicted that China will take steps towards asserting administrative control over Taiwan.
That can be done without a military invasion. The events in Hong Kong over the last two decades are a perfect example. Assuming I’m right, there are deep implications for the world of high tech, and, of course, the global economy.
If China were to have control over the world’s largest semiconductor manufacturer, Taiwan Semiconductor Manufacturing (TSM), it would literally have a chokehold on the world.
China would have the ability to control, alter, allocate, or completely stop the supply of key semiconductors in electronics that we use and need every day.
It may sound strange that anything “good” could possibly come from something like this. But if it were to occur, it would only speed up the reshoring of advanced manufacturing.
The world is learning an important lesson right now: Having control over technology supply chains is a national security imperative. A country either needs to manufacture onshore, or it needs to know that its supply is coming from an ally that can be counted on.
Given that the U.S. economy has literally been built upon technological innovation, there is nothing more important than this to national sovereignty.
Obviously, these kinds of events are disruptive and scary. And they can influence the direction of the markets as people react with fear and panic.
To start, I want to reiterate my commitment to my readers. If you subscribe to one of my paid publications – or even if you are simply a reader of The Bleeding Edge – you have entrusted me to help you navigate the markets through good times and bad.
My team and I will continue to monitor markets, and will alert all subscribers to anything we see that might impact our portfolio companies.
And to ensure we always provide timely updates, I have empowered my team to assist me with publishing relevant updates to readers.
But now to the question that I’m sure many of us are asking… What should investors do?
As investors, we shouldn’t let our emotions cloud our decisions at moments like this. I know many of us are anxious or afraid. But we tend to make our worst decisions when we are emotional.
Maintaining objectivity is the single most valuable skill that I have taught myself over decades of investing. I acknowledge that this is one of the hardest things to learn.
We should, of course, always feel empowered to make investment decisions that are best for us… But my general guidance right now is not to sell our positions.
Historically speaking, while markets pull back during breaking news of invasions, they often recover quickly after the initial shock. In fact, we’re seeing this happen in real-time right now.
As I mentioned earlier, the markets have already recovered what they lost during the week. The rebound has been sharp, but not unusual.
If we look back to the market action over the course of the last five major conflicts, we can see a starkly consistent pattern:
As we can see, markets tend to panic at times of geopolitical uncertainty. But once the threat of a war/crisis is realized, equity markets have historically marched higher.
While I strongly prefer a world of peace, global crises do not deter me as an analyst or as an investor.
History has shown us that crises can lead to market opportunities… That means we need to remain rational and logical with our portfolios despite the chaos that is unfolding.
And as always, I will keep readers informed in the coming days and weeks if there is any action we should take as this situation evolves.
Now let’s turn to our mailbag…
Profiting from private investments…
First, a reader wants to know more about private investment exits…
Thank you for the opportunity to get in on the Day One investments. However, I do have a question/concern that I don’t believe you’ve addressed. At what point will we be able to take profits? Are these pre-IPO investments that we will be able to trade when they become public? Or is there some other mechanism?
I am concerned because other pre-IPO investments I’ve made give you a number of shares and sometimes warrants for the investment. However, [your recent recommendations] don’t identify a number of shares.
So how will it work in the end when there is an option to cash out? I hope there will be a time when we will be able to cash out. I don’t believe you’ve ever talked about that. Please educate us uninformed. Thanks,
– Greg L.
Hello, Greg, and thanks for joining me on my latest venture with Day One Investor. Private investing is new to many subscribers, and it’s very different from investing in the public markets. So, it’s natural to have questions on how it works.
In Day One Investor, we’re investing in Regulation Crowdfunding (CF) and Regulation A/A+ deals. Due to recent regulatory changes, this method of raising capital has become a very attractive route for private companies to take. That creates a fantastic opportunity for all of us.
Investing during the earliest stages of a company or project’s lifecycle, at valuations that tend to be less than $50 million, is the single best way that I know to build generational wealth.
Returns are that much greater as an angel investor… Say we invest in a company at the time of its seed round, when it has a valuation of just $10 million. If it becomes a $1 billion company, we earn a 100x return on our money. That will turn $10,000 into $1 million.
Compare that to if we invested in that same company at the time of an early initial public offering (IPO) – let’s say at a valuation of $500 million. If it grows to the same $1 billion, that is just a 2X return… It’s enough to turn a $10,000 investment into $20,000.
That’s a $980,000 difference, and that’s why investing at the earliest stage is so powerful.
As for taking profits, this is one area that is very different from investing in public companies. Investors can purchase shares in public companies one day and then turn around and sell immediately if they want.
Most private investments will remain illiquid for years. That’s why I always recommend to never invest any capital that you might need to access. Once we’ve made a private investment, we should assume that we won’t have access to that capital – or the profits – for some time.
And it may seem counterintuitive, but the longer our capital stays “locked up,” the better.
What we want to happen is for a private company to continue to grow, receive additional capital at much larger valuations, and eventually get acquired or conduct an IPO. Let’s explore those two outcomes and what they mean for investors.
In the event one of our private companies gets acquired by a larger company, one of three things typically happens:
If the company gets acquired in an all-cash deal, then investors will receive their proportional cash payout once the deal has been closed and funds are distributed.
If the company gets acquired in a combined cash + equity deal, then investors will receive their proportional cash payout as well as a distribution of equity in the acquirer.
If the company gets acquired in an all-equity deal, then investors will receive equity in the acquirer.
And there is one more nuance… If the acquirer is also a private company, then the equity that an investor will receive will remain illiquid.
In that sense, our shares of the original private company will be exchanged for shares in the acquiring private company. Then we’ll hold for an eventual exit.
In the case of an IPO, the outcome is different.
When a private company goes public, our investment will convert into shares of the newly public company. This doesn’t happen immediately; it’s a lengthy process.
This process begins with the private company choosing a brokerage firm to distribute its equity to its shareholders. Once one has been appointed, investors have the option to either open a new brokerage account with that firm, or have their equity transferred to another one of their existing brokerage accounts.
Once investors receive the shares in their brokerage account, which usually happens several weeks after the IPO, they then have to typically wait until the lock-up expiration window has transpired before they can sell.
Employees and shareholders of the private company that just went public are usually restricted to sell until the lock-up has ended, which is usually 180 days after the IPO. That is the point at which an investor has the choice to sell their position or hold on for further gains.
Most of the investments that I will be recommending in Day One Investor will come in two forms:
SAFE – securities agreement for future equity
DPA – debt purchase agreement
Investing in a SAFE via a Regulation CF deal will be the most common. It’s just like it sounds. We make an investment for “future equity.”
The key thing to understand is how and when a conversion into equity takes place. All SAFEs are done at either a priced pre-money valuation or a cap on pre-money valuation. This effectively sets the share price of the equity for the future conversion.
With most SAFEs, the conversion will happen when there is a change of control in the company (like an acquisition) or an IPO.
The DPA is a different kind of instrument that is used for the purpose of effectively investing in a pre-sale of tokens (digital assets).
It can be used as a convertible note that converts to equity at a future point in time. But it’s more popular in the context of a blockchain-related project that will convert that investment into future tokens.
When we make equity investments using a SAFE, we can expect that our investment will be illiquid for years until we have an exit as described above. In the case of a DPA, the liquidity will come much faster.
Usually, a token generation event (TGE) will happen within a couple of years of making an investment.
Once the TGE takes place, then tokens will be distributed to investors, and they will become liquid. The investor will then have the option to hold, sell, or even buy more of the tokens on a digital asset exchange.
There is, of course, some additional nuance depending on the nature of each investment. That’s the kind of information that I’ll be providing to all of my Day One Investors and Brownstone Unlimited members for each investment that we make.
I’ll provide instructions and details related to our investments. And I’ll follow up when it’s time for us to take profits or hold on for further gains in each.
The beginning of the end of paper currency…
Let’s turn next to some concerns about a cashless society…
Hi, Jeff, I’ve read your newsletter today, and I’m deeply concerned about the following comment: “This will be the beginning of the end of paper currency. And in time, physical U.S. dollars won’t be accepted as a form of payment.”
I find such an outcome completely terrifying. I’m happy to use digital currencies (and do) but I completely disagree that they should be the only form of currency. What would happen in the event of a power cut or (dread the thought) an electromagnetic pulse (EMP)?
The shift towards digital currency is inevitable, but removing cash payments completely is a disaster waiting to happen. If a nation were attacked with an EMP, there would be no way to buy goods and services in a cashless society. Do you share the same concerns? If not, why not? I’d like to hear your thoughts.
– Christopher W.
Hi, Christopher, thanks for sending in your questions. And yes, I do share your concerns. I certainly understand why a cashless society is a concern for many readers.
As I’ve written before, the U.S. government is clearly making plans for a central bank digital currency (CBDC) – an official blockchain-based digital dollar.
And once a CBDC is in place, the government will likely begin the process of removing all paper bills and coinage from the system. It will tell us “there’s no need for them anymore.”
In fact, I predict that eventually coins and physical currency will no longer function as legal tender in the United States.
Yet if this comes to pass, what will we do during disaster recovery situations? What about internet outages when we can’t get online? Or as you mentioned, what if we experience an EMP that knocks out electronics?
What will we do for payment in those kinds of circumstances?
While it is highly unlikely that something like this would happen – and if it did it would only be for a short period of time – we do have to acknowledge that the chances are certainly not zero.
The reality is, it depends on how bad a situation becomes.
For example, if an entire power grid was down with no backup for electricity – which would be highly unlikely – then it becomes very difficult to transact. In the absolute worst-case scenario, such as an EMP, we’d likely have to revert to bartering and IOUs for a time.
The reality, however, is that in those kinds of situations, emergency services would be present in one form or another in most countries in order to provide the bare necessities and help people manage through that kind of disaster situation.
With power generation and the ability to set up a wireless network quickly, people would likely be able to charge and use their phones. This would enable them to transact with one another.
In that way, peer-to-peer transactions are actually more robust, as they don’t require an intermediary like Mastercard or VISA to enable a transaction.
And we can prepare in advance for a major storm or a disaster scenario… One logical step to take is having a backup generator to power the most critical things in a home.
A generator, combined with a large propane tank to fuel the generator, is a great solution. That combination can potentially provide a week’s worth of electricity. I have one myself and end up using it a few times every winter due to the storms that knock out the power typically caused by a fallen tree.
As for communications access, if the wireless network went down and the internet service provider’s network went down (e.g., if CATV lines or fiber lines were severed), there are always satellite-based solutions as a backup. If we have a generator, then a satellite internet service could serve as a great backup for internet access.
Wireless networks tend to be more robust, however, as their infrastructure is located on fixed towers that don’t fall down. Additionally, they have hardwired power and typically have fiber optic connections to the network along with backup power as well. So even if our home internet goes down, we’ll still have connectivity over a wireless network.
The latest player on the scene with the best performance is SpaceX’s Starlink service. For those who absolutely need to remain connected no matter what happens, this is a great solution.
We’re also building other interesting alternative communications networks… networks that do not require cellular towers, Wi-Fi, or satellite connections.
GoTenna’s “mesh” network is a good example. Without relying on satellites, GoTenna has created a people-powered, decentralized network. The mesh device generates a signal that connects with other units in range.
And there are already mesh “nodes” popping up around the country…
GoTenna Network Map
Signals hop, hop, hop until they hit a node that broadcasts transactions to a satellite. Once the system logs the transaction, then a confirmation message is relayed back to the customer.
No internet, low power requirements, and a fully operable network… We can think of this as a way to crowdsource a communications network.
Puerto Rico used this technology after Hurricane Maria hit back in 2017. The Category 5 storm knocked out 93% of the island’s telecommunications. These GoTenna devices made it possible for people to communicate while Puerto Rico rebuilt or repaired the normal infrastructure.
In either case, a merchant with a simple USB device and some form of backup battery or solar cell would be perfectly capable of accepting digital payment even if the internet and power were down.
Yet these are absolutely the questions we need to ask as the world moves in this direction.
There will certainly be growing pains, but many of the best minds in the industry are currently looking for creative solutions to these kinds of problems.
Of course, as investors, we must recognize that a cashless society would involve a number of changes to how we spend, save, and invest… even without a disaster scenario.
But Christopher, there’s something even more nefarious about CBDCs that I’m concerned about – the absolute power and control that it would give a central government.
The movement can’t be stopped towards CBDCs. There are just too many incentives to make it happen. But it’s frightening to think about the control that it would give an authoritarian government.
Just look at what has happened in Canada. The government has gone so far as to freeze bank accounts of those that they don’t agree with.
Imagine a world in which our bank accounts are frozen if we simply exercise our free speech in disagreement with the prevailing political narrative that we are told we MUST support.
That’s why I recently recorded a presentation about how we can prepare and protect our money in a world without cash. If you’d like to learn more, simply go right here for the full story.
Touching base on this wild project…
Let’s conclude with a question about a unique way of launching payloads into space…
I really enjoy your great research. However, I must wonder why you have not written about this wonderfully wacky space tech yet: https://spectrum.ieee.org/spin-me-up-scotty-up-into-orbit?
Greetings from Tokyo!
– Ralf W.
Hi, Ralf, thanks for the compliment and for sending this article my way.
SpinLaunch is a fascinating aerospace company, and you may or may not be surprised to know that I’m an investor in the company… So I have been tracking its progress closely (naturally).
In fact, we did discuss SpinLaunch back in 2019 when it first received its launch prototype contract from the Department of Defense (DoD). At that time, the company was in the process of building its Spaceport America facility in New Mexico.
Your message provides the perfect opportunity for me to update readers on its progress since then.
For new readers, SpinLaunch developed a giant centrifuge to launch payloads into space. It’s essentially a massive wheel that spins in order to “fling” its load outside of Earth’s atmosphere… There’s actually more to it than that.
The problem that SpinLaunch is solving is that traditional rockets are comprised of 92% fuel in terms of weight. And the weight of the payload is only about 2% of the overall weight of the rocket launch system.
This is what is required to launch a rocket from a standstill launch pad. SpinLaunch can launch a rocket at 1,000 miles per hour, and immediately after the rocket clears the centrifuge, its own rocket engines kick in.
This dramatically reduces the amount of fuel required to get to orbit, and also reduces the size of the rocket required to get a particular payload into space.
SpinLaunch’s system is obviously designed for smaller payloads, but it is addressing a massive multi-billion-dollar market for launching small satellites or payloads that need to get to orbit quickly.
SpinLaunch will have the ability to launch thousands of payloads every year with its system… for a fraction of the price of existing launch systems. That’s what’s so exciting.
Imagine being able to send up supplies to a space station “affordably” once a week with one of these rockets? That’s what SpinLaunch enables.
Last fall, SpinLaunch tested its first launch at supersonic speeds in a scaled-down version of its accelerator. This year, it expects to perform additional tests with more launch vehicles and different velocities. It expects to take on its first customer contracts as soon as 2024.
Assuming it succeeds, SpinLaunch could radically change the industry.
As a result, the company has already attracted interest from a variety of backers, including Google Ventures, Airbus Ventures, Kleiner Perkins, DoD, and of course, yours truly.
I’m very excited to see where SpinLaunch goes from here. And if it ever looks like it could enter the public markets at a good valuation, it would potentially make a very compelling investment target.
Sadly, I won’t be able to formally recommend it at that time due to my equity position in the company, but it is still a company to keep a close eye on, nonetheless.
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.
Editor, The Bleeding Edge
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