Wilkins Chung
When investing, whether in public or private markets, it is important to have a strong hypothesis about the advantage you enjoy over others. An advantage generally comes in one of two ways, knowledge and/or access.
In public markets, there is no advantage is access, only knowledge, as all information is — by definition — public. In classic “value investing” in the Buffet sense, you create a knowledge advantage by parsing and understanding publicly available information about companies better than other investors. However, the ability for you to create such a knowledge advantage in today’s world, given the accessibility of information in near real-time, has all but disappeared; it’s near impossible to find untapped value.
You can still gain an advantage in public market investing by relying on special insight into an industry you are intimately familiar with. Take the example of Amazon and AWS. Most in the technology sector knew even early on that AWS would be huge and likely become the dominant player in cloud computing, a notion likely missed by most outsiders. With this knowledge via special insight, you would have bought Amazon if you believed that the share price failed to adequately value this particular asset, and you’d have been rewarded once the actual value was revealed to the public (see Amazon’s revelation in April 2015 that AWS was nearly a $5B business). You could have made a similar bet on Tesla prior to it’s announcement of a longer-term foray into battery technology, and you can still make a similar bet on Facebook based on some of its current experiments, including its explorations in the virtual reality space.
On the contrary, in private markets, the main advantage you can enjoy over other investors its simply access, or “deal-flow”, in popular Silicon Valley parlance. The earlier you get in on a deal, the better it is for you simply by virtue of the fact that demand hasn’t started to pile on yet. However, as more investors look towards private markets due to its potential for greater returns and access to private markets opens up because of platforms like SecondMarket and AngelList, returns here will naturally fall.
Given the enormous risk and variance in early-stage startup investments, valuations are extremely difficult. That, compounded with more capital chasing such deals, returns in private markets may start to fall below that of public markets.
To be a successful private market startup investor, you must maximize both access and knowledge advantage. You gain access by building a strong brand, reputation and network. On the other hand, you gain a knowledge advantage from continuing to be intimately involved in different sectors, or sub-sectors, and gaining special insight.
Wilkins Chung. Wilkins is a co-founder at A Thinking Ape, a Y Combinator-funded mobile games startup. Wilkins previously worked as a software development manager and software engineer at Amazon where he focused on scalability solutions. Wilkins graduated from University of Waterloo in Computer Engineering.
