• Is it time to buy commodities?
  • How private fundraising works…
  • Investors are interested in nuclear fusion…

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.

Before we get to today’s questions, I’d like to make an announcement. Starting next week, I’m going to be doing something different in The Bleeding Edge.

Given how difficult this year has been for investors, I’m going to be “unlocking” much of my premium research and sharing it with readers. For the next two weeks, you can expect to receive analysis, ideas, and research that is typically reserved for my paid subscribers.

It’ll be my way of saying thank you for being a subscriber to Brownstone Research and The Bleeding Edge. I hope you enjoy a look behind the curtain and find the ideas and analysis useful. Expect to see that starting this upcoming Monday.

Now, let’s turn to the mailbag. If you have a question you’d like answered next week, be sure you submit it right here.

A crunch is coming…

Let’s begin with a question on commodities…

With the expected crunch in global food supplies and heating fuel this coming winter, would it be a good time to get into those commodities?

– Kenneth H.

Hi, Kenneth, you’ve asked a very insightful question…

Obviously, markets have not behaved as many of us expected this year. We’ve had high volatility and inflation, a lingering war in Eastern Europe that it seems no one wants to end, and strange forces at work that want to reduce agricultural production and supplant yet another “pandemic” on the world… and the entire equity, bond, and even precious metals markets have been crushed as a result.

But there have been bright spots in some of the commodities markets. The current situation has been generally positive for the energy sector, specifically oil and natural gas, as well as in some parts of agricultural commodities like corn, wheat, and soybeans.

I’ve been adjusting many of my model portfolios to account for these changes and better position subscribers for the current economic environment. That’s why I recommended an energy company in The Near Future Report this month. (Paid-up subscribers can catch up here.)

In addition to oil and natural gas-related investments, yes, heating oil can also present an interesting investment opportunity, as it is a byproduct of crude oil. There are several different ways to gain exposure to higher prices in these energy-related commodities:

  • Buy futures – these are the most risky & require margin

  • Buy futures options – also risky & require margin, but not as much as futures

  • Buy companies that produce these commodities

  • Buy companies that have exposure to these commodities (like refiners, distributors, technology and/or service companies)

The same is true for the coming food shortages. I’ve written before in The Bleeding Edge about how several countries around the world have already stopped exporting their food products, like wheat and soybeans, so that they build their own store of foods to prepare for the shortages.

We will soon have supply problems, that when compounded with inflation, will cause food prices to rise even higher. Wheat, corn, and soybeans have proven to be strong investments over the last six months – but that would have had to be timed very well – and wheat and corn have pulled back significantly since the highs of a couple of months ago.

Exposure can be gained in these commodities much in the same way as the energy complex. My team and I have been doing a lot of research in this space on companies that are well positioned for an environment like this, and still trading at reasonable valuations.

My one word of caution in this environment is that valuation matters a lot. Even if the company is a blue chip company, or best of breed, if it is overvalued right now, it is ripe for a fall. 

The market isn’t kind right now on stocks supporting elevated valuations. It doesn’t take much to happen before they are brought back down to Earth. And in everything that I’m recommending right now, I’m trying to build a large margin of safety into any recommendations.

Another related sector that we’re watching closely is the fertilizer sector.

On the face of it, this might not sound particularly exciting… But Ukraine and Russia are major producers of fertilizer products, and the war has created some major supply problems.

This has exacerbated the issue of the coming food shortages. Not only will the world be short on wheat, but the Northern Hemisphere has been short on fertilizer this entire planting season. And as a result, crop yields will be much lower this fall.

Fertilizer can mean the difference between a so-so harvest or a profitable yield for farmers. For example, fertilizer can mean the difference between 200 bushels of corn… or just 60. That’s a huge deal not only for farmers but also for the world’s population.

So you’re definitely thinking along the right track, Kenneth. And subscribers can keep an eye out in the near future as we continue to build our portfolio in these kinds of investments, as a way to adjust our investment strategy for the world that we find ourselves in.

How financing works in the VC world…

Next, a reader wants to know more about venture capital (VC) rounds…

Jeff, you write frequently about venture capitalists and companies that raise funds with “rounds” of financing. Does a VC fundraising “round” have a legal definition? I see that they are labeled “A,” “B,” “C,” etc., so how many are typically done before the company goes public? Thanks for all of your fascinating research.

– Scott C.

Hi, Scott, and thanks for writing in.

This is a great question for those of us who want to gain a better understanding of how promising private companies raise capital. Unless we’re on the inside, it is a bit of a hidden world that few ever see.

With that in mind, here’s an overview of the process…

Most companies actually get started with a “friends and family” round. This is usually a small amount of capital, just five or six figures, to get an idea off the ground. These rounds are never published as we should never expect to see a VC firm in a round like this.

After that, it is normal to see a pre-seed round, which usually involves some larger investors, and oftentimes, a VC fund that specializes in the earliest kinds of investments. The amount raised is usually around $1 million or less.

As the company makes some progress with its product and/or service development, it will gear up for a seed round. This is usually the first major round for a company, and is often a multi-million dollar raise with at least one VC firm involved. 

The goal with seed round capital is to ideally find what’s called product market fit. That’s when a company has built something that is being received well by the market, something that should be able to scale.

A Series A round follows, and that is largely to support what is typically sales growth for whatever was built with the seed round capital.

Subsequent rounds of B, C, D, etc. are all about growth and scaling. And depending on the business strategy, some of those rounds can be designed to facilitate acquisitions that put the company in a better competitive position.

The amounts invested in each round, and the corresponding valuations, can depend heavily on the state of the market – bull market or bear market – and the sector of the investment. Some sectors continue to run hot right now, like blockchain/crypto, and I continue to see elevated valuations for each round. That means that the VCs who are investing continue to see incredible growth that would support those valuations.

I’m also seeing increasing valuations in the biotech sector right now, which is an indication of what’s coming for biotech in both the private and public markets.

As for how many rounds a company raises before going public? There is no rule of thumb. 

A major trend that we saw after the financial crisis back in 2008/2009 is that VC firms wanted to keep private companies private for extended periods of time. They saw so much growth that they basically wanted to keep the profits to themselves and not sell too early by having an initial public offering (IPO).

That resulted in a major shift towards private companies raising seven or more VC rounds before even contemplating going public. Before the crisis, it was far more normal to raise three or four rounds, get to the point where a company was generating free cash flow, and then go public as a small cap.

There is so much private capital right now available to fund private companies, which is why I believe that we will continue to see private companies stay private for an extended period of time – which means more VC rounds.

This is why providing access for my subscribers to early stage private investment opportunities is so important to me. If “big money” wants to keep the largest profits to themselves by keeping companies private, our best strategy is to invest in promising early stage private companies before they do. That’s why I created Day One Investor.

Investing at these early stages is higher risk, which is why having a portfolio approach is critical to success. By building a basket of investments across both sectors and time, we stack the deck in our favor and make sure that we gain exposure to those outlier investments. 

This investment strategy is particularly attractive right now as private companies aren’t really impacted by all the volatility and chaos in the short-term public markets. They compound and build over time. 

Already, we have taken part in 10 excellent crowdfunding deals for companies in a range of industries since I launched last November… and we have Deal No. 11 on the way…

I shared all about that – and even gave out the name of the company – at my event this past Wednesday. If you weren’t able to attend, I’d highly encourage tuning in to the replay right here.

This is such a fantastic space for investors to get involved in… especially given how resilient private investments are during market volatility.

Investing in nuclear fusion…

Let’s conclude with a question about nuclear fusion companies…

You continue to talk up nuclear fusion. I agree that it is the only real rational solution for a “clean” energy future. However, I do not recall a suggestion from you on what company(s) might be rational investment options. Care to offer some suggestions?

– Michael F.

Hi, Michael, and thanks for writing in. Many readers would love to invest in this technology. I would, too!

To your point, nuclear fusion is the only real rational solution for our clean energy needs. It is essentially the power of the Sun. By “fusing” two separate nuclei into a new nucleus, we create plasma that produces an enormous amount of clean energy.

We’ve also seen some extraordinary advances that indicate that this technology is much closer than many of us might think.

Last September, scientists at the National Ignition Facility (NIF) used high-powered lasers to create a fusion reaction. And their experiment generated 70% of the energy the lasers used to produce the reaction.

70% may seem far away from that, but this is eight times more energy than the NIF’s experiments from back in 2018. This technology is improving quickly.

And back in February, the U.K.-based Joint European Torus (JET) laboratory demonstrated a super-hot plasma in its reactor for five seconds. That too may not seem like a big deal at first. But this reaction occurred at over 100 million degrees Celsius. That’s nearly seven times hotter than the Sun.

Maintaining it for five seconds is quite the feat. For comparison, most fusion reactions to date have lasted in the millisecond range.

And get this – the reaction produced a world-record 59 megajoules of energy. It’s not a lot of energy, but that wasn’t the point. This is a great proof of concept for the reactor design that will lead to even more progress.

Even better, shortly after this announcement, Google shared that its DeepMind AI can help control fusion plasma in a fusion reactor. This is a big advance, as the “neural network” will be able to control a sustainable fusion reaction for 24 hours a day.

And that’s not all… In June, we shared how General Fusion, in partnership with the U.K.’s Atomic Energy Authority (UKAEA), plans to have its reactor operational by 2025 – less than three years away.

And as we wrote earlier this month, we’re hitting an inflection point with this technology as companies begin to see a path toward commercialization…

The eventual goal, of course, is to create a fusion reaction that can produce more energy than what it takes to maintain the reaction. That’s when we begin to see nuclear fusion’s real potential to meet our needs, for what will essentially be “free” clean energy production. It will become the cheapest kind of energy production on the planet.

So when will we be able to invest in this tech? There already have been some limited opportunities to invest in private companies working on the bleeding edge of nuclear fusion technology.

Unfortunately, those opportunities have been limited to accredited investors, and they’re mostly only accessible to those who have inside access to those kinds of deals.

This is unfortunate. The companies that bring nuclear fusion and clean energy to the world will most certainly become multibillion-dollar corporations and bring about a clean energy revolution in the world.

I’m actively scouting right now for any early stage fusion technology companies that might be willing to pursue a Regulation CF funding round. These are the kinds of deals that my team and I scour the markets for, and recommend, in my private investing research service Day One Investor. I’ll do my best to find such an opportunity.

And there are several later-stage private nuclear fusion companies that I’m keeping a close eye on – Commonwealth Fusion Systems, Helion Energy, and TAE Technologies are three potential investment targets once they are public. And for accredited investors, every once in a while there might be a secondary offering available in the market.

It is also possible to invest in a public company that has invested in a private fusion company. For example, Chevron invested in TAE’s last VC round.

But the challenge there is that Chevron is a $334 billion company, and the investment in TAE is tiny in comparison. Even if TAE is “the one,” there just wouldn’t be that much leverage in TAE by investing in Chevron.

Ultimately, whichever company succeeds in bringing nuclear fusion technology to the masses will make a fortune – and at the same time do incredible things for the world. So as soon as I have any information, you can be sure that my readers will be the first to hear about it.

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

P.S. As I mentioned above, my Private Deal Room event last Wednesday shared how to explore the realm of private investing… And while this may seem out of reach to investors who are unfamiliar with the space, I’m happy to say it’s not, even for those of us who are unaccredited.

I’ve already helped Day One Investor subscribers participate in 10 exciting deals… and anyone interested in the forthcoming Deal No. 11 can learn more by going right here.

Like what you’re reading? Send your thoughts to [email protected].