Dear Early Investor,
We hope you enjoyed the first edition of the Early Investing Mailbag. This week’s mailbag looks at the current crypto market and where to find the next big pre-IPO startup investment opportunity. Keep those questions coming (mailbag@earlyinvesting.com)!
Q: In my opinion, crypto is no longer a free market system. The current downturn in crypto stinks of Wall Street, banks and big money manipulation. With this being a tiny “worldwide” market, I feel they could easily control and/or crush the market to their benefit at any time.
A: I believe there probably is some market manipulation going on – possibly involving futures. That said, manipulation takes place all the time in “regulated” markets such as foreign exchange, gold and silver. But I don’t think it’s playing a significant role in this downturn. Similar downturns have happened throughout crypto’s history (some were worse in the early days). And that was before we had futures markets, Tether or hedge funds.
This is a natural correction. We started 2017 with the price of bitcoin at about $1,000 and altcoins worth a small fraction of what they’re worth today. The market is still up significantly compared to the beginning of last year.
This is what crypto markets do. They run up a huge amount, correct, consolidate and then move back up again. It’s nearly impossible to judge just how much they’ll run up during bull periods and how much they’ll decline in bearish periods.
But the overall trend in historical prices remains overwhelmingly positive. Every growth cycle attracts some new dedicated, long-term holders. These are the people who learn to grit it out and hold. This base of dedicated “hodlers” continues to build over time.
I believe these growth cycles will continue as crypto continues to spread. Volatility will decrease (eventually) as crypto becomes a more mainstream asset. But for now volatility is a given.
I know holding during periods like this one isn’t fun. But the best thing to do is hunker down and maybe buy more (only what you can afford to put at risk).
I honestly think that the fundamental case for crypto has never been stronger. But for now, we remain in the shadow of a major correction.
- Adam Sharp, Early Investing Co-Founder
Q: I read in The New York Times that there’s a new wave of initial public offerings (IPOs) coming. Is there any way I can cash in on this?
A: Yes. But not in the way you think. It’s too late to invest in private companies like Uber, Lyft and Airbnb – which are seen as the most likely to IPO next. But when they do go public, like Dropbox and Spotify did earlier this year, they generate an interesting “startup wealth effect.”
That’s because an IPO does more than just raise money for the company. In Silicon Valley, in particular, it generates wealth for its employees. One of the reasons smart young entrepreneurs work for startups is they hope their companies will strike it big – either with an IPO or through acquisition. In fact, they’re counting on it. That’s why stock options are an important part of their compensation packages.
For many entrepreneurs, though, being part of a successful startup – whether it’s Google, Facebook or Twitter – is just the start of their careers. These are people who want to be founders… to create their own companies based on their vision, their ideas and their execution. A successful IPO or acquisition gives them the money – and the credibility – to do that.
An example of this is the PayPal mafia – a group of former PayPal employees that went on to create new companies that generated millions (and sometimes billions) more dollars for themselves. Here are a few examples:
- Jeremy Stoppelman, one of PayPal’s top engineers (he eventually became vice president of engineering), went on to start review site Yelp with another former colleague. His estimated net worth, according to Business Insider, is $111 million to $222 million.
- Peter Thiel, a PayPal co-founder, invested $500,000 in Facebook as an angel investor, started his own hedge fund and owns and operates a venture capital fund. He’s now worth an estimated $2.2 billion.
- Reid Hoffman, who was PayPal’s chief operating officer, went on to co-found LinkedIn, which went public in 2011. His stake in LinkedIn is reportedly worth $2.39 billion and his net worth is an estimated $3.9 billion.
- Elon Musk joined the PayPal ecosystem when the payment company acquired Musk’s X.com, which was an email payment firm. Musk eventually became PayPal’s biggest shareholder and made $165 million when eBay bought the company. Musk went on to start Tesla Motors, virtually creating the luxury electric car market from scratch, and SpaceX, a private space vehicle company. Musk is now worth about $9.7 billion.
Those are just four stories from PayPal. There are at least another 10. You can read about some of them here.
Just as PayPal veterans went on to create successful companies, so too will people from this year’s (and next year’s) class of companies that IPO. So if you’re looking for new companies to invest in, keep an eye out for what these entrepreneurs do next. We certainly will be.
Somewhere in there will be the next Yelp, LinkedIn or Tesla. And you don’t want to miss out on that.
- Vin Narayanan, Early Investing Senior Managing Editor