Dear Startup Investor,

David here.

We’re fast approaching one of the strangest and most divisive presidential elections in history.

No matter your political affiliations, if you want to be a serious investor, you’ll need to learn how to make decisions in a rational way (much like how large corporations are run).

In fact, instead of making decisions based on what you think will happen, you should think probabilistically. In other words, you should take some time to determine what the value of your investments might be given each potential outcome.

The presidential election is a great example. Many people believe Biden is a shoo-in and will win with near 100% certainty. But here’s the thing: Many people believe the exact same is true about Trump.

The fact is that they’re both wrong. U.S. elections are uncertain events, and are the result of millions of dynamic variables – especially during a year when there is a global pandemic with no certainty of a vaccine on the horizon.

To be a great investor, you should think logically first and foremost. The best way to do this (since it’s difficult to remove personal bias) is to look at what the money is telling you.
Text Box: Wisdom of Crowds: The idea that large groups of people are collectively smarter than individual experts.
In the stock market, the wisdom of crowds has proven time and time again that it can outperform some of the most talented hedge fund managers in the world.

This is exactly what Warren Buffett had in mind when he placed a $1 million bet that over 10 years, the S&P 500 would outperform a collection of top-performing hedge funds. The bet began in 2008, but it was considered a done deal long before its December 31st, 2017 deadline. Buffett won by a wide margin.

There’s an online platform called PredictIt that treats political events like their own miniature stock markets, with each outcome having its own “share price.” The higher the price, the more participants have “invested” in that outcome.

This “prediction market” currently has Biden at a 59% chance of winning and Trump at 44%. Again, this isn’t the platform’s “opinion,” but rather the probability of each outcome based on thousands of individual bets that have been placed on the results of the election.

Still, anything can happen in the months to come; if you asked me to hang my hat on one pick or another, I wouldn’t. With that in mind, let’s unpack what a second-term Trump presidency and a Biden presidency would mean for angel investing.

Factor 1: SEC and Regulations

If Trump lands the presidency, we can expect the deregulation framework at the SEC to continue. The SEC’s top officials are appointed by the President, so what happens next could vary widely based on who holds the Oval Office.

Republican presidents (including Trump in his first term) tend to err on the side of allowing individuals to invest in startups at their own risk. Democrats tend to lean the other way, with more protections for unaccredited investors and limited access to certain opportunities.

It’s noteworthy, however, that the Jumpstart Our Business Startups (JOBS) Act, which allowed for the general public to invest in startups via crowdfunding, was passed during Obama’s first term with nearly unanimous support.

Advantage: Trump
Factor 2: Immigration Policy

Aside from being one of the election’s more divisive topics, immigration is instrumental to the entrepreneurial ecosystem in the United States.

Nearly half of all top Silicon Valley startups had at least one foreign-born founder; entrepreneurial rock stars like Elon Musk (PayPal, Tesla, SpaceX), Peter Thiel (PayPal, Palantir), and hundreds of others were born outside the United States.

Although illegal immigration has produced very few high-tech entrepreneurs, legal immigration has been a significant boost to the U.S. economy. In short, it’s a factor that leads to increased economic prosperity, and that is absolutely instrumental for the long-term competitive advantage of the United States.

One initiative that has been immeasurably beneficial to the startup ecosystem is the H1-B Visa program, which attracts the best and brightest minds to the U.S. and has been shown to benefit the overall job market here.

Despite having huge bipartisan support (outside of the radical fringes of both parties), President Trump has undertaken several initiatives against this program. Biden as President is more likely to support the continuation of the H1-B program, vs. Trump who will likely continue his position against it.

Advantage: Biden

Factor 3: Government Funding of Research and Development

With topics like foreign relations, immigration, tax reform, racial inequality, and many others taking center stage this year, R&D is the last thing on many voters’ minds.

Although it doesn’t have much populist support, government-backed initiatives (like the internet itself) have historically immensely valuable to the startup ecosystem. This is especially the case right now; physics as a field has not seen significant innovation in a few decades now, for example.

Much of our innovation in recent years has come from incremental improvements in the world of bits (the digital world) vs. the world of atoms (the tangible physical world), which has significantly more potential upside.

Democratic presidents have historically supported government-backed scientific research much more than Republican presidents. However, Trump’s 2021 budget recently called for a 30% increase in funding for artificial intelligence (AI) and quantum computing.

Advantage: Tie

At the end of the day, both candidates (and the parties that back them) have been on a pro-entrepreneur tear for several years now. And with the coronavirus pandemic wreaking havoc on our economy, that trend is likely to continue.

History has shown us that startups and entrepreneurs have been some of the biggest drivers of innovation, job creation, and ultimately, GDP. In the months and years following this crisis, any president with a good head on his shoulders is likely to make moves in favor of these drivers – including pushing the crowdfunding markets to new levels.

The truth is, if you want to be in the top decile (top 10%) of investors, you’ll need to cultivate one skill in particular: the ability to manage your portfolio without letting your emotions get in the way.

Learning to act dispassionately and to think probabilistically are the two best things you can do to mitigate the risks you face as an investor in turbulent political and economic times.

Look for the tried-and-true signs of success that consistently produce winners. Track records and numbers don’t lie. Founders might.

What are some of the most pragmatic and fact-based things you look for in a startup? Let me know in the comments below.

I’ll be back soon.

Very best,

David Weisburd