Wealth Systems: Direct Investing, Part I
We have been busy since Wealth Systems launched in November 2023.
So far we’ve published 56 pieces, roughly 8 each month, exploring wealth from all angles.
What is wealth?
What’s the difference between being rich vs wealthy?
What systems can you build to create wealth?
To that last point, we explored wealth engines of many different types including passive income via dividends, options and direct lending. While we don’t want to spread ourselves thin in life, dissipating our results with our attention… we must also recognize that multi-engine aircraft fly further and operate safely due to redundancies.
This is why you must have multiple wealth engines in your life. To carry you and your family further with the comfort of assets and cash flow.
Let’s add a fourth engine now.
Direct Investing
Direct Investing can be called simply investing, the outlaying of value in the expectation of return of greater value.
Most investing is not done directly today however, with capital instead being pooled and injected into companies via vehicles of different size and structure:
Hedge fund
Mutual fund
Private equity fund
Exchange traded fund
Special purpose acquisition company
You lose so much control when you become a LP or otherwise invest through one of these vehicles. You gain “access” to the lawyers, CPAs, quants, PMs and whatnot at these funds when you become a part of their ecosystem.. but the funds first obligation is to the fund — not you.
Your liability isn’t the only thing Limited by the L in LP.
Going direct means shaking the hand of the Founder and/or leadership team. It means you get to meet the other investors (again directly, not at some luncheon the fund offers once a year).
You gain a great deal being able to directly engage with these teams.
Becoming an Angel Investor doesn’t require any accreditation but you will pay in losses — start small and never invest what you can’t afford to write-off (that’s fancy for lose.. but we’ll get to that in Parts III and V).
If losses are guaranteed why do people do it?
Experiencing (even witnessing) a 50x return — turning a $200k initial outlay into a $10M liquidity event — generates a great deal of excitement and willingness to take risk.
Even a “measly” 10-bagger on $25K is a $250K return.
This is going to be 5-part series. As usual I’m going to start by explaining the big topics, establishing vocabulary and getting us oriented on the map. Then we’ll dive deeper into key topics (deal flow, diligence, dealmaking, post-investment, etc..) toward the end of the series.
P.s. this engine is special in that is catalyzes so many of the others → you may end up direct lending to one of these companies instead (or in addition), you may sell a service or a digital product to these companies, etc…
Time to dive in.
The Art of Direct Investing
While nothing in investing is guaranteed, direct investments can offer a level of upside that's simply not accessible through traditional routes. By cutting out the fees associated with funds and having a more concentrated portfolio, the potential rewards can be significantly higher.
What really resonates deeply with me about going direct is the greater control it offers.
I'm a builder by nature, and direct investing allows me to be more than just a passive observer. I can actively choose the companies I invest in, based on my own research and analysis. It's about having a seat at the table, influencing the direction of these companies, and ultimately, shaping my family’s destiny.
But there's more to the story. Direct investing opens doors to a hidden world of deals that simply aren't available through traditional channels. These are often early-stage, high-growth companies with the potential to disrupt industries and redefine the future. As a tech investor, this access is invaluable. It allows me to get in on the ground floor of the next big thing, to be part of something truly innovative and transformative.
Now, it's important to note that direct investing isn't for everyone. It's a game primarily played by high-net-worth individuals, family offices like mine, and institutional investors. This is partly due to the higher risk involved and the often substantial minimum investment amounts. However, with the rise of crowdfunding platforms, we're seeing a democratization of sorts, allowing a wider range of investors to dip their toes into this exciting world.
In the next section, we'll talk about the types of direct investments and explore the different stages at which investors can get involved. But for now, let's just say that direct investing is more than just a trend; it's a paradigm shift that's empowering investors to take control of their financial future and be part of something bigger than themselves.
What This World Looks Like
The world of direct investing is a sprawling landscape, filled with diverse opportunities and investment vehicles. As an investor, understanding the different types of direct investments, stages of investment, and strategies available is key to navigating this exciting terrain.
Let's start with the different types of direct investments you might encounter.
The most common are equity investments, where you purchase shares of a company, either common stock or preferred stock. Think of this as buying a piece of the company's factory and earning a piece of what it generates. As the company grows and hopefully prospers, the value of your shares can increase. It's a classic way to participate in a company's success and potentially reap significant rewards.
Another option is debt investments, where you essentially become a lender to the company. This could involve purchasing convertible notes, which can later be converted into equity, or bonds, which offer regular interest payments. Debt investments can be a less risky way to get involved, as you're typically first in line to get paid back if the company faces difficulties.
Finally, there are hybrid instruments that combine elements of both equity and debt. These can offer a unique blend of potential upside and downside protection, making them an attractive option for certain investors.
Now, let's shift gears and talk about the different stages at which you can invest in a company's life cycle.
The earliest stage is the seed stage, where companies are just starting. This is high-risk, high-reward territory, as the companies are unproven but have the potential for exponential growth.
Next comes the early stage, where companies have a product or service and are starting to gain traction. This is still risky, but the path to success is becoming clearer. There are more investors competing for deals here.
Then we have the growth stage, where companies have established themselves and are scaling rapidly. This is a less risky proposition, but the potential for massive returns may be more limited. The most investors compete here → they perceive the least business risk as these companies typically have free cash flow and strong operating mechanics by this point.
Finally, there's the late stage, where companies are mature and may be preparing for an IPO or acquisition. This is the least risky stage, but the potential returns are often more modest.
The stage you choose to invest in depends on your risk tolerance and investment goals. I personally enjoy the earlier stages, where I can get involved in building something from the ground up. But each stage has its own unique appeal.
Finally, let's talk about direct investing strategies.
One approach is opportunistic investing, where you jump on deals as they arise, based on your research and analysis. This is a more flexible approach that allows you to capitalize on market trends and emerging opportunities.
Another strategy is thematic investing, where you focus on specific industries or themes that you believe will outperform the market. This could be anything from artificial intelligence to luxury consumer goods designed with sustainability-first mentality. As a tech investor, this is a strategy I often employ.
Understanding the direct investing landscape is a crucial first step in your journey. It's about knowing the options available to you, assessing your risk tolerance, and developing a strategy that aligns with your investment goals.
The Road Ahead
In Part II we are going to map out the Direct Investing Process.
We’re going to start with deal flow. How investors find potential deals via networks, platforms, referrals and other means.
Then we’ll get into my favorite topic: due diligence. We will discuss the importance of thorough research (financial analysis, market assessment, team evaluation) across several types of due diligence (financial, legal, operational, commercial)
Key Point: Talk to former business partners, service providers, college professors, people in the Founders’ past.
Part III we will transition into dealmaking aka negotiating terms (valuation, ownership stake, board representation, risk mitigating language) and structuring the deal.
Part IV we will discuss the often missed post-investment period.. where the real work begins frankly.
Part V will conclude with a collection of best practices I’ve collected to make you more effective.
It feels good to add a new engine.
👋 Thank you for reading Wealth Systems. I started this in November 2023 to share the systems, technology, and mindsets that I encountered on Wall Street.
💡The BIG IDEA is to enable the audience to learn while also gaining practical knowledge that can be applied toward the development and refinement of wealth building infrastructure.
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