Thread by @LifeMoneyTips

How to Have A High Net Worth and No Cash

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People want to invest.

I have been an active investor for years, not in the standard stuff (stock market, real estate) but rather in private companies.

This can work, but it's not for everyone. Here are some thoughts

1. The first thing is that investing in private companies can make huge returns, like 10x or even possibly 100x.

That is the main reason to do it.

These are life-changing numbers, as a tiny investment can turn into FU money.

What are the risks?

2. The most obvious is that the investment doesn't work-- and it goes to zero, or becomes a zombie that you can't sell or exit for a decade.

The other big one is liquidity. You can't sell it for a long time, and usually you don't get dividends, so you are stuck in the position.

3. The other challenge is that this is difficult. Spotting winning companies ahead of time takes a lot of research and skill.

And it's as much qualitative, when evaluating the founding team and the whole pitch.

4. Private deals can run the gamut from "hacker in a hoodie" startups to established company founders who are setting out on their own.

Unless you're in San Francisco with exceptional deal flow, you should stay away from the former. Your returns come from the latter

5. Studies have shown that the most reliably successful entrepreneurs are those with 20 years of industry specific experience.
They usually fall into moulds:
- success within a company and want to get paid better
- have seen problems in their industry and they solve them

6. These are the kind you want to back. If you can reliably find this kind of opportunity, then you can feel comfortable deploying capital.

The next question is price. How do you determine the valuation?
How do you value it and pay the least possible?

7. The first step is to do a back of the envelope about where the business could grow to in 3-4 years, and then make sure that in that scenario, you would get 5-10x your money.

The higher the probability of success, then the lower your return expectations

8. Then you want to double check by doing some comparisons with the industry for valuations.

What are the multiple for revenues and profits of similar businesses in that niche?

Use that as a benchmark for your expected return and work backwards

9. Lastly, it's better to wait until the business is started and and running, before investing.

80% of the battle is starting and seeing how the founders do in the market.

Did their clients follow them?
Can they sell?
Is their "brilliant solution" working?

10. You will know in a few months if it's working, and then your capital goes to EXPAND/SCALE what's working, not to fund a guess.

Obviously, there are some guesses that you can back because they're low risk, but still...

11. INVEST TO SCALE WHAT WORKS, not to determine if it works.

Some things scale better than others:
- Services like marketing, finance, etc.
- Software/telecom/IT products
- E-Commerce
- Asset-light businesses

Restaurants and retail can work but usually don't scale well

12. Using this approach, I have invested in many private deals and my portfolio is up 4x overall
- an IT company which returned 8x my capital and is worth 50x what I paid
- a services business which is paying dividends and worth 6x my purchase price
- a few zombies
- a zero

13. While the returns look great, and I have realized multiple 6 figures there's one drawback- liquidity.

I was stuck in these assets, and they didn't produce cash, so I couldn't raise cash from them

High return but high risk also for your overall portfolio

14. Yes, I ran out of cash

If i had a do-over, I would have bought real estate instead:

- Steady cash flow, so easy to hold
- Active market if you need to sell
- Easy to finance with debt
- Can add value

And only invested in private companies when I had good cash flow

15. What are your thoughts and experiences with investing in private companies?
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