IPO Mania: Tricky Investments and Long-Term Strategy

Amit Raizada

October 12, 2020

If you have been paying attention to the stock market at all these last few months, odds are that you’ve seen skyrocketing IPOs that seem to defy all logic. Snowflake (SNOW) IPO’s at $120 a share, then closes at $254 after reaching $319 at its highs. Lemonade (LMND), a tech/insurance hybrid, opened its big day at $29 and traded to highs of $64—a 132% gain on the day. These are the kinds of jumps investors dream about seeing once a year, let alone in one day.

Even in the midst of the deepest economic crisis we’ve seen in decades, IPO’s are having a banner year. September was one of the best months on record for IPO funding, and all signals are pointing to an October defined by the same astronomic impact. In fact, IPO tracker Renaissance Capital found that IPOs this year are enjoying 2.5x more first-day pop than the historical average. These head-turning debuts are exactly what financial bloggers and stock market reporters salivate over, creating headlines that catch even the most casual investor’s attention. Pair that with the meteoric rise of easy-to-use online, app-based brokers like Robinhood—which has an $11 billion valuation itself—and you have a recipe for quick success (and in many cases, ensuing disaster).

Gains of this magnitude can paint a rosy picture over a rough canvas, highlighting the outliers while ignoring the true reality of the underlying economy. This primes amateur investors and get-rich-quickers to enter into IPOs purely based on the initial event, ignoring the inherent value of the company and long-run considerations. As I have frequently cautioned in the past, investing with a long-term time horizon in mind beats fast, speculative trades. Every. Single. Time.

As a venture capitalist and entrepreneur, I’ve long pursued opportunities in the economy of the future. At Spectrum Business Ventures, we see the world differently, closely monitoring the preferences of young consumers and emerging market trends to gain footholds in the firms and products that will come to define our economy in ten, fifteen, or twenty years—even if doing so means incurring short-term losses. I urge aspiring investors to do the same.

IPO deal hunters have the right idea—they just need to refine their approach. Investing in IPOs requires meticulous research and assiduous reading of market trends. Rather than funneling this energy into boom-and-bust stocks, though, look for the ventures promising to deliver innovation for the long-run.

FOMO-induced surges

The allure of 200 percent overnight gains has attracted many aspiring investors, and while some may have realized gains from these one-day pops, most are being dragged down by the subsequent crashes. As the legendary Jim Cramer says, you never have a gain until you actually take it.

Take hydrogen-powered vehicle company Nikola (NKLA), for example. After a significant run-up to $80 a share in early June, very shortly after its IPO, the stock now sits at a cool $24.15. This means that there are some people out there who got trapped at $80/share who are now sitting on nearly 75 percent losses. Those who bought at the top were not making decisions based on long-term considerations—they were jumping in on a short-lived rocket ride.

Shades of 2000-2002

The 2020 IPO landscape is demonstrating remarkable similarities to the tech melt-up of 2000-2002. Driven by simple online investing, unrestrained optimism, and manic buying, the current valuations of some tech stocks have soared through the roof.

I urge aspiring investors new to the stock market to look toward fair or underpriced businesses whose products or services have the potential to change the way we live. Some of these IPOs even have these traits, but make sure you are getting a good deal on any stock you get into. And if that means pinning the stock to your watchlist and buying in after a sharp decline, then waiting is the way to go.

Those in search of lucrative IPOs have the right idea—they’re searching, ultimately, for innovation. But I caution aspiring investors to look toward the long term. Search not for lucrative stocks to purchase for cheap and sell at a profit a few weeks later, search for the ventures and opportunities that are popular among young consumers and in emerging markets and that deliver innovative new products or services that improve peoples’ lives. Investing in these opportunities for the long-haul is when venture capital truly becomes worth it.

Investing in Health Care: A Once in a Lifetime Opportunity

Amit Raizada

August 21, 2020

The COVID-19 pandemic has prompted a healthcare revolution that could usher in the next wave of biomedical innovation and redefined healthcare investment opportunities. This shift has created a unique opportunity for investors to align capital with transformative medical advancements, ensuring a healthier and more resilient future.

As the CEO of Spectrum Business Ventures —a private equity firm that has been at the forefront of revolutionary trends in biotech, payment processing, real estate, and many other industries—I’ve always sought to use capital as a tool to improve people’s lives.

With more than 150,000 Americans dead at the hands of this virus, healthcare and medical technology are now the sectors in which this philosophy can be most effectively applied.

I urge venture capitalists to seek out innovative and entrepreneurial ventures in two healthcare subfields: preventative health and biotech. Now, more than ever, we need large scale private investment in medical technology to help build a healthcare apparatus capable of withstanding future shocks like the novel coronavirus.

Preventive Health

At one moment, we are witnessing both the most significant stress test our healthcare infrastructure has ever endured, and an unprecedented leap forward in technological innovations. The intersection of these two defining moments will inevitably lead to exponential growth in the healthcare sector.

As we embrace this new reality—a reality in which we understand the true impact a novel virus can have on our world—we are also hyper-aware of the need to establish resources that keep us healthy.

That’s where preventative health comes into play.

Telehealth companies are an interesting new vertical within this field that fit well within the COVID and post-COVID reality. One telehealth company, Livongo (who is now in talks to merge with industry titan Teladoc), is leading the way with a revolutionary platform that helps people with chronic conditions reduce their risk for future diseases with alerts and lifestyle tips based on user data. It also helps organize health reports for doctors, streamline the purchasing of supplies, and connect patients with live coaches.

Companies like Livongo make prudent investments in the post-COVID paradigm, deliver key services to those hungry for innovation, and help mitigate public health concerns before reaching crisis-level proportions.

Biotech

COVID-19 has shown us all just how disruptive a public health emergency can be to our lives and institutions. We must place an emphasis on staying healthy now if we wish to hedge against an unpredictable future. At the same time, biotech companies like Gilead, Moderna, Abbvie, and many others are in a race for what has the potential to be the most profitable vaccine ever created. While the winner of this race has not yet been determined, other companies are undeniably looking toward the next virus, investing in R&D for new drugs that we don’t even know we need yet.

Any time there is an opportunity to invest in, and in turn, catalyze life-changing innovations, I jump at the chance. That’s why I have sought out biotech companies making innovative strides. The COVID-19 virus has awakened a newfound, widespread interest in what these incredible companies do. When a new industry becomes inundated with demand, we can expect an unprecedented influx of capital into that sector. As we saw with tech at the onset of our century, healthcare could very well be the industry that defines the next decade. Don’t miss the chance—this could be the only one in our lifetimes.

Lessons Learned from a Highly Speculative Stock Market

Amit Raizada

July 24, 2020

Lessons Learned from a Highly Speculative Stock Market

The recent price movements in the stock market emphasize the growing relevance of disruptive market investments for savvy investors. These investments have become essential for navigating the global economy's dramatic shifts, offering a unique lens to uncover long-term opportunities through innovation.

Understanding the Shift Toward Disruptive Market Investments

The huge swings up or down can be enticing—even intoxicating—for new investors. Promises of fast money on exaggerated market moves have led to a surge of reckless investing. However, this type of speculative trading often lacks the long-term potential found in disruptive market investments. The difference lies in identifying trends that cater to changing consumer needs, enabling investors to bank on sustainable innovations.

The Age of Robinhood and Immediate Gratification

The popular investing app Robinhood has democratized market access, encouraging a wave of new traders. While this has led to some impressive short-term gains, it has also sparked troubling trends. The allure of options trading and penny stocks often eclipses the long-term value of disruptive market investments. By focusing on companies that innovate and fill market gaps, investors can avoid the pitfalls of speculation and instead build sustainable portfolios.

Case Studies of Disruption: Hertz and Nikola

At the end of May, Hertz declared bankruptcy, but its stock price inexplicably soared by 900 percent due to speculative trading. Similarly, Nikola’s rise and abrupt fall highlight the dangers of jumping onto short-term trends without understanding the fundamentals of disruptive innovation. Investors looking to capitalize on the transformative power of disruptive market investments should focus on ventures that address real-world needs and offer groundbreaking solutions.

The Future of Investing: Focus on Disruption

Investment is more than just a numbers game. By emphasizing disruptive market investments, aspiring investors can tap into ventures that revolutionize industries and provide long-term value. Whether it’s filling voids in the market created by younger generations or delivering cutting-edge technologies, the future belongs to those who can identify and support innovation. Disruption doesn’t just transform industries—it creates opportunities for life-changing returns while positively impacting the world. You can read more about Investment Philosophy here

Millennials and Markets, Part II: Currencies and Gigs

Amit Raizada

July 6, 2020

In the first installment of my series on young people and their changing investment habits, we looked at how their “millennial outlook” on investment had been shaped by adverse economic conditions in which many were raised and by a desire to use investment as a strategic tool to drive social change. In that article, we discussed how sustainability is a significant concern among millennial investors, as many seek to patronize innovative green firms like Tesla in lieu of the traditional fossil fuel giants.

But it’s no surprise that climate change and sustainability are important to young people. In this article, I wanted to examine some millennial preferences that are less intuitive to outside investors. In many ways, this mirrors one of my favorite investment strategies – closely observing the preferences of young consumers to gain a foothold in the markets of the future.

Cryptocurrency

Cryptocurrencies like bitcoin, Ethereum, and Litecoin are continuing to gain popularity with millennials. But I believe a deeper, psychological shift is underlying the younger generations’ move to crypto. Many young people experienced the Great Recession in their teens and the COVID-19 pandemic in their twenties, is it any wonder that they’re circumspect about banks?

As the Federal Reserve enacts protocols of “unlimited” quantitative easing – a process where America’s central bank buys assets to pump money into the economy – there is a profound concern about the state of inflation, the dollar, and fiat money in general. If the Fed has the ability to essentially create money out of thin air, what does it mean for the value of our greater economy?

By investing in blockchain technology, investors are putting their money behind a valuable innovation with advantages that look quite enticing against the backdrop of today’s economic woes. By allocating a portion of their portfolio to cryptocurrency, the next generation is essentially hedging against the failings of the global economic system. If economic policy or global unrest causes the collapse of fiat currencies, what will be there to take its place? Cryptocurrency.

It’s important to note that the situation I’m describing is closer to a doomsday scenario than reality, and I wouldn’t necessarily recommend allocating a large sum of money to cryptocurrency. However, as a proponent of diversification, I side with millennials in my belief that crypto has its place in any well-diversified portfolio.

Solo Entrepreneurship / Self-Employment Technologies

Some larger corporations view their employees as expendable, which leads employees to take flight in search of better benefits and pay (I personally think companies need to incorporate a people-first approach into their business model).

With more tools available to nascent entrepreneurs than ever, the next generation of investors is turning to companies that empower the “little guy.” Shopify—an e-commerce platform that offers extensive resources for budding businesses—has seen an incredible resurgence since the crash in March, signaling that investors expect retail stores to increase their online presence (and sales) in the years to come. As barriers to entry are lifted and overhead expenses minimized, small business finds a space to thrive, making Shopify and related services like Square (a mobile payment company) incredibly enticing investment opportunities to the young investor.

As we see millennials make the jump from corporate jobs into self-employment, the gig economy is in full swing. Technological innovation—by way of Uber, Lyft, Grubhub, Instacart, etc.—has afforded people the opportunity to dictate their own hours, pay, and freedom. Younger generations are serious about freedom, and their investments show that.

If you enjoyed our book series then please check out our Millennials and Markets Parts 1 and 3.

It’s time to diversify your investments

Amit Raizada

May 20, 2020

The novel coronavirus has given way to some unusual business and economic headlines over the last two months. A rollercoaster couple of months for the stock market. Speculation of an impending housing or rent crisis. The possibility that Jeff Bezos may become the first trillionaire due to Amazon’s surge in revenue.

Yet, perhaps nothing was more unexpected than last month’s precipitous drop in oil prices. In late April, overproduction and decreased demand caused the per barrel price of crude oil (for contracts to be delivered in May) to slip below $0. Investors on both the macro and micro-scale, from the governments of Saudi Arabia and Russia to small local capitalists, were left reeling as their petroleum assets lost literally all their value overnight.

While prices somewhat recovered in May, this episode illustrated a crucial concept in investment that all prospective venture capitalists should consider: diversification.

Diversifying your portfolio and investing in a plurality of industries can be an effective insurance policy against wholesale financial ruin when the economy begins to contract. When your money is spread across a multitude of sectors, rather than concentrated in one narrow market, odds are that at least some of your assets will stay above water when a recession hits. The more diverse your portfolio, the greater the odds your assets will continue to perform.

A shrewd investor should never, as the old saying goes, place all your eggs in one basket. I spend a lot of time considering many scenarios, but I had not factored in a global pandemic. Diversification helps protect against both the known and unknown.

Here are some of my strategies to help you diversify your portfolio.

1. Follow emerging trends, they’ll lead you in new directions

Diversifying your portfolio can often be a difficult task. While every investor wants a diversified set of assets, finding new industries in which to place your resources is often challenging.

An innovative way to go about this, though, is to follow emerging market trends. In my case, I often look toward the consumer products and experiences in which my kids demonstrate an interest. I use their preferences to help craft long-term investment strategies that pursue the products and experiences that will dominate the market in the coming decades.

This approach leads me in directions I would’ve never expected. A decade ago, I never imagined that I would have been invested in online video gaming or in fast-casual restaurants like Tocaya Organica. But by following nascent investment trends – and the things kids like to do or eat – I was led to two lucrative ventures that helped further spread out my portfolio.

You can follow suit simply by closely watching consumer trends – particularly those of future generations.

2. Take risks in pursuit of bold ideas

Investors can always diversify their portfolios by taking some calculated risks.

This could mean investing in a startup with an innovative new product that may not be profitable in the short-run. It could mean looking for investment opportunities overseas or in products that may face regulatory hurdles.

At my firm Spectrum Business Ventures, we strive to see the world differently. We look for investments in ventures that others overlook, we look for opportunity where others see none. And to do so we take risks – calculated risks.

When it comes to diversity, these risks often take us into uncharted territory. They’ve propelled us into rocket and satellite technology firms, biomedical R&D companies, novel restaurant and entertainment models, innovative consumer shopping technologies and improbable real estate acquisitions. Above all, though, our pursuit of cutting-edge innovation has broadened SBV’s portfolio.

Aspiring investors should do the same. Take smart risks in pursuit of bold new products or industries. You’ll end up with a well-rounded, diverse portfolio that has invested your money across a spectrum of industries, ensuring that you’ll have some cushion the next time we hit an economic bump in the road.