Last Thursday morning, as I was browsing headlines on The New York Times, I saw an article entitled, “Which Start-Up Could Be the Next Big Thing?”
That’s a serious newspaper and an exciting topic. Coffee in my left hand, mouse in my right, I clicked on through.
After the author created some heat (Tumblr was acquired for a billion dollars; its investors made a fortune), and threw in a quick caveat (tech start-ups occupy an “unpredictable” world), she prepared us to behold eight magical companies.
Any of these eight companies, she implied, could become the next big success story; the next major wealth creator; in brief, the next Tumblr.
Fully engaged now, chomping at the bit to uncover my next early-stage investment, I tore through her list. But as I did so, my excitement gradually dimmed, then died out altogether.
Her list was great. There was just one problem: it was five years too late.
The Latest and Greatest
The companies I read about in The Times are incredibly interesting. Some are even changing the world. One such company, Lyft, is disrupting public transportation by turning any of us with a car into an impromptu taxi service.
Another service called Snapchat allows people to send text messages that self-destruct after a set amount of time. Maybe you already use it. (With 200 million messages being sent a day, someone’s using it.)
The thing is, by the time companies like this make it into The New York Times, they’re closer to being a blue-chip stock than a potential early-stage investment.
What’s an Early-Stage Investment?
Keep in mind that one of the most important — and ok, most obvious — criteria for an early-stage investment is that it is, in fact, early-stage.
When companies are young and unproven, they’re valued at, say, a few million dollars. Why is that important? Because if and when they sell for a billion dollars, like Tumblr did, you have the chance to earn several hundred times your money.
A company like Snapchat, on the other hand, is already an old dog, a proven commodity. With 20% of iPhone owners already using it, it can command a steep valuation. In fact, after its last round of financing, it’s valued at $800 million!
To be super clear about the challenge here: when you invest at a $800 million valuation, even if the company is acquired for a billion dollars, you’ll barely get your money back.
That’s not much of an early-stage investment.
An Uber Good Investment
But here’s something interesting…
Almost three years ago, in October of 2010, an early-stage company called Uber raised money on Angel List. You might recognize the name, Angel List — it’s one of the platforms from which Crowdability sources its deals.
Uber ended up raising $1.25 million. Its valuation was likely somewhere in the $5 million range.
Fast-forward to last month: Uber raised another round of financing. This time they raised about $250 million at a $3.5 billion valuation.
At that valuation, its earlier investors from Angel List, on paper, have already earned about 700 times their investment. And Uber is still growing; it’s possible it will become even more valuable.
Now that’s an early-stage investment.
Look For Minnows
So if you’re looking for interesting reading, definitely peruse mainstream newspapers like The New York Times. That’s where you’ll read about big fish swimming in big ponds.
But if you’re looking for opportunities to earn a good return in early-stage investing, you need to fish where the minnows swim.
TechCrunch is one such option. They cover plenty of early-stage companies, although not all of them are raising money.
Another option, of course, is Crowdability. In the last month alone, we’ve published two dozen opportunities from some of the best platforms on the web.
You aren’t likely to come across these early-stage companies in The Times anytime soon, but we think you’ll find their valuations refreshing!