Editor’s Note: Welcome to the Early Investing Mailbag. Each week, we answer questions we think will help you learn about investing in pre-IPO startups and cryptocurrencies. If you have any questions for us, please email us at mailbag@earlyinvesting.com. Just remember, we can only answer your general questions for information and strategy. We can’t offer personal advice.
Q: Quick question, Andy, from the Early Investing News Fix email I got today. You said 28 startups had an initial public offering (IPO) last quarter. But my investments are recent. I don’t expect to get paid for years. Is there any reason for me to pay attention to recent IPOs, when I’m counting on IPOs well after 2020?
A: For a while we had more and more companies raising large sums of money in the late stages of their startup processes with fewer and fewer IPOs.
I’m not saying it was reaching a critical point. But it was not a good dynamic. Something had to give.
Either the availability of venture capital to pre-IPO companies would eventually decrease…
Or IPOs would finally increase. Now we see which of the two scenarios is playing out.
Again, I’m not breathing a huge sigh of relief. The VC space was not in danger of disappearing. But at least we can point to recent evidence that it’s not broken.
So how does this affect you?
Use it as a reminder that today’s out-of-favor vertical is tomorrow’s darling. Broadly speaking, healthcare companies have disappointed VC investors. Too few have rewarded early investors with generously priced IPOs. And too many have fallen by the wayside.
That changed this year. Two-thirds of the 41 venture-backed companies that went public this year were in the healthcare sector, according to PitchBook.
Watch for healthcare startups to come back into vogue and carry higher valuations than before. I was bullish on healthcare before this data was published… and I still am.
Some of the most exciting technology around is being developed in the healthcare sector. It trumps the regulatory uncertainty, in my view.
Another reminder: Patience is a must. More than 41% of the companies that IPO’d took a decade or more to get to that point.
Lost in the headlines? More companies find liquidity via acquisitions than IPOs.
Last quarter saw 134 startups get bought out, allowing investors to cash out returns of $8.8 billion. The 28 IPOs announced couldn’t keep up. They generated $4.12 billion in gains.
- Early Investing Co-Founder Andy Gordon
Q: There’s a Congressional hearing coming up about cryptocurrencies. What does the government think about bitcoin and other cryptocurrencies? Is this going to generate news that affects the market?
A: Congress doesn’t actually think a lot about bitcoin. And that’s a problem. It’s been up to the regulatory agencies to take the policy lead on bitcoin and other cryptocurrencies. And they’ve all taken different approaches.
As far as the SEC is concerned, bitcoin and ethereum are not securities. But other cryptocurrencies that had initial coin offerings (ICOs) might be or – we suspect – likely will be.
The Commodities Futures Trading Commission regulates bitcoin as a commodity. The IRS treats bitcoin as property. The Department of Homeland Security worries about its use in crime and money laundering.
Congress has yet to offer a clear policy vision on how cryptocurrencies should fit into our economic system – or who should regulate them. Neither has the White House.
Will Wednesday’s hearing fix this problem? No. But it’s a start.
A House Financial Services subcommittee (Monetary Policy and Trade) requested Wednesday’s hearing.
The agenda:
This hearing will examine the extent to which the United States government should consider cryptocurrencies as money and the potential domestic and global uses for cryptocurrencies. The Subcommittee will evaluate the merits of any uses by central banks of cryptocurrencies, and discuss the future of both cryptocurrencies and physical cash.
What’s interesting about this hearing is the direct focus on cryptocurrencies. And whether central banks – like the Federal Reserve – should get in the game.
The hope is the committee isn’t going to focus on criminals using bitcoin – especially in light of the recent stories regarding Russian hackers, bitcoin payments and the 2016 election.
A quick look at the witness list suggests that the criminal use of bitcoin will play a minor role in written and oral testimony. Rodney Garratt, an economics professor at the University of California Santa Barbara, is well-versed in both central banking and the various uses of cryptocurrencies. He’s worked for the Fed, the Bank for International Settlements and on Project Jasper, a bank-to-bank digital payments system.
The other witnesses are from very inside-Washington think tanks – the Heritage Foundation, the Brookings Institution and the R Street Institute. None are overtly anti-bitcoin. They tend to see cryptocurrencies through the lens of how governments will/should use them and what governments will/should allow.
So no, I don’t expect this to be a bad news day for bitcoin. Some politicians will ask about bitcoin’s criminal use. And some reporters will write about it. But that shouldn’t be the big news story coming from this hearing.
The more interesting news story should be how the government plans to integrate cryptocurrencies into its ecosystem – if at all. Whatever the message is, however, I doubt it will move the market.
We won’t wait long to get our first clues. I’m covering Wednesday’s hearing in person. And I’ll provide a full report in Friday’s Early Investing newsletter.
- Early Investing Senior Managing Editor Vin Narayanan