Hidden Investments: Front Running Wall Street and Mining The New Gold
In 2015 Michael Lewis told the story of Wall Street firms utilizing network technology to front-run trades in order to gain a massive competitive advantage. His book Flash Boys detailed the use of fiber optic network access points to get ahead of other firm’s trades by milliseconds. That access advantage of millionths of seconds allowed software based trading platforms to see into the future and respond by getting ahead of a trade that was technically already made. Jumping ahead of network packets to respond to a buy or sell order was essentially a time machine like advantage. The complexity of these systems and the microscopic size of the time units made explaining any of this to regulators almost as difficult as building the systems themselves. Typical investors were shut out of the real value of trading as they lacked this access.
Right around the same time that the world discover Flash Boys, a new investment access mechanism was starting to pick up steam. This mechanism is commonly referred to as the “secondary market” or sometimes “private market exchanges”. The secondary market is perfectly legal and in some ways introduces some nice ethical advantages to non Wall Street types. To be clear the secondary market was not invented in 2015 — it had been around for a bit— but in the last 7 years or so — innovative platforms have been built to allow more people to invest into startup companies prior to Wall Street getting its hands on said investments. These platforms front run Wall Street in a way. You no longer have to wait for an IPO.
If you have your money invested in retirement or brokerage accounts you are missing out on the best growth investments in today’s world. Not because you are doing anything wrong — because you lack access to where those investments are. Over the last decade they have moved.
The Emergence of Private Markets
Two things have led to this. First, startup companies are staying private longer — a lot longer. The median time to an IPO has more than tripled in the last 20 years and is still increasing. According to CBInsights the median time to an IPO grew from 6.9 years in 2013 to 10.1 years in 2018 alone. There are a few advantages to staying private longer, including maintain control of the company and not dealing with the cost, risk and complexity of being publicly traded.
Second, the availability of private capital has exploded. Crunchbase News tells us that venture capital has grown in the US from $8B in 1995 to $110B in 2019. Globally it has shot up from $47B in 2010 to $294B in 2019.
This means that an emerging technology company’s hockey stick years are no longer an accessible investment — neither through your own investing mechanisms nor your 401k/IRA fund manager’s.
The secondary market has a few entry points. While some innovative companies that have built platforms to facilitate access to this type of access have done a great job at making it reasonably easy, few investors know about this world. For a while there were three major players in this space: Equityzen, Sharespost and Forge Global. Each offer a marketplace of investment options into pre IPO companies. They do that by match making investors with founders or employees that want to cash out of their vested stock options in the company. Recently Sharespost and Forge Global merged. A new player, Carta X is about to enter this space and is aiming to disrupt the manner in which investments into the secondary market are made. The transition from static match making to a more real time market place has begun.
Nothing Worth Having Comes Easy
There are some requirements of knowledge around the VC world to navigate investments this space — type of stock offered and the ramifications, current valuations and number of rounds of funding, market opportunity, inherited lock up agreements — and you have to navigate all of this with almost zero access to the company’s financials. The risk profile is different from typical venture capital — not more risky — just different. It’s not for the average investor much less the average person. That being said, this is where the gold is. A seemingly endless list of emerging, disruptive companies that are well funded and in their growth prime waiting as long as they can to go public.
I stumbled into this world by chance in 2014, in Vegas of all places. I was searching for a way to stay involved in the tech startup world without working in it. After 20 years of working in startups I was no longer wanting to work 70+ hours a week but wanted to stay plugged into the excitement. l loved the idea of having some skin in the game. So when presented with the opportunity to invest my own money in emerging companies, I jumped at it. I had no prior VC experience nor access to that world. I also didn’t have an endless pile of cash to play with. I had to convert some old 401k accounts to get started. To be honest , at first I thought the secondary market might even be a scam — I knew not a single person that had so much heard of this approach. I took the risk and gave it a shot. Seven year later I have invested in over 40 startups and so far 7 have IPO’d and several have been aquired. Some have gone out of business and many are in growth mode. This segment of investing has outpaced the growth of my 401k and Vanguard index funds by a staggering clip even in the greatest bull market of all time.
Some of the companies I have invested in include: DocuSign, Lift, Pinterest, Draft Kings, Mongo DB, Nutanix, Cloudera, Instacart, Betterment, Dataminr, 23andMe, Carbon3D, Superhuman and Digital Ocean.
After having several people approach me about investing their money in this manner I recently formed a fund. Portfolio X is a vehicle for qualified investors to participate in this marketplace without having to learn and navigate all the ins and outs that I have had to. We provide the access and there is no time commitment on the investors part. In addition, pooling other investor’s capital will open doors to deals that require larger check sizes. If you are a qualified investor you can learn more about the opportunity here: www.portfoliox.fund or if you are so inclined you can learn about this world and invest on your own.
I believe that over the next decade the world of innovation is poised to improve life exponentially fueled by many amazing technolgies including: AI, 5G, Blockchain, 3D Printing, Quantum Computing, Drones, Carbonless Tech, Autonomous Transportation (Ground & Air), Space Travel, Genomics, Augmented Reality, Virtual Reality, Nano Tech, Robotics, CRISPR, Business Disruption Tech, IoT, Crypto and Advanced Drug Development. In that process, the growth of companies in the innovation economy will offer value in size and scale never seen before. Tapping into that value as an investor is going to require a different approach.