That’s the headline behind the most recent ad for Penny Stock Fortunes, a small cap stock-picking newsletter run by Jonas Elmerraji at Agora Financial.
The spiel is all about a back-door way to get into the world of venture capital and buy in “before the IPO”, so it caught my eye because we’ve seen several similar teasers along these lines in recent weeks — from the “Alibaba backdoor” to the “President’s Stock Market” or the “Silicon Valley Bank” — all of which promised, in one way or another, a way to buy into hot new companies before they go public.
So what is it this time around?
Here’s the first part of the pitch:
“The truth is you can bag far higher returns, get rich a lot faster and beat the bankers to the punch well before they take home outrageous fees for taking a company public.
“Get in before the bankers… while the companies are still private… at a huge discount.
“And if you win, the rewards could be life-changing.
“In fact, you may even laugh when ‘all’ you get is a triple.
“And 10-baggers may not even excite you that much.”
So what is this investment he’s teasing?
“… recently… a few savvy Silicon Valley venture capital pros started a firm that lets you play private companies and potentially make absurd profits when they go public.
“In short, they created a way for regular Americans like you and me to level Wall Street’s playing field and trounce the bankers….
“Because of this little-known firm, now you could play some of the most valuable tech startups in the world… BEFORE they go public….
“All you have to do is buy one security and you’ll have SEVERAL chances to hit a grand slam.”
We’re told that this firm being teased held both facebook and Twitter, which despite their ups and downs have certainly been huge winners for early stage investors… and that they’re currently holding some red-hot private companies that are just itching to make us rich. More from teh ad:
“Palantir is just one of 49 companies you could play before they go public.
“And the best part is that you can get in dirt-cheap. A piece of Palantir could be yours for about 21 cents through this unique business development company.
“Meaning you could be set up for a potential windfall in 2014, as Palantir could soon file for an IPO.
“Now you have the potential to make 10, 20 or even 50 times your money if the IPO pops. Maybe even much more.”
So yes, like a couple of the stocks we looked at last week this is a Business Development Company — but it’s one of the rare ones that is not focused on lending money and paying dividends.
Which one? Well, let’s dredge the moat for a few more clues:
“… this specific BDC is run by experienced technology insiders.
“Among them is a board member of Apple…
“Another is the former head of George Soros’ private equity portfolios….”
And a couple more of their hot portfolio companies that they say you’re paying about 21 cents each for, with Dropbox and Jawbone among the named ones…
“In October 2011, Dropbox was valued at $4 billion, but about two years later, it was valued at $10 billion. So obviously, private investors are valuing their growth.
“But the best part is an IPO could unlock the true value of Dropbox”
And of course, the ultimate money-maker in recent years (for investors, at least — I don’t want to imply that the company itself has actually made any real money) has been Tesla (TSLA). So that’s part of the lure, that you might catch the next ballistic missile of a stock:
“… if you could have gotten into Tesla before it went public, the gains could have potentially been enough to retire on.
“You could have that opportunity available today. You can play Jawbone, along with Palantir and Dropbox… for about 21 cents each!”
So what is this firm that lets you buy some hot names like Jawbone, Palantir and Dropbox for 21 cents? Thinkolator sez it’s: GSV Capital (GSVC)
You may well have heard of GSV Capital — particularly around the time of the facebook IPO or, more recently in the month before the Twitter IPO, because they are a big TWTR owner.
Actually, that’s not really true — they are a small Twitter owner in the grand scheme of things, they own less than one half of one percent of the company, but Twitter is a huge part of GSV’s portfolio and is by far their largest holding. The portfolio is very top-weighted in general: Twitter, Dropbox and Palantir together account for more than 50% of the value of the portfolio, the top ten holdings account for about 80% of their net asset value, and they have a large number of investments that are just 1-2% positions. You can see the distribution of their portfolio here, they say they’re focused on the Cloud, Social/Mobile, and Education, with a secondary focus on sustainability/alternative energy and internet commerce, but it strikes me that the bet on new education technology is their biggest sector bet, with lots of companies in the portfolio (they sponsored a big education tech conference and gave an interesting keynote, you can see the slides here to get more sense of where they think the world is going). There are other household names in their portfolio, they still own a tiny slice of facebook and they have positions in Spotify, Coursera, Gilt Groupe and a few others that you might have heard of. Eight of their portfolio companies (out of 52) are now publicly traded.
And yes, they are an investor in Jawbone, which is often touted as a potential winner of the move toward wearable computing — though that’s one of their smallest holdings at 0.3% of the portfolio.
GSV trades at a substantial discount to what they call their net asset value, which is a combination of the easily ascertained value of their publicly traded investments (like Twitter shares) and the difficult-to-value holdings in early-stage private companies, which don’t seem to get updated as frequently — those might just update when there are new funding rounds, I’m not sure. They make some transactions each quarter, including often selling down their publicly held shares and making follow-on or new investments in little companies — last quarter, for example, they sold some more of their facebook shares and some of their Control4 shares and used that cash to invest more into some of their pre-public companies and add a couple new investments (including Lyft, which is a ridesharing competitor to the better-known Uber). You can see their last quarterly press release here highlighting the moves they made. It appears that they only release their NAV quarterly, so as of March 31 it was unchanged from the end of 2013 at $14.91 — March was a bad month for speculative tech stocks (and for Twitter), so GSVC ended March with a share price of $10.14. When the last quarterly report came out and everyone then knew what that NAV was, on May 8, GSVC shares were a little over $9. Pretty much where they are right now.
Twitter is obviously the huge driver of the net asset value for the portfolio at GSV, since it’s such a large holding (it’s at 28% last quarter, after TWTR shares fell, and probably lower still now, but was up at 35% or more a few quarters ago), but the goal is to exit TWTR eventually. They couch this in their discussion of strategy, saying that their goal is to exit companies fully by 18 months after the IPO but also noting that they think TWTR is undervalued and they will be price-sensitive as they try to wind that position down. The good news, I guess, is that GSVC is so small that even if they dump their TWTR shares quickly they should have no impact on Twitter’s share price — GSVC’s Twitter position is worth probably a bit over $60 million today ($80 million on March 31), and that’s about 20% of one day’s trading volume in TWTR. But they seem to think that they can sell the shares at better prices than the $30 or so where it trades now, so they may not be in a rush — they’ve got about another year before their “goal” of an 18 month post-IPO exit. You can get a little more flavor from management’s commentary in their last conference call, but that’s the way I hear it.
The company has also noted that they have authorized a small buyback of shares, perhaps just to call attention to the fact that the shares trade at such a marked discount to their net asset value — but it’s worth noting that aside from the huge runup in the second half of last year, which I think was largely due to the anticipation of the Twitter IPO, GSVC has pretty much always traded at a marked discount to their net asset value. A year ago, the net asset value was between $12-13, and GSVC shares were at about $8.
Actually, if you go back a bit further GSVC has had two substantial periods when their share price climbed dramatically and was near or above net asset value for a while, in 2011/2012 when the shares were being traded as a proxy for facebook before the facebook IPO, and in the second half of last year when the shares were traded as a proxy for Twitter before TWTR’s November IPO. So there is likely a floor for the shares to some degree down in the neighborhood of 50-75% of asset value for GSVC (noting that the asset value could certainly fall, too), but the strong moves for the stock have really all been driven by big name IPOs and the venture-hungry sentiment they inspire among investors.
GSVC is not the first venture backer for most companies, they participate alongside much bigger investors and also participate in follow-on fundraisings — so their holdings in Twitter, for example, cost them an average of about $17 a share… they have invested about $14 million in Dropbox over about 2-1/2 years and they say the value of that investment is about $25 million now, and ??? if the company has a big IPO eventually. So these are definitely not all moonshots where they’re financing a garage startup before the big hedge funds and venture funds get in, but they do certainly get in at prices that are often much lower than the public price.
And yes, I suppose if you divide the share price by the number of companies in the portfolio you get something like 21 cents (actually, it’s more like 18 cents now) — but that’s obviously not the same as saying that you’re “buying Palantir for 21/18 cents.” If you want to do the math, you could say that if Palantir is about 15% of their portfolio (which it is, according to their valuation) and the Palantir investment is worth roughly $42 million… and since GSVC trades at a discount to NAV you can “buy” that chunk of Palantir for about $27 million (that’s 15% of the current market cap of GSVC), so effectively about $1.40 per share of your GSVC investment is tied to Palantir at the current price. (and if you’re counting, about $3 is tied to Twitter).
Weak investor sentiment for tech and “cloud” and “social” and startups means that now, when there is little anticipation for hot IPOs, might be a decent time to start researching a stock/fund like this… as long as you can be patient and wait it out, and live with it if TWTR falls another 50% and drives GSVC down again before the next moneymaker hits their portfolio (assuming, of course, that you like their portfolio companies and their investment strategy). Could be that Palantir becomes such a portfolio-changer for them, but it may not (or it may not happen quickly — Palantir is a big company and could have gone public well before now but has reportedly continued to resist an IPO), or that Dropbox will catch a wave of IPO enthusiasm before long, but market sentiment seems pretty tepid to such deals right now — from what I can see there are not a lot of big, booming IPOs on the horizon other than Alibaba (GSVC has no Alibaba position, just to be clear).
So… interesting, but no rush that I can see. They are tiny, they are not a control investor so they can’t force IPOs, and they seem likely to ride the wave of IPO and “new tech” sentiment… they said they fully intend to pay dividends if their realized gains from the portfolio warrant it, but that hasn’t happened yet in their three years as a publicly traded BDC. Seems to me we can take our time thinking about GSV Capital. What do you think? Have any feelings about the next wave of tech IPOs, or venture capital investing? Let us know with a comment below.