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Unicorns and IPOs: Three Ways to Get in Early
04/01/2019 5:00 am EST
Early investors often make the biggest profits. How? By investing in small companies — before they strike it big, explains growth stock expert Ian Wyatt, editor of Million Dollar Portfolio.
For most investors, that means investing in an initial public offering (IPO). That’s when shares first start trading on a public stock exchange.
Venture capital investments have reached record levels. And that’s created a record number of “billion-dollar startups” — also known as unicorns. Today, there are over 153 privately held companies with venture capital financing — each valued at more than $1 billion!
We have a way from you to profit from the top five tech IPOs of 2019, without having to deal with the hassle of requesting IPO shows and hoping you get them. Why are there so few IPOs? Well, that’s because venture capital funds have been investing billions in private companies.
With tons of cash available on the private market, the top tech companies are staying private for longer. This lets them avoid the hassle of answering to investors, staying on regulator’s good side or having to watch their spending.
In our view, the IPO drought is over. All those venture capitalists and angel investors are looking to unlock the money they’ve had parked — at a profit.
Taking these companies public is one of the two ways to cash in. Going public lets the investors, founders and employees a chance to sell their stock and make a profit.
It also creates an opportunity for you to buy shares of these newly public companies. New IPOs are typically high growth companies. And shares of the right companies tend to deliver healthy gains after going public.
Several big-name IPOs were expected in the fourth quarter of 2018, but market volatility and the government shutdown scuttled those plans. That means 2019 is going to see a wave of IPOs. So how do you get into these IPOs before they even go public? Simply by buying three funds.
GSV Capital Corp. (GSVC) is basically a publicly traded venture capital firm that invests in promising late-stage tech companies that have attracted significant VC investment. It makes its money by getting in early, then as the companies it is invested in go public, cashing out (usually at a profit).
Just a couple of its big winners have been Dropbox (DBX) and Spotify (SPOT). Since it was added to our holdings in June 2015, it’s gained 53.2% while the NASDAQ Composite is down 31.4% over the same period.
As of Dec. 31, it was invested in 28 companies, including $13.5 million (or 6.2% of GSVC’s assets) in Lyft and $35.5 million (16.4% of assets) in Palantir.
Firsthand Technology Value Fund (SCCV) has an investment approach that is a bit different. While it looks for promising technology companies that haven’t gone public yet, it has more of a focus on “cleantech” companies.
If you aren’t familiar with the term, cleantech means processes, products or services that reduce negative environmental impacts. That cleantech focus hasn’t stopped it from getting in on other promising tech companies, though. Some of its best past investments include names like Facebook (FB), Twitter (TWTR), and Yelp (YELP).
Since its addition to our holdings in October 2015, firsthand has gained 55.8%. We expect those gains to keep adding up, even if it doesn’t have positions in our top five expected IPOs.
Kevin Landis, the fund’s CEO and chief investment officer is a big reason why. Landis has been in the VC business since 1998. He doesn’t just make investments and wait. He actually sits on the board of a number of companies his fund is invested in. That lets him keep an eye on Firsthand’s investments.
Another reason is that the fund appears to be severely undervalued. Since it’s a closed-end fund, its shares trade at whatever price investors are willing to pay for it, regardless of the value of its assets. Based on the current price of two of its holdings — Pivotal Systems (PVTL) and Revasum (RVS) — that have gone public in Australia, the fund is trading for less than those holdings alone are worth.
Right now, the fund’s net asset value — the market value of all its holdings — is $26.79 per share, yet it’s trading for just $13.38. Buy GSV Capital Corp. and Firsthand Technology Value Fund at market prices.
The SharesPost 100 Fund (PRIVX) isn’t part of our portfolio because the broker who handles my real money account doesn’t support mutual fund trading.
The way the fund works is it monitors the investment performance of venture capital firms and identifies the top performers. It then applies a proprietary process to analyze their holdings, looking for the best performing late-stage, venture-backed private companies.
It uses that data to establish a list for the top 100 companies, which defines its investable universe. That process has created a well-diversified fund with 47 holdings, including all our top five IPOs other than Pinterest.
Since the fund’s inception in March 2014, it’s generated a cumulative total return of 42.2%. It returned 5.92% last year, even as the NASDAQ Composite lost 4.4%. Buy and hold SharesPost 100 Fund.
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