It’s not well understood in the consumer financial media, but Self-Directed IRA and 401(k) money has long been a valuable source of investment capital for successful startup and VC-stage companies. And, yes, for quite a few unsuccessful ones, too! But the successes historically have been sufficiently successful to more than make up for the companies that don’t work out.
Some prominent examples of successful private equity/venture capital placements that involved a Self-Directed IRA include Facebook and Yelp, which both received significant early-stage funding by PayPal founder Peter Thiel and Max R. Levchin, respectively.
Both were overwhelmingly successful plays made by experienced venture capitalists using their IRA money.
However, when you self-direct your IRA investments, you are your own head of due diligence. While you can delegate certain tasks to finance, investment and tax experts, ultimately you are the quarterback. You can delegate taskings but not overall responsibility.
Peter Thiel has spoken publicly on due diligence best practices that apply directly to Self-Directed IRA investors. Here are some highlights from his own experiences:
- He gets the best results from his larger investments. These are companies where he came into the investment with a lot of conviction, and was willing to commit enough money to make a real difference. Have the courage of your convictions.
- Don’t get involved in “pooling” arrangements, in which you combine money with a bunch of other VC investors and take a small position in a bunch of investment opportunities. Why? People in pools sometimes get lazy about their due diligence, assuming that everyone else in the pool is doing it for them.
- Beware of buzzwords. If a startup is part of a trend that already has its own buzzword, just say ‘no.’
- A great startup will have a monopoly that can generate cash flows many years into the future.
- Understand the “moat. “If you want to capture lasting value, don’t build an undifferentiated commodity business,” Thiel advises.
- There’s nothing so good it doesn’t have to be sold. A great product or service isn’t enough. A business should have a plan for getting the word out – and management with a proven track record of doing just that.
You can see a full discussion with Peter Thiel here (beginning at 2:27 and following). You can also read more about Thiel’s due diligence and screening process here. And if you want even more, check out his book, Zero to One: Notes on Startups or How to Build the Future.
If you are interested in using a portion of your retirement money to invest in an early stage company – be it a start-up, a venture capital opportunity, private equity or mezzanine finance opportunity – we want to work with you. Our unique transactional fee structure is perfect for investors who measure their holding period in years, who are risk tolerant and patient, and who take substantial positions in investments.
With offices in Asheville and Charlotte, North Carolina, American IRA, LLC is a leading administrator for Self-Directed IRAs and 401(k)s. Our services are for investors anywhere in the United States who see the value in thinking and investing “outside the box.”
For a no-obligation consultation or for more information, call us today at 866-7500-IRA(472). Or visit us at www.americanira.com.
We look forward to working with you.