“RIP: Good Times.”
That’s what venture capital (VC) firm Sequoia Capital wrote in a slide deck sent to its portfolio of startup companies in 2008…
The U.S. was in a recession… and the deck outlined the decline of the U.S. economy and the long slow recovery ahead.
Photos of butchered pig carcasses and skulls and crossbones littered the 56 slides.
At the time, Wall Street titans like Lehman Brothers were collapsing on themselves… Mortgage delinquency rates were climbing to double digits… Unemployment was surging to 10%… And Sequoia warned its portfolio of companies that funding would dry up.
The presentation couldn’t come at a worse time for Tobias Lütke…
Just weeks prior, he’d flown out to Silicon Valley to meet with Sequoia Capital to pitch his promising startup.
He slept in a hostel… bought a bike off Craigslist to get to the meeting… and in the end, his efforts paid off – Sequoia extended him an offer.
But around the time of the RIP slide deck, Sequoia froze funding and rescinded their offer to him.
Tobias was broke. He wasn’t taking a salary. And soon, he wouldn’t have money to pay his four employees.
For Tobias, the “good times” had died before they began… or so he thought.
Today, Tobias is worth $2.8 billion, and his “startup” Shopify is a $33 billion juggernaut…
VC investors came back around in 2010 and invested in Shopify at a $7 million valuation. Today its value is 4,714x higher… turning every $1 million into $4.7 billion.
And the odds are good that if you’ve bought anything online, you’ve used his company’s software (more on that below)…
But as incredible as the story seems… it offers an important lesson about investing in the next generation of startups during a bear market.
From Lagging Recession to Life-Changing Returns
There’s no doubt we’re in a bear market. Since January, the S&P 500 and Nasdaq are down 23% and 33%, respectively.
Nearly every company is taking it on the chin, especially in the tech industry.
Things are so bad that giants like Alphabet (parent of Google) and Meta (parent of Facebook) are doing what was once unthinkable – laying off staff.
Alphabet is requiring employees to reapply for jobs if they’d “like to remain” at the company.
Meta is cutting expenses by 10% – including staffing cuts…
CEO Mark Zuckerberg went on record saying, “Realistically, there are probably a bunch of people at the company who shouldn’t be here.”
At the same time, VC funding is down 53% – or $90 billion – year over year. It’s hard to imagine a worse environment for tech startups.
Yet, brutal markets like these can birth the next generation of billion-dollar ideas.
That’s where Tobias Lütke comes in. In 2006, he founded Shopify, the startup I referred to above.
Based on his own struggles running an online snowboard shop, Lütke wanted to make it easier for anyone to open a webstore.
Sequoia’s rescinded offer almost ended his dream… but in 2009, Tobias’ luck turned.
Thousands of unemployed but ambitious people decided to start their own companies… and many turned to Shopify to help launch their web stores.
Shopify’s userbase exploded almost overnight… and today, its software is used by almost 4 million online stores worldwide.
Keen venture capitalists saw this strength and started investing in the company in 2010.
And Shopify wasn’t the only startup to thrive during the Great Financial Crisis…
Companies like Airbnb, Block (formerly Square), Github, Ring, Warby Parker, Mailchimp, and more hit their stride during the recession…
And early investors in these companies saw life-changing, crypto-like gains when they went public.
Early investors in Airbnb got in at a $67 million valuation in 2010 – today, it’s $71 billion.
Early investors in Warby Parker got in at a $37 million valuation in 2011 – today, it’s $1.6
And Block’s early investors got in at a $47 million valuation in 2010 – today, it’s $35 billion.
That’s the power of early investing. With the right companies, you can make life-changing thousand-percent gains… even in a recession or lagging economy like today.
Decades of Returns in About a Year… Even in a Recession
Before the end of the year, thousands of highly skilled tech workers will find themselves unemployed. These are tough times.
But as Lütke showed, the American entrepreneurial spirit is tougher. Not only will it survive the current crisis… it will thrive.
Some of the highly-skilled workers laid off today will go on to establish the next Shopifies and Airbnbs of the world.
That’s why Daily editor Teeka Tiwari says the current crisis is an opportunity.
The difference is that this time you could be an early investor, too…
In 2015, the Securities and Exchange Commission changed the rules about investing in private companies. Previously, you had to be an accredited investor – in other words, a millionaire – to invest.
But the new Regulation A+ and CF rules open a door for everyday investors to get in on deals like Shopify and Airbnb when they were still tiny startups. Often, you can buy into these pre-IPO deals with minimums of $50, $100, or $500.
And since private companies don’t trade on the stock market, their share prices are virtually insulated from the market volatility we’re seeing right now.
Obviously, there are risks to investing in private deals. Like public companies, private companies can fail. So you could lose your entire capital in a private placement.
That’s why we encourage proper risk management at Palm Beach Research Group.
We advise individual position sizes of $200–400 for smaller investors… and $500–1,000 for larger investors.
That allows you to potentially generate life-changing gains from private deals without putting your current lifestyle at risk.
The current economic downturn will separate the wheat from the chaff as struggling companies go out of business.
The best of the best will rise to the top like Shopify did.
If you’re interested in finding private deals, now is the time to start looking.
You can start your search on crowdfunding platforms like Republic.
They list dozens of startup companies raising money from the general public. In some cases, you can start with as little as $50.
But be sure to diversify your positions and treat these investments like speculations… So don’t bet more than you can afford to lose.
Invest with conviction,
Analyst, Palm Beach Daily