IPOs Are for the Last Investors in Line

Financiers now come to Silicon Valley to invest in companies first

Sep 20 2019

Naval: The tech industry is still underestimated. People used to think of Sand Hill Road as a nice, little backwater compared to the gargantuan Wall Street. Now there’s an acknowledgment that Sand Hill Road is an important place, even though Wall Street still captures the headlines.

If you’re investing in the IPO, you’re literally last in line

It’s becoming increasingly apparent that Sand Hill Road produces the technology that generates much of the wealth in the U.S. The wealth originates here and spreads elsewhere. Wall Street financiers now come to Silicon Valley to invest in companies before they get to Wall Street. 

By the time a company goes public, you can bet anybody with connections, an appetite, investing skills and capital got a bite at it. So if you’re investing in a tech company’s IPO, you are literally last in line. That’s not to say you can’t make money—but the odds are lower because the fruit has been picked over many times.

Nivi: The last bunch of financiers who were sitting in the right place at the right time—we call them Wall Street. This is where people used to get capital for their startups. Back then, there was no other market for fundraising until you had the metrics to go public. 

Silicon Valley is turning into the new Wall Street, except it’s not as formalized, organized and segmented. The JP Morgans and NASDAQs haven’t popped up.

A 401(k) plan is like investing in the DMV

Naval: This is going to fly in the face of conventional wisdom. The average person should be saving for their retirement. But I never set out to save anything; I reinvested almost everything. 

In economics, there’s the savings identity, S=I, savings equals investment. If you contribute to a 401(k), that money is getting reinvested in “safe” but unproductive parts of society, such as the government.

You’re investing in the DMV and the Defense Department. Their returns have not been spectacular. It’s essentially just whatever money they can take at gunpoint from taxpayers and foreigners.

If you’re in the tech industry, it’s generally a better bet to invest back in the industry—especially if you’re young and can get diversified.

$50,000 invested in a smart entrepreneur will change their life

Invest in the smartest, best and brightest people around you, rather than people in far-away lands with far-away motives who already have trillions of dollars of capital flowing into them and are not as motivated as your neighbors.

Fifty thousand dollars in your IRA isn’t going to make a difference to the U.S. government when it gets put into a T-bill. But $50,000 invested in an entrepreneur down the street will change their life. 

If you can find 10 to 50 investments like that, one or two of them may pay off, assuming you listen to us and build skills along the way.

I sleep well knowing my net worth is invested in the best talent

Most of my net worth is illiquid and lying in startup companies. But I sleep well at night knowing that hundreds of teams of brilliant entrepreneurs are working hard to build things that could be massive and change the world.

These teams include some of the best talent in the world: founders, coders and designers who studied at top schools. They’re leveraged with venture capital, products with no marginal cost of reproduction and the most modern methods of distribution.

It just takes a few of these companies for the entire portfolio to balance out. If you invest in 100 companies and one of them produces a 1,000x return—which is not that unheard of—the other 99 investments could go to zero and you would still see an overall return of 10x.