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  1. cwelsh

    Investing in Private Companies

    Lightspeed Venture Partners turned a $480,000 investment in Snap into $2B (though they did also invest in the second round). Such returns aren’t limited to Silicon Valley and the tech either. Tom Perkins at Genentech, received one of the highest payouts in history when it was acquired by Roche in 2009, turning a minute investment of $500 into an exit worth over $40b. Of course, such investments do not come without risk. Mark Suster of Upfront Ventures has noted that investors in startup private companies should expect the 1/3, 1/3, 1/3 return rule. Namely that 1/3 of your investments will be total losses, 1/3 will be around breakeven, and 1/3 will be successful, delivering the lion’s share of returns. Cambridge Associates and other studies have returned similar findings. Other VC firms insist that returns for startups mimic the Pareto returns, where 80% of the wins come from 20% of the investments. But whether the win ratio is 20% or 33%, it is clear making such investments come with risks. This risk can be partially alleviated by investing in second stage companies – those which already have a product, revenue (though they may not be cash flowing positive), and have been in business two to three years. When advising individuals on making private investments, we always prefer second stage companies to first stage startup ventures. Private investors typically provide these companies with money to “fuel the fire” by enabling expansion, sales growth, and entry into new markets. Investing in second stage companies can be just as lucrative as first stage, with significantly less risk. This is all a moot point for most investors though, as most second stage companies seek “professional” venture capital firms, the debt markets, or deal with networks of ultra-high net worth individuals. However, occasionally a good opportunity is found that is open to smaller retail investors. These opportunities normally emerge because the company seeking second stage funding seeks amounts under $5m and does not want to cede the level of control that VC firms require. Our subscribers have just such an opportunity, if they are interested. New Avenue, Inc. is a Silicon Valley technology firm that seeks to address many of the problems individuals may encounter when building or remodeling a private home. This is often a monumental, time consuming, and expensive process for any individual. Finding and vetting architects, contractors, and subcontractors can be a time consuming and risky proposition. Most individuals have never negotiated the complicated contracts at issue. Ensuring that the consumer is getting a good price and good service can promote anxiety and lead to loss of time and money. Managing the project itself creates another layer of difficulty. New Avenue address all of these issues. It has created a system and network for architecture and contracting. The company has built a network of vetted architects and contractors, a system that automates project management and payment, and pre-negotiated consumer friendly contracts and agreements. The Open Table like booking and collaboration system reduces project costs from 10% to 30% by reducing time, mistakes, and risks. Other contractors are frequently at least 40% more expensive. Lorintine Capital has partnered with New Avenue to assist this second stage company in its second stage of growth. They already have a product, revenue, and a platform and seek to expand into new markets and propel sales. Their ultimate goal is to be one of the largest residential builders in the country with a $1b valuation in under five years. Due to their strong momentum and current growth projections New Avenue is avoiding current “traditional” Silicon Valley venture capital firms, which typically require larger infusions of cash than New Avenue needs and demand extensive controls over the firm. New Avenue is currently seeking $4,000,000 in investment and is taking investments as low as $50,000.00. It can take up to 35 non-accredited investors. This cash infusion will cover the next two years of the Company, which should be cash flow positive well before that point. This is a unique investment opportunity not often available to “smaller” investors. As the amount they are seeking is lower than is normal, they are able to target individual investors, as opposed to corporate. Investing in a private company such as New Avenue carries much more risk than simply investing in stock indexes. Lorintine Capital has done what it can to reduce some of those risks by insisting on a board seat or observer rights at all board meetings, reviewing the books, technology, and performing additional due diligence already, performing a site visit, reviewing existing projects, and will stay involved with New Avenue for the foreseeable future. We view the risk of investing in such a project to be less than almost any first stage investment and less than most second stage investments. But there is no guarantee of return. We are making an investment in New Avenue ourselves. Because of the risk of this style of investment, we do not advocate committing a significant amount of your capital to it. A full investment overview is outside the scope of this article, but the full overview can be found at: Or if you’d like to discuss this potential investment, please contact Christopher Welsh at: Christopher Welsh Lorintine Capital E: P: 214-800-5164