Because of finance laws dating back to 1933, most investors are almost clueless on how to invest in startups and other privately held companies. In this video, I begin to address the main concerns that come up over and over again in my discussions with people interested in getting into vegan investing.
I recommend you watch the video, but I’ve noted some highlights below:
Despite what anyone says (like your financial advisor or broker) ALL investments carry a risk of 100% loss. However, all things being equal, those risks are different for different types of investments.
For example, if you purchase a certificate of deposit (CD) at a bank, the risk of loss of your principle is typically moderated by government insurance, at least in the U.S. This is one reason why CD’s in other countries often pay higher returns – the chance of default and 100% loss may be higher in those countries.
In the public stock markets, the risk of total loss of principle is perceived as higher than with a bank CD, and when investing in startups, the risk of losing your entire investment is very high.
Now, let’s look at the reward side…
Typical US certificates of deposit pay very small returns. Perhaps 2% annual interest. On a bank CD, this means you’re putting $100 at risk for the prospect of gaining just $2.00 of annual return (ROI).
A fundamental investment term is the “price to earnings ratio”. In the example of the bank CD, the P/E ratio is $100 ÷ $2 for a P/E ratio of 50. So, you could say that this investment class is “expensive” because you have to put a lot of money at risk in order to make a small annual profit. In this case, it costs $50 to buy $1.00 of future gain for the year ahead. This seemingly high cost to get access to the $1.00 of gain is rationalized because of the generally low risk losing all of your principle.
Now let’s look at the P/E ratio as of today for Apple, a mature stock:
You can see that Apple’s P/E ratio is only 16.64 (~17). This means that you only need to put $17.00 at risk to get $1.00 of growth. Why are Apple shares so much cheaper in terms of P/E ratio than the C/D? Because the potential for loss of your principle is a lot higher, and the chance of not achieving the desired ROI is also higher.
In my previous post, Why I won’t invest in Beyond Meat, I explain how the first round investors in Uber only put $1.00 at risk to eventually make $20,000, and how first round Beyond Meat early investors likely earned $2,500 for each dollar they put at risk.
What this tells you is that investing in growth oriented startups provides the potential to completely flip the P/E ratio in favor of wealth creation rather than capital preservation. The challenge is that the risk of loss of your entire investment is extremely high when investing in startups.
Summarizing all this info, I have a little rule of thumb to help you get a feel for investing:
Capital Preservation – Invest $100 to make $5
Wealth Creation – Invest $5 to make $100
The more you can reduce your risk when it comes to wealth creation, the more likely you are to enjoy the gains. Vegan Launch helps investors by providing them access to enough early stage vegan investment opportunities to reduce risk through diversification, and educating our investor members on key entrepreneurial success factors.
I’ve learned these things in a lifetime of pursuing the question of how to best use the fields of finance, investing, and business to create large scale social and environmental progress, so that these objectives can become mainstream instead limited to the domains of charity, volunteer activism, and government.