Whitney Tilson is out with a big pitch for Crowdability, which, like Tilson’s own Empire Financial, is now a niche publisher under the Marketwise umbrella (Marketwise has been a bit of a train wreck for investors, including for founder Porter Stansberry, but is still a very large publisher — I think Marketwise still owns half of Empire Financial, as was the case when Stansberry Research and Whitney Tilson partnered on that imprint a few years ago).

And Tilson has been pushing Crowdability of late, I guess because they’re colleagues now (Marketwise bought Crowdability in 2022)… he was selling a “TaaS 3.0” pitch a few weeks ago that was really a push for Crowdability subscriptions, and this week he’s got another pitch that he calls the “59X Backdoor”… so let’s see what the spiel is about this time.

Here’s how that presentation starts:

“Discover how a secret “backdoor” to Whitney Tilson’s recommendations could have made you 59 times more money

“(Without touching bonds, penny stocks, cryptos, warrants, options, or leverage of any kind)”

So, of course we know right off the bat that these “backdoor” investments are investments in private companies, generally crowd-funded investments through one of the many angel investing/crowdvesting platforms that are open to individual investors (WeFunder, Crowdstreet, Yieldstreet, Seedinvest, Kickstarter, Startengine, etc., there are dozens of different ones, many focusing on different types of companies or offering different types of exposure to the companies they raise capital for). That’s what Crowdability is, it’s an education platform for private investing and a seller of private investment advisory services — they recommend private investments, similar to how a traditional investment newsletter recommends stocks or ETFs or other strategies.

Today, they’re selling subscriptions to Crowdability’s Private Market Profits, which essentially profiles one company a month for a potential private investment (the price is $995 for two years in this particular deal — no money-back guarantee, but there are all kinds of terms that would let you exchange the subscription price for other Crowdability or Empire Financial products if you don’t like it, or extend your subscription for free.)

Here’s a little more from the ad:

“To make the biggest gains, you need to forget ticker symbols and stocks. Instead, you need to use the secret ‘backdoor’ strategy he’ll teach you about today

“With this strategy, he claims you could’ve made 59x more money – on the same exact companies Whitney’s recommended – without touching stocks, options, cryptos… or anything else you’ve likely heard about before.

“You see, this ‘backdoor’ investment strategy has been responsible for the biggest investment gains of all time…

“This ‘backdoor’ strategy trounces the returns of stocks by a huge margin. In fact, as you’ll see here today, it can sometimes beat the returns of stocks by a factor of 100.

“And if ‘quitting’ stocks and stock newsletters isn’t crazy enough, what makes today’s message even more controversial is this:

“As Matt will explain, if you’ve choked down Wall Street’s lie that the stock market is the absolute be-all and end-all place for wealth, then get ready…

“Because, the truth is, the world’s wealthiest families have built their fortunes outside the stock market – by using this ‘backdoor’ investing strategy.”

And apparently this is an “AI” related investment…

“I’m sure folks at home have started hearing from their friends, neighbors, or even the nightly news all about ChatGPT and the promises of AI.

“Well, the opportunity I’ll be sharing today is a super high-potential AI play you can take advantage of right now. This is my No. 1 way to play the AI trend at the moment.

“But there’s also another reason for the urgency here…

“Due to the nature of this opportunity, it simply won’t be available to invest in after April 3rd, 2023.”

Hmmm… starting to sound a little familiar. We’ll come back to that in a minute, but let’s touch briefly on the general idea of this “backdoor” investing… they build up this “59X” bit by comparing private investments to (later) public investments in the same company…

“… for readers of your Empire Investment Report, your Ambarella recommendation produced a 72% return in exactly three months.

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“For context, that’s a 772% annualized return. That’s better than “pretty good.” That’s downright awesome.

“…if you’re really looking to make the most money – if you’re looking to accelerate the creation of wealth – you need to forget about ticker symbols for a minute.

“Instead, you need to use the “59x Backdoor” strategy I’ve been telling you about. That’s how you can profit the most from companies like Ambarella.

“… what most folks don’t know is that deep inside Ambarella’s corporate DNA was a little-known code. It’s something I call a “Backdoor Code.”

“And to be clear, this isn’t a ticker symbol. And it’s not something you can look up on Yahoo Finance. But I have its code right here…

“Ambarella’s ‘Backdoor Code’ was 0001280263. You can see it right on the SEC’s website. That’s the U.S. government website for the Security and Exchange Commission.

“And if you’d known about this code – and gotten in early on Ambarella – your return would have been 7,361%.

“And again… this is the same company Whitney recommended. But investors in this code got radically different results….

“With Whitney’s ticker-symbol recommendation, his readers saw a return of 72% – that’s great for the stock market.

“But by using the ‘backdoor’ I’m sharing with you today, investors could have pocketed a mind-blowing 7,361%.”

And they make essentially the same argument for several other very successful companies, including Netflix and Apple… so we should make just a couple points, in case they’re not already ridiculously clear to you.

First: Uh, NO… that’s NOT the same company. OK, technically it’s the same company… but that’s like saying that when Sergey Brin and Larry Page were Stanford grad students monkeying around with a new search engine project that they were still calling “backrub” in 1996, their company was the same company that went public as Google in 2004 and became Alphabet in 2015. Yes, the same corporation… but an entirely different situation. You can’t use revisionist history and imply that investing in Ambarella as a venture capital firm back in the early 2000s, is at all like speculating on a short-term Ambarella trade when it collapsed during COVID in early 2020, when the company was profitable and had been publicly traded for almost a decade (their last funding round, Series C, was in early 2006, and they raised a total of $38 million in their venture funding rounds in total, according to Crunchbase).

And the CIK number is not really a “secret backdoor code” that you can use to find the best venture investments, of course, it’s just an index number that the SEC uses to keep track of companies. Every company that files with the SEC has a CIK number, you can find them by doing a lookup by name on the SEC’s Edgar database if you’re interested — it will at least give you an idea of whether a company has ever solicited public funds, but it won’t unlock any secret back door. Any company that’s raising money from individual investors is generally trying pretty hard to get attention for that equity raise, they’re not keeping it secret and trying to fool you by hiding behind SEC filings (they might try to hide the actual financial results the SEC makes them disclose, since those are rarely impressive, so it may be wiser to follow up on their presentation or sales pitch by reading the actual SEC filings and fundraising prospectus, where they can’t be as promotional… but they won’t hide the fact that they want your money).

To sum up, this is what the ad claims…

“With Whitney’s ticker-symbol recommendation, his readers saw a return of 72% – that’s great for the stock market.

“But by using the ‘backdoor’ I’m sharing with you today, investors could have pocketed a mind-blowing 7,361%.”

Sounds phenomenal, right? Why would we not do that? Well, the missing phrase there is, “and a time machine” — so let’s fix that:

But by using the ‘backdoor’ I’m sharing with you today, and a time machine, investors could have pocketed a mind-blowing 7,361%.

And Milner goes on:

“The key thing to remember is this: If you can find the Backdoor Code to these companies…

“If you can identify the right ones…

“And if you know how to get your money in early…

“That’s how you get a shot at multiplying your money exponentially. That’s the secret to success here.”

Those “If’s” are doing a lot of work in that argument, as you probably realize, but it still gets your blood going a little bit, right? The ‘code’ isn’t hard to find, and ‘getting your money in’ is pretty easy, since companies are motivated to try to hoover up your cash and the platforms they use to do that are pretty user-friendly, it’s the ‘identify the right ones’part that’s especially hard.

Especially if you start with the realization that the best, fastest-growing, biggest-market, proven-idea startup companies aren’t necessarily available to you and I. Those companies are rarely going to make it past all the institutional investors and venture capital funds and trickle down to the “beg for cash $500 at a time” world of crowdfunding.

That’s the power of a good marketing pitch — even though if you slow down you know it’s mostly ridiculous, when you’re listening or reading you can’t help but think there’s a secret code that would let you buy Alphabet before it was Google, if only you knew.

Why do we all know who Peter Thiel is? And know the firm Kleiner Perkins? And maybe know the name of folks like John Doerr, or Bill Gurley? It’s because they’re some of the huge winners from the past 25 or so years of venture capital investing. They’re the people who made vast fortunes from venture capital investments, by finding Mark Zuckerberg in his Harvard dorm room and convincing him to move to California, giving him a few million dollars to ramp up the development of facebook. Most venture capital investments don’t work out nearly that well, as I’m sure you know… venture capital is driven by what are called “power law” dynamics and an extremely wide distribution of outcomes — one hit investment generally leads to the success of a fund that has made 15 or 20 investments (and failing to hit paydirt with 5-10% of your investments leads to failure, generally speaking).

Fred Wilson has been a venture capital investor for almost 40 years now, and a few years back (2019) he posted a great comment on this called “The Hit Rate”, which (among other things) sums up the percentage of companies that generated a return of 10X from a venture investment portfolio. Venture capital funds are essentially set up to look for and rely on those kinds of companies, the ones that can generate 10X or more returns for very early investors, and they know that searching for those kinds of returns will also lead to a lot of failures. The success or failure of a venture capital fund depends, more than anything else, on the hit rate: The percentage of fundings they do that result in massive returns. And even though that’s what every VC firm depends on, the number is almost always VERY low.

We could just stick with a familiar baseball metaphor here: Home run hitters tend to strike out a lot.

According to Fred Wilson’s post, during the decade following the dot-com bust, almost all venture capital was destroyed. The percent of money that the funder invested which generated a 10X return averaged out to “zero” from 2002 to 2008 or so. Those are the “exit years” for those investments, so that very weak performance is probably mostly because they wildly overpaid, or were otherwise just wrong about which kinds of companies would be successful, from 1996-2001. By 2012-2018, that had settled in a bit, and they were again at the point where roughly 5% of venture capital investments that “exited” generated a 10X or higher return. That’s the period Ambarella was in, Tilson’s example above, they went public in 2012 when there was about a 1-in-20 chance that a VC exit would lead to a 10X or better return, and they were one of those big winners.

And that is for the venture capital funds, who by definition are managed by experts who are extremely experienced at investing in early stage companies, they are good at choosing sectors and management teams and judging their worthiness… and they play a meaningful role in the development of the companies they invest in. Venture capital firms are not passive investors, they put people on the board of directors, exercise some control, and in many cases actively mentor and develop the leadership team and help them make connections to customers and peers and key employees… or even replace executives when companies need a new strategy or new leadership.

We just can’t compare that to you or I surfing the Crowdability website or Wefunder and picking a little startup company that we think might survive, googling it for ten minutes, and then getting excited and betting $500 or $1,000 on that idea. There are sometimes successes in crowdfunding investments, and we’re only really a decade or so in to this being a wide-open world where small investors can even participate in this stuff at all, so we don’t really have any statistics… but my guess would be that crowd-funded projects have a much lower success rate than investments by venture capital funds (and I’d guess that differential is huge, I bet we’ll find that it’s more like 1 in 100 crowdfunded investments that generate a 10X return, not one in ten or twenty, but that’s entirely my guess… and probably my bias).

There was also a good Harvard Business Review article about this in 2021, “Why Start-ups Fail”, if you want a wider overview — the assessment there is that more than 2/3 of startups fail, with the measure of failure being much more generous “never deliver a positive return to investors” (instead of “doesn’t generate a 10X return).

The ad doesn’t try to hide that, of course, they just don’t emphasize the high failure rate:

“… the ’59x Backdoor’ strategy is about getting in on the world’s most exciting companies – way, way before other investors.

“This is about getting in at a company’s earliest stages – after an idea is born, and maybe even after its business model is proven and after sales start coming in… but before the company trades on a public stock exchange.”

And Whitney Tilson does highlight one of the studies that drew attention to venture capital recently:

“A research firm named Cambridge Associates – this is a prestigious financial advisor with clients like The Rockefeller Foundation, Harvard University, and the Bill Gates Family Office – recently released a study.

“Essentially, it tracked investment returns over a 25-year period…

“And it compared returns from stocks, bonds, and returns from private investing.

“And as you can see in the chart here…

“Over a 25-year period, venture capital, or private investing, was the highest-returning asset class by far.

“Stocks and bonds returned low single digits….

“But investing in private companies returned an absolutely incredible 58% per year!”

Well, sort of — that was one small subset, the earliest stage private investments made by venture capital funds, and that’s probably the best number in these historical studies of past venture capital performance. Cambridge Associates is the aggregator of that data, and they publicize benchmarking numbers that institutional investors use to decide how to allocate capital (like all other investors, institutional investors are human beings, and they tend to chase returns, buying whatever it was that did really well recently). They release similar data every year, and break it up in lots of ways — a year ago they would also have told you that the net return for investors in venture capital funds as of that point was 15.94% a year for funds that were raised in 2000, 0.59% for funds that were raised in 2006, and 16.22% for funds that were raised in 2015, for example. There’s a wide array, and in most cases those were probably driven by a few huge wins from a breakout sector that drove a lot of IPOs, or some hugely successful venture-backed company like Facebook or SpaceX or whatever. And those are investments made by venture capital investors, who often manage several funds, each of which invests in dozens of startup companies.

The ad also rolls through how this “restricted” kind of investment was unfairly kept from you for decades…

“A bill Congress pushed through a few years ago – H.R. 3606, or what’s commonly known as the JOBS Act – is finally tearing down all the Kennedy-era rules…

“For the first time in nearly a century, now you can make ‘pre-IPO’ investments – you’ll be able to access the most profitable investment strategy in the history of the market.”

That’s been the law of the land for a little more than a decade now (it’s PL 112-106, if you want the details), so it’s a little bit of a stretch to say it changed “recently,” but it has taken time for a more robust marketplace to emerge (including Crowdability) to take advantage of this new ability to publicly sell shares of small companies to individual investors. Crowdability launched in 2013, in case you’re curious.

More from Matt Milner:

“Jeff Bezos’ Google stake was nothing compared to the wealth he generated from Amazon, he founded Amazon.

“To me, the best way to get rich is to start your own company.

“But starting your own company is pretty challenging for most people. They need to have a breakthrough idea… they need to raise capital… they need to hire the right employees… they need to find a business model.

“So starting a business is NOT right for most folks.

“But the second best way to grow rich is to back somebody who starts their own company.”

I won’t argue with that, but there are shades of grey everywhere. It’s a lot easier to build a business that is moderately successful, and generates an income for you, than it is to start a rapidly growing business that becomes very large … and it’s also a lot easier to invest in a local restaurant where you know the chef and the manager and visit every week, even if it probably won’t be super-profitable and most new restaurants eventually fail, than it is to invest in a startup that might develop a product or service that will catch on and generate a huge return. The more you bet on the distant future instead of the reasonably visible opportunities that you understand, the harder it is to bet wisely.

There are plenty of other examples in the ad of the attractiveness of venture capital investing, too, we’ll look at just one more…

“… let’s look at a company called Talkspace – the ticker is TALK.

“TALK was recommended around $10 a share in the Empire Investment Report in the spring of 2021, and it was closed several months later for a loss of about 50%…

“No one likes a loser. But from a portfolio management perspective, selling at a loss of 50% was a very good strategy…

“Because as you can see here, the stock got crushed after the sell recommendation – it’s down under $1 per share now…..

“… it didn’t have to be a loser, at all…

“Despite regular investors getting crushed in the public stock market, Talkspace private investors are still sitting on huge gains…

“See, Talkspace had a Backdoor Code, too – CIK number 0001803901….

“Investors who got into Talkspace using the CIK code, Pre-IPO, are still sitting on gains of 172%.”

So, to be clear: Talkspace, which basically provides psychotherapy by video call (not unlike Teladoc’s Betterhelp and others), was not, as far as I can tell, available as a “crowd funded” investment, even though that would have been perfectly legal — they raised money first from “micro venture” funds back in 2012-2014, then raised escalating amounts of money several more times, culminating in a Series D round in 2019 that raised $50 million from some big and well-known venture capital firms, including Revolution and Norwest Venture. In total the venture investors put about $107 million into Talkspace over a period of nine years… and then they got lucky, and the COVID pandemic exploded the demand for online therapy at the same time that there were hundreds of SPACs bouncing around with capital to throw at hot ideas, and they were able to merge Talkspace with a SPAC to go public and raise more money.

The plan was for existing Talkspace investors, mostly VC firms and company founders, to own 51% of the combined company, though that shifted a bit because the SPAC holders pulled out and TALK ended up with only about $250 million in funding, not the $700 million they were hoping for. Either way, the company that was probably the biggest investor in that Series D round, Revolution, may well have LOST money on the deal at this point — they still own 7.7 million shares of TALK, worth about $5 million today with the stock at about 70 cents (though if they tried to sell it, one imagines, the price would drop pretty quickly).

TALK overall is worth $114 million today in the stock market, which is roughly the amount of cash they have on the books, so that means the company is also worth roughly the sum of all the pre-SPAC venture capital money that was invested in it over a decade, and much less than the roughly $400 million that has been invested into the company overall. Maybe some of the VC firms invested at such a low valuation that their investment is profitable even today, but probably not if they account for the costs of managing that investment. Maybe some managed to sell out of some of their holdings at a profit over the past year or so, too… but at this point, nobody is calling TALK a venture “winner” — I’d say it was a splashy but (so far) failed startup that is more of a poster child for how crazy SPACs got than it is a story of VC success.

But I’ve blathered on about this broader topic for plenty of time… what’s the “secret deal” that closes today?

We do eventually get to the “bait” for this tease:

“And now today, you’re ready to share a NEW pre-IPO opportunity with folks watching, is that right? This is a private company you’ve identified for them.

“MM: That’s correct. And that’s exactly what makes it so urgent.

“You see, with private companies, the ‘funding rounds,’ as they’re as they’re called, are very limited. So you’ll want to take action quickly, before this new opportunity closes its doors.

“Specifically, this new private company I’ve discovered is closing the doors to its most recent funding round on April 3rd, 2023.”

And what’s the company? Here’s how they put it:

“… it’s smack dab in the center of the AI revolution. And I believe anyone who gets into this company right now could be looking at gains as high as 5,934%. Or 59 times their money.

“To be clear, nothing is guaranteed in investing, especially when it relates to private opportunities like this….

“But again, because this company is private, and because its funding round is strictly limited, I can’t send it to everyone. Even though I have no financial interest in whether you invest or not, I don’t want to run the risk of flooding the funding round and shutting it down prematurely….

“… large investors can swoop in and take huge chunks out of funding rounds – fast.

“That’s why, many of these deals, including the specific one I want to share today, could realistically close any day.”

OK, so that deal is really closing today. At least for now. Those few clues and hints tell us that this must be yet another pitch for an investment in Epilog AI, which is a little company trying to commercialize a self-driving accessory that can be installed in existing cars (yes, they added the “AI” bit a few months ago… and no, I would not agree that Epilog is “smack dab in the center of the AI revolution”).

Crowdability has pitched this one before as a “Neural Vision” breakthrough, and Whitney Tilson joined in with his endorsement of it as a “TaaS 3.0” idea a few weeks ago, before re-pitching it as a “59X” idea now, as we hit the deadline.

How’s the capital raise going? Well, it was faltering back in January when the market was a little nervous, and then Tilson’s last push seemed to have some impact, Epilog was at about $230,000 raised in this round at Startengine as of mid-March, and today, as we close in on the end of this particularly fundraising (assuming they don’t extend the deadline, like they did in February), it’s at about twice that level, roughly $465,000, from 232 different investors. As of my last update, on March 16, the latest I had heard about delivery of Epilog’s first test devices for initial customers was that they planned it for April, but, no surprise, that has been delayed as well, they’re now saying they’re “still testing” and expect SideCar (that’s the name of their little device) to be available in May or June (a few weeks ago they were waiting for parts, so perhaps “still testing” is a step forward).

You can see my March 16 article here about Epilog AI and Tilson/Crowdability’s last pitch for that private investment. It’s a cool engineering project and maybe it will be a useful product, or, probably more likely, have a patent or a design that’s worthy of being acquired someday by a much larger company that needs to add a little something to its self-driving product, but it still strikes me as an “oversold” idea and an extreme long shot at this point, so I haven’t been interested in investing. Your mileage may vary, of course, here’s part of what I wrote in the Quick Take for the Irregulars in that TaaS 3.0 article a few weeks ago:

“Matt Milner at Crowdability thinks Epilog’s high-definition camera system for autonomous driving will be better than the lower-resolution systems at Tesla or LiDAR-based self-driving sensors, and the world will beat a path to their door. I’m skeptical that higher-resolution cameras automatically mean a better self-driving system, but they are in the process of building and soon selling their first 1,000 test units of the SideCar device — that’s their actual product, which is designed to upgrade existing cars with a replacement for the camera module behind your rearview mirror that offers some version of autonomous driving (I’d call it “souped up cruise control,” but perhaps that’s unfair). My impression is that they’re tiny and out of their league, particularly when it comes to AI processing power or accumulated test miles for their “autonomous driving” system, and I’d worry that drivers who install this are putting a lot of trust in something untested, especially if it’s “taking over” your car’s cruise control, but sometimes dabbling in entrepreneurial optimism and backing a cool idea is fun… I wouldn’t throw money at this, but if you’re intrigued I’d just tell you not to expect actual profits or an “exit” anytime soon, and go into it assuming that you’re really buying a $350 T-shirt, maybe that will make it easier to be patient.”

There are over 100 current projects seeking funding on StartEngine, in case you’re curious — including StartEngine itself, so you can buy into the platform if you like, not just speculate on the companies they raise money for (and there are plenty of other platforms beyond Startengine). I can’t say that any of the businesses currently raising money jumped out at me as being intrinsically exciting, but it could be that I’m just too boring or risk-averse to jump into this kind of venture capital investing. Crowdability will no doubt recommend investments on several other investing platforms, too — in the past we’ve covered their pitches for Solstar and 20/20 GeneSystems, and I know they’ve also pitched LiquidPiston, which is a heavily marketed pre-IPO investment… none of them have gotten particularly close to an “exit” or provided liquidity to existing investors as far as I know, but that’s a pretty small sample size.

And, to be fair, Crowdability does highlight that this is the kind of thing that you might use as an “accelerator” for your investment portfolio, not as a core holding — they suggest investing 5-10% of your portfolio in these kinds of “backdoor” pre-IPO investments. That’s a lot of risk for me, particularly because I like the much fuller disclosures and communications I get from public companies, but perhaps it will be reasonable for you.

The odds for venture capital have worked out very well for the best venture capital funds and their institutional investors, and have done so for a very long time, boosted, in the last decade, by the fact that the best private companies can stay private much longer, and startup investing might work for you, too… but given how much lower-quality most crowd-funded investments appear (the best ideas are still more likely to go to the big venture capital funds that can help them grow, and write $10 million checks instead of $1,000 checks), I’d say they probably won’t.

When it comes to startup companies that are seeking capital, investors like you and I would be the smallest participants, with the least leverage and the lowest amount of information… and unlike with public companies, of course, we are stuck — if we change our minds and decide the company is likely to fail, we can’t sell or back out… in almost every case there’s no one to sell to unless the company is a huge success and goes public (or gets acquired), and for most private companies there’s no marketplace for selling your shares, even if someone else might be interested in buying. I would be nervous about tying my money up in a private company unless I was actively and personally involved in the company, and felt like I understood it as well as the Board of Directors.

To put it another way, I think angel investing and startup investing is a great hobby, for those who love building businesses, want to try to get more engaged with those businesses, or like fairly expensive hobbies. I will loudly defend your right to buy into crowdfunded startup companies… but if you’re not looking for a hobby, and you don’t have extra cash available that you can really afford to lose, preferably enough cash that you could distribute your bets among at least 15 or 20 private startups, you probably still shouldn’t do it.

Enough of a buzz kill for you? Sorry, when folks pitch an idea as “59X better” I want to push back, maybe even a little too hard, to counter that hype. Sure, it’s possible to make money in private investments. It’s also possible that your cousin’s new winery, or the cat cafe you were thinking about opening with your daughter in law, will be a profitable hit. Just don’t bet the 401k on it.

Have any interest in crowdfunding investments? See any offerings out there that you like, or have stories of great success or failure to share? Let us know with a comment below… thanks for reading!

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