Are All the Big Gains Gone in Private Companies?

Mar 22, 2024
Are All the Big Gains Gone in Private Companies?

To kick off the year, I wrote on January 3rd Outer Limits — 2024 Will Be Chaos — Here’s How We’ll Come Out Ahead.

I explained how the market was pricing in six or seven rate cuts in the Fed Funds rate, which would amount to a 150 or 175 basis point reduction.

I also said that it wouldn’t happen. “It’s wishful thinking,” I wrote.

I made the point that “despite what we hear in the news or from the government, inflation is everywhere. It hasn’t been tamed. We all feel it every day.”

I went further:

“Any decrease in the Fed Funds rate will result in increased spending in the market. The reason is because lower interest rates increase disposable income and increase consumer spending. That fuels more inflation.

It also results in an increase of purchases of things like real estate and automobiles, which are both interest rate sensitive.

And that’s why the Federal Reserve won’t be cutting the Fed Funds rate six or seven times in the next 12 months.

If there’s one thing we know about Fed Chair Powell, it’s that he is hell bent on shutting down inflation… no matter how much damage it has on the economy or the stock markets.

This means that if there are any interest rate cuts, they will be limited — far less than what the market has priced in. I’d say 75 basis points or less.”

So I wasn’t surprised at all when the Federal Open Market Committee (FOMC) came and went this week with no cut in the interest rates.

Fed Chair Powell admitted that inflation has been stickier for far longer than has been anticipated. He went so far as to say that policymakers shouldn’t be “dismissing data that we don’t like.”

Now, the consensus is circling around: only three rate cuts this year, which would result in a 75 basis point drop in the Fed Funds rate, just as I’d predicted at the beginning of the year.

I’m not going to run a victory lap, though. A lot could happen between now and December, but it’s already clear that interest rates won’t fall anywhere near as what was expected. 

And in an election year, we shouldn’t be surprised at all if the Fed suddenly drops the Fed Funds rate by 50 basis points in the fall… in hopes that it will goose the stock market heading into the elections.

I’m reminded of my list of “wild cards” — of things that would be unexpected but could happen between now and November (these are in my January 3rd issue). It’s important for us to stay on top of the market, and not get blindly caught up in this bubble-like behavior that we’re seeing right now in a very limited number of stocks.

Lots of fun and interesting questions about AI companies and private investments this week, as well as one about the sinister WEF that some might find interesting.

Have a fantastic weekend.


NVIDIA’s Silent Partner?

Great having you back, Jeff. I had a question regarding Nvidia’s silent partner. Do we know who they have partnered with to bring their chips to market? Thank you for your time. — Jeff R.

Hi Jeff,

I’m glad that you found me again, and I’m very happy to be back at it. There are just too many exciting things happening right now to be sitting on the sidelines.

I’m not sure of the “silent partner” reference. It kind of sounds like a term designed to disguise the name of an interesting company.

But if I had to guess, it is a reference to Taiwan Semiconductor Manufacturing Corp (TSMC). TSMC is the world’s largest semiconductor manufacturer. It produces semiconductors on behalf of other semiconductor companies, specifically “fabless” semiconductor companies.

Fabless means that a semiconductor has no semiconductor fabrication plants. (You can find a good rundown of this topic right here, in Outer Limits — The $7 Trillion Investment of a Lifetime.)

NVIDIA is a fabless company. It focuses on research and development, design, and ultimately sales and marketing of its semiconductors which are all manufactured by TSMC.

I remember back in March of 2019, NVIDIA made a $6.9 billion acquisition of another fabless semiconductor company — Mellanox — which was a data center-centric semiconductor company. Very smart acquisition at the time by NVIDIA, done before NVIDIA became the most valuable semiconductor company in the world. I suspect that deal would have met heavy regulatory scrutiny if it were done this year, so it’s smart that NVIDIA got the deal done back then.

And just like NVIDIA, all of Mellanox’s semiconductors were/are manufactured by TSMC. This is true for so many semiconductor companies, as well as other tech companies that design custom semiconductors for their products.

Some examples are Apple, which uses TSMC to manufacture key semiconductors for its iPhones, iPads, laptops, and other consumer electronics devices.

Meta, Amazon, Microsoft, and so many others also use TSMC to produce their own data center semiconductors, most of which are designed with AI in mind.

So my guess would be TSMC, NVIDIA’s most important partner for its semiconductors.

Big Gains Are Gone?

If this company GROQ is already a $1B dollar company, how could we benefit from it? If we could have invested in one of the rounds, I could see the value. I don’t see any value if it goes to an IPO. The big gains will have already be made. — Allan S.

Hi Allan,

I’m glad you wrote in with this question. This is an interesting topic to explore.

For anyone that didn’t catch Monday’s issue of Outer Limits — The Tech Company That Will Accelerate AI I recommend doing so if you’re interested in artificial intelligence.

Allan, I’ll start with a question. If a $1 billion company can grow to $10 billion in valuation, would that be an attractive investment to us? Or if it grew to a $30 billion valuation, would we be interested in that company at a $1 billion valuation?

It’s a rhetorical question, of course. But I asked it just to provide a framework of how we can think about valuations, growth, and whether or not an investment opportunity still has potential for attractive returns.

Of course, the perfect time to have invested in Groq would have been at the Series A round, back in 2016 when it was valued at only $30 million. But the reality is that only two large venture capital firms participated. (Note: Groq is still a private company.)

If we were back in the late ‘90s, a company like Groq, which is growing like wildfire, would almost certainly be going public. But in today’s environment, venture capital and private equity firms work very hard to keep companies like Groq private until they become worth $10 billion, $25 billion, or $50 billion companies. Doing so allows them to capture the majority of the value… before taking the company public and selling their ownership. (I talk about this in the Brownridge special mission video, Changing the Private Investing Landscape, for those interested.)

It's not very fair, but that’s the reality right now.

It’s also why I strongly believe that building a portfolio of high-growth, high-potential private investments is so important as part of an overall asset allocation strategy. Unfortunately, this is easier to do for accredited and high net worth individuals. But it is not impossible for normal investors.

Thanks to crowdfunding regulations, normal investors can gain access to private investments at very low valuations. They are more risky at those stages, compared to when a company becomes worth $1 billion. That’s why taking a portfolio approach is so smart when investing in private companies at early stages.

If I could help facilitate a $5 million Reg CF offering in Groq at a $1 billion valuation, I’d do it in a heartbeat. Why? Because ultimately, I believe that Groq will be worth many multiples of that. It will likely be acquired, but it may very well make it to any IPO down the road. 

Either way, this is an exciting high growth company that has a very bright future.

Will NVIDIA Acquire Groq?

Jeff, great article about Groq. As an acquisition target, is Nvidia a possible Buyer? Or, is their AI GPU system not compatible with the LPUs of Groq? Look forward to more updates on this next giant leap. Thanks for sharing. — Diann C.

Hi Diann,

Smart question!

Groq’s LPUs would be very complimentary to NVIDIA’s GPUs. As I wrote on Wednesday in Outer Limits — “Everything That Moves Will Become Robotic,” NVIDIA’s GPUs are the workhorses of artificial intelligence. Specially, they are critical for training large AI models.

Groq’s semiconductors are different, however. They are designed for inference. They take a trained AI model, intake new data, and then infer the optimal course of action, or predict the most likely outcome given the new information.

Groq would therefore be an ideal target for an acquisition by NVIDIA. But that doesn’t mean it will happen.

The reality is that NVIDIA has become such a dominant force in the market that every deal will be heavily scrutinized by regulators. One could argue it has too much power now. For example, an acquisition of competitor AMD would never get antitrust approval.

With that said, we can imagine that there are a bunch of other semiconductor companies that would be interesting acquirers of Groq. It could be AMD, Intel, IBM, Broadcom, Qualcomm, or any number of smaller fabless semiconductor companies.

Either way, we’ll be watching closely. If a public company did acquire Groq, we might want to be invested in that public company because of Groq.

Best Approach to Buying Private Companies?

Hi Jeff, I'm seeing a lot recently about Figure AI and Groq. You have mentioned them, and seem encourage about their potential, but not come out endorsing them at this time (which I know will come). It seems like Forge is the place to invest but it looks like we have to bid on them, as the most direct approach to buy, but how do we know what that would be? Thanks again for all your insight from an old Brownstone Lifer! — Bob L.

Hi Bob,

These are definitely two companies to watch closely, for all the reasons that I’ve written about.

While I’ve been tracking Figure AI closely, I’ve been less impressed with the company than Groq. Figure AI is the nearest competitor to Tesla’s Optimus, but it is still way behind Tesla. It is well funded right now, which is why we want to keep an eye on it.

Groq is on fire right now, and very impressive, but it is still a private company, so investment opportunities are limited right now.

And you’re right, Forge is a place where accredited investors might be able to purchase shares in Groq, and many other private companies, despite being a private company.

We can think of Forge Global as a secondary market for the shares in private companies. It is a marketplace that looks to match sellers and buyers. Employees of a private company, or even funds that hold shares in a private company, can register their interest to sell those shares in that private company for a specific price. Buyers can do the same. If both parties come to an agreement on price, Forge Global can help to facilitate the exchange of shares.

It is not at all like purchasing stock through an online broker. It is a complex process that requires the private company to approve the sale from one shareholder to another buyer. Shares need to be transferred legally, and the process takes time. But it does work, and it can be done.

One thing that all investors should look out for is the valuation that shares are offered at. Let’s use Groq as an example. Its latest funding round resulted in a $1 billion valuation. But sellers might be asking to sell their shares at a $3 billion valuation. Investors that don’t understand the valuation of the most recent round, and the current status of the company, can mistakenly overpay, by a lot, for shares in a private company.

Said another way, it is very rare for shares in private companies to be offered in secondary markets that are undervalued, and it is normal to see shares on offer that are overvalued. Smart investment decisions can only be made if the investor has enough information to determine if the valuation is reasonable for the shares on offer.

Please don’t purchase shares in a secondary transaction without understanding the key metrics like price, valuation, and any past or present funding rounds.

Bob, a better approach to purchasing shares in private companies is to do so in a formal fundraising round. That could be a venture capital led priced round, or it could be a formal crowdfunding raise with either a priced round, or one that is convertible with a pre-determined valuation cap. That way, all investors are getting in at a known valuation (or better), and there is enough information to determine that the valuation is reasonable at any given point in time.

The Devil’s Den

Greetings Jeff! If I’m not mistaken, in the past, you have attended WEF events in Davos. If so, what were you doing there, what was your connection with the WEF and will your participation continue in the future? Please advise/confirm. Thank you in advance. All the best. — David H.

Hi David,

No, I have never attended the WEF in Davos. And I have no connection at all with the WEF (World Economic Forum). I’ve been a vocal critic of the WEF and many of its superficial policies and tyrannical plans with its “Great Reset.”

I could write a novel about this non-governmental organization — full of unelected officials backed by powerful elites who are aggressively working towards controlling our lives and restricting our future freedoms.

For just a quick taste of what the WEF is working towards, just have a look at this short clip of the WEF’s great leader (sarcastic), Klaus Schwab, sharing with pride about how the WEF has been “penetrating” various governments around the world. You can see the clip right here.

Or if we want to get really upset, we can watch another short clip of the scientific advisor to Klaus Schwab, Yuval Harari, about what to do with all of the “useless people.”

In the video which can be seen here, he discusses the main issue that will have to be dealt with in the future, as AI and automation technologies propagate around the world. He says that the big problem will be “what to do with all these useless people.” 

He goes further to say that “they are basically worthless.” And when he considers what to do with us (that’s who he is talking about), he says “my best estimation is a combination of drugs and computer games.” 

I have to warn you, watching the video will probably make you sick to your stomach. You can see the sheer disdain and contempt with which is sees the rest of us, the people that are not in the “elite class.”

It is frightening that these are the types of discussions that are held at the WEF.

With all that said, it’s not unthinkable that I might attend one day, but it would be purely for research. That said, I don’t think I’d fit in very well…

There is immense power and wealth hidden behind the WEF, Klaus Schwab, and his minions are just what we see publicly.

For anyone interested in understanding which public figures have been “programmed” at the WEF Young Global Leaders program, the Malone Institute did a great job compiling the WEF graduate lists. The lists can be found here.

Welcome to the Outer Limits with Jeff Brown. New reader? We encourage you to visit our FAQ, which you can access right here. You may also catch up on past issues right here in the Outer Limits archive.

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