Start-up vs public market investing

Start-up investing is uncorrelated to the current public market, and not just in the financial sense…

By Paul Soanes

Many ‘glass half empty’ observers in the investment markets are shaking their heads in disbelief at the resilience of current share prices, particularly in the US. The bears are either expecting a long slow rerating or a short sharp adjustment. The bulls on the other hand have a long list of reasons to keep investing and are the ones who appear to be shouting loudest at the moment. In the end though, bulls and bears are generally always a little bit wrong.

An issue when investing in public markets is that you hear this ‘noise’ all the time. It not only causes you to question or doubt your investment positions, but also encourages you to try the impossible – getting the timing right. Timing for buying or selling an individual share is virtually impossible to get right. I, for one, like to make an investment decision and then sleep on it for a few days before I make the trade. But in the age of the smartphone this becomes increasingly difficult, as your trigger finger is only ever two clicks away from a buy or a sell! For many amateur investors, I suspect the immediacy of the transaction plays against any better judgment earned after a couple of nights’ sleep. In my opinion, it’s always better to reflect and research further, weighing up against other opportunities. However, impatient human nature and the immediacy provided by technology can make public market investing either very rewarding or very stressful.

Now, I’m not suggesting that investing in private businesses doesn’t have its stresses, of course it does – I should know, it’s my day job and my hair is very grey! But there are attributes of how the set-up of private investing brings into focus how balanced it can be versus public market investing.

The financial arguments for private company versus public market investing are well documented, but are mostly centred around getting capital in early and hitting the biggest capital gains. I often discuss the beneficial effect of non-correlation between private equity and quoted businesses in a wider portfolio – small private companies generally suffer less from market shocks and can pivot more easily. But there is a wider non-correlative argument. Private company investing is not only uncorrelated from a financial perspective, but also uncorrelated in useful non-financial ways too. What do I mean by this?

Small private businesses provide easier to digest information than quoted businesses

Firstly, information is easier to digest in smaller private businesses at due diligence stage. It’s easier for you to see with clarity what you’re investing in. The business itself will generally be in a simple state with no balance sheet clutter, there are fewer staff to make judgement calls on, there will be only one service or product, there will be a succinct business plan and obviously a clear and wide-open market to go after.

If however you were to look at a small young publicly quoted business on AIM, you might eventually be able to find the business plan buried deep in some impenetrable listing prospectus, stacked full of compliance-led health and wealth warnings – I read one recently which was 141 pages long, and I estimate that only 30 of those were related to the business plan. You would also find a few research notes (sometimes paid for by the business), chat forums and so on, but already the path to your investment decision is non-linear and extremely noisy. You’ll still get to your decision as to whether to invest, but the due-diligence journey is more complex than start-up investing.

In my view, private investing is more about market timing than stock-market timing

Private investing forces you to ignore any thoughts about market timing, other than in a macro or operating market sense. It’s illiquid by nature, so once you’re in, you won’t be getting out until a liquidity event presents itself. In fact, leaving the timing decision to the founders (sometimes in conjunction with the investment manager) is your best bet. They know the nuances of their business and their market. If you’re backing the right team, the founders will have near-perfect knowledge, and so riding with them is much better than calling the timing yourself.

Information can flow faster to the investor in private markets

You’re much closer to the action with private investing. You’ll generally get pithy communication with private company founders. Regular and short update emails ‘hot off the press’ are much more valuable than those generally provided by Boards to highly regulated public markets, which on the whole are out of date by the time you receive them. At Worth Capital, we encourage the founders we work with to provide snippets of hot news as it happens. We’ve heard that investors like this as it brings them closer to the action as it happens and is both rewarding and more timely. You also get a clearer sense of the ‘direction of travel’.

Private investing can create more buzz

There is something pioneering about private company investing. Giving your capital over to a nascent business is higher risk, but knowing you’re buckled in for the ride can be both exhilarating and stimulating. Some journeys will end in success, others won’t. However, what will be consistent for any investor is that you’ll want to share your involvement with friends and family. How often can you say that of public market investing?

At the end of the day, wherever you invest your money on the spectrum between private and public businesses, there’s certainly more nuance to the decision than just the financial returns versus risk mix. If you’re a public market investor and you decide to also invest in private companies, then my own experience is that the process of embarking into private investing may be rewarding and refreshing in more ways than purely financial.

Other Posts...

Getting sleeves rolled up

Getting sleeves rolled up

3rd March 2021

Read More
The impact of COVID19 on seed investing

The impact of COVID19 on seed investing

20th January 2021

Read More
The role of SEIS & EIS in a portfolio

The role of SEIS & EIS in a portfolio

3rd October 2020

Read More
Genius is evenly distributed, opportunity is not

Genius is evenly distributed, opportunity is not

14th September 2020

Read More

Get in touch

Contact us