Garbage in, garbage out
Beware of bad actors
A very small local company that I invested in over a year ago just went public via a direct listing on NASDAQ. When I originally invested, I thought the idea was sound, and I recognized a board member or two as solid, successful business people. Fast forward to today, and I have gleaned a few insights on this company, and not many of them are good.
I’ll outline the facts as I see them with the intention of providing you with a cautionary tale when you consider a private investment on one of the public-facing platforms or directly.
The focus of the company is single-unit real estate rentals that can be placed on the Airbnb platform and AI-influenced tech to supposedly give investors in such properties an advantage. Two years ago, this was somewhat intriguing. Today, it looks like a saturated market that is facing huge headwinds from higher interest rates. While this situation may improve in the future, it may take a while for this thesis to play out. So, the economic environment has a direct negative impact on this business model.
Schlocky messaging and broken promises. The company “teased” potential investors by promoting a number of free nights in one of their investment properties for various levels of investment. Judging from remarks on a Reddit feed mentioning this company, they are not following through on this promise.
Press releases that appear to be vapor, if not outright fraud. Mentions of large capital commitments from third parties that were intended to be used for property purchases have apparently never been put to use for that purpose. It appears that they have bought maybe one property in two years. Another press release promoted their purchase of a failed real estate crowdfunding portal in unsubstantiated and bloated language. Presumably to drive up hype.
Early and frequent promotion of the fact that they would soon be listed on NASDAQ, which they have done, but to what end? Few quality private companies look to go public before they have established themselves and proven their business model.
There may be technology here worth something in the future if they license it to others, but if it were really so valuable, where are the fantastic real estate investments they’ve promised?
Increasing verbiage on the website and other communications that reference the AI focus of the tech. Bandwagon, anyone?
Although the stock shot up to around $500 on its first day of trading, it closed the day at around $100 and is falling as I write this. I expect it will find its footing around $10 / share, or what I paid for it.
What are the lessons here?
Just like public companies, there are a lot of promises and optimistic projections from private companies at virtually every stage of their maturity. Sometimes they pan out, sometimes they do not, and sometimes blatant misrepresentation or fraud is taking place (think Theranos). There is way less regulation over private companies and much less disclosure, so you just have to accept the fact that, as an investor, you will not win them all. Take your licks and move on.
Trust your gut. This is easy to say in hindsight, as my stomach didn’t start turning until I saw very little real execution, even in light of some major outside capital (reportedly $200 million +). Hype-filled press releases and website messaging were other red flags, so trust your spidey sense.
Spread your risk exposure. Consider using managed private funds to accomplish your objectives instead of individual company investments. If you are intrigued by a particular company on a platform like StartEngine or Republic, go for it as a compliment to your portfolio, but only use play money, not serious money.
I have purposely not mentioned the company under discussion, but if you figure it out, know that I currently have a neutral-to-bearish position in the shares. I would not advocate buying shares.
Until next time,
Go out and play!
—Doug