Beginner’s Guide to Passive Income (9): – Private Euqity/Pre-IPO Terms, Returns, and Entry Points

This is the last major asset class I want to share about passive income and alternative assets—angel rounds, Private Equity, and Pre-IPOs all fall into this category. In the case of angel rounds, the risks are high, the price is relatively cheap, and the investment horizon is long. If you’re lucky enough to back a successful one, it might take 7 to 10 years to exit. However, sometimes around the 5-year mark, when Series A or B investors come in, early angel investors may exit part of their position. In any case, liquidity is very low. The typical entry is between $50,000 to $100,000, but it can sometimes be as low as $25,000. The risks are high, and the timeframes are long, so institutions tend to invest small amounts in large numbers, hoping to catch one winner to offset all the losers. Generally, early-stage investments are made through funds, and over the long term, successful venture capital (VC) firms usually see annualized returns of about 15-20%. However, many funds result in losses. During the angel stage, individual investors can still participate, but once institutions like VCs or anchor investors come into subsequent rounds (like Series A and B), individual investors typically can’t invest anymore due to a clean cap table. The price in later rounds is usually higher than the angel round (unless market valuations drop significantly) because the risks are lower. However, the returns from later rounds tend to be lower as well, though the risk of losing 100% decreases. But of course, it’s not absolute. Here are some valuation changes from funds that invested in prominent companies that you probably have heard of:

• Anthropic: -10%
• Bytedance: -53%
• Kraken: -70%
• Neuralink: +34%
• OpenAI: +68%
• OpenSea: -69%
• SpaceX: +581%
• Stripe: +110%

These are just the valuation numbers on paper; exits and cashing out are still far off. And these are the results from funds that managed to get into these high-profile companies early, which shows how high the probability of failure and the magnitude of that loss can be. Of course, there can be high returns for the winners. For example, I know an angel investor who retired after his very first investment turned out to be a unicorn; the company hasn’t gone public yet, but thanks to institutional investors entering later rounds, they managed to exit a portion of their stake and achieved a 300x return. Another investor bought original shares at $0.50, and after the company went public, the value surged to $95. These are rare and fortunate cases—so far, my personal record in this area is still 0%.

So, regarding the conventional fund approach in this asset class, my strategy is as follows: to have good results in angel rounds, you need to be able to invest in a large number of high-quality startups. I don’t have the time to do all that work, nor do I want to bear third-party risks with funds. Relying solely on luck is not worth it. Also, if the annual return is genuinely 15-20% and I have to wait 10 years, then it’s not worth it for me, because I have other passive income methods with higher returns and the ability to exit every 12 months. Therefore, the conventional market strategies don’t align with my requirements. I don’t want to spend time on it, or else it wouldn’t be passive income. But I also don’t want to rely purely on luck, so I prefer to invest in fewer but higher-probability startups. My strategy combines both angel and Series A rounds in a hybrid approach.

What does this mean? I invest in the angel round just before an institutional investor enters for Series A. This way, the price is still reasonable, and the valuation can increase after the round, shortening the exit timeline. At the same time, the risks are lower than in the very early angel rounds.

To achieve this, there are several core prerequisites. People are the most important factor. We’ve all heard that investing in startups is about investing in people, right? For example, the founder needs to have the ability to pivot until the vision is realized. I agree that people are the most crucial factor, but they are also the most unpredictable and uncontrollable risk. So, my understanding of “people” in this context is different. I look at three things when evaluating the “people” factor in a startup: First, is the founder a repeat founder, and has he or she achieved significant results before? I don’t know whether the person is capable or not, but I know I’m not capable of judging them purely by their personal qualities, so I focus on their previous track record. Either the founder has already achieved success in a previous startup or has gone public before. Second, are there investors or board members who have already achieved significant results? These aren’t institutional investors, but individual investors. These people generally have incredible luck and experience, and when they are heavily invested in a company, they often tell me that the feeling about this company is similar to one of the unicorns they backed before, and they trust their intuition more. Third, can I communicate with the founder or key investors? I don’t necessarily need to know them personally, but we must be able to provide significant value to each other. In this way, we see each other as crucial partners and gain access to critical information about key milestones, like how to get in before an anchor investor or an institutional investor come in.

If the right people are in place, deal flow issues will also be resolved. Repeat founders can usually have many opportunities for investors. Similarly, investors who have previously achieved significant results often have good relationships with early-stage investment firms and frequently discuss the best-performing startups in their portfolios among themselves. If everything aligns in terms of timing and valuation, they will participate in each other’s rounds. Furthermore, because everyone can offer something valuable, some companies are invested in purely because value is exchanged elsewhere, and the startup becomes a vehicle to realize further value. For example, the friend who invested $0.50 per share and later saw the price rise to $95 initially invested because they had helped someone else in a big way, and this company became the exchange for that value. They originally expected a few times the return, but it turned out to be a big win. Many other good deals are accessible because some people’s businesses revolve around serving startups that meet specific criteria. Through providing value, they naturally gain access to great investment opportunities. Ultimately, to succeed in this space, you need to be able to offer something others need—only then will you become part of the entire value chain.

Aside from people, there’s also data. Typically, a company reaches Series A when it hits $100 million in revenue, so by the time institutional investors come in, the monthly growth, revenue increase, and ARR (annual recurring revenue) will have reached a certain level. It’s almost time for Series A, and although the returns aren’t as high as those from the very early investors, the risks in terms of product, cash flow, and other factors have already been reduced significantly. I don’t mind slightly lower returns.

With this framework in place, I’ve invested in a few companies based on this strategy, and they all have unrealized gains, although not much. At least it’s a better result than my previous total losses—it’s a good start. Currently, I feel that by finding the right deal flow, I see opportunities everywhere. There are so many good startups, and I’m not lacking opportunities. As I continue to walk this path, I’ll share more about the real data and details along this part of my journey as well in future series.

In addition to the strategies mentioned above, there are also platforms dedicated to startup investments. If you’re interested in exploring these platforms, I’ve compiled a list at the end of “Complete Guide to Start Your Passive Income Journey”. Feel free to check it out.

Finally, I’ve covered the basics of legal, credit, entertainment, collectibles, private equity, and Pre-IPO assets. In the next post, I’ll start discussing the risks, expectations, and major principles for assessing whether passive income is suitable for you. Till next time!