EC Your Right To Invest In Startups

How could a government agency possibly determine the level of income that qualifies a person to invest in private companies? It can’t, and it shouldn’t try.

People will always want to invest in early-stage companies. It’s human nature to seek out opportunities with the highest potential return. If the only option you offer these opportunity-seekers is penny stocks, the outcome is preordained. It will not end well for the vast majority of “microcap” investors.

Unintended Consequences

The stated intent of these laws is to protect individuals from unnecessary risk.

But the result is that non-accredited investors are excluded from investing in promising private enterprises.

This is especially important in today’s market, where private companies are IPOing later than ever. Take a look at this chart we adopted from a recent presentation by venture capital firm Andreessen Horowitz.

0715EI_market-return

The chart shows the effect of companies delaying their public offerings. You can see that in the past, tech firms like Microsoft (MSFT), Apple (AAPL) and Oracle (ORCL) all provided excellent returns to public market investors.

Today that’s not the case. The vast majority of profits in companies like Google (GOOGL), LinkedIn (LNKD) and Salesforce (CRM) went to their private investors. By the time a big tech company IPOs today, blockbuster returns aren’t attainable.

Few Bargains in Public Markets

I’m a believer in stock-picking. But there simply aren’t many cheap stocks to be found today in public markets.

Take the Russell 2000, the most widely tracked small cap index. Russell advertises a price/earnings ratio of 22 times. But if you look closely at its site, the P/E is reported “ex negative earnings.” That translates roughly to “doesn’t include all the companies with losses.”

EI_russell-1

 

The WSJ reports a very different P/E number: 75 times…

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Jason Hamlin 5 years ago Contributor's comment

"Your Right"???? I think it should be "You're Right" as in You Are Right.

Caitlin Snow 5 years ago Member's comment

I took it as 'your right', as in, you have the right, learning what your rights are, etc. That's what to write to your congressperson about - getting/preserving those rights.

Jason Hamlin 5 years ago Contributor's comment

you are correct, i overlooked that first sentence. sorry about that. cheers.