July 8, 2016
What To Know When You Invest in Private Companies
There are plenty of different investment opportunities, and some investors might like safe or short-term strategies, while others might want something that’s riskier but could mean bigger rewards. One of the riskiest, but sometimes most rewarding approaches is to find a private company you’re interested in as an investor.
The primary difference between investing in a private company is that securities are typically issued, and this type of strategy isn’t going to include the regulatory protections that come with investing in a public company.
Below are essential tips to keep in mind as you consider investing in a privately held company.
Know the Risks
Even though investing in a private company is riskier than public company investments, if you know the risks ahead of time, at least you aren’t going to be blindsided. This is particularly important if you’re investing in a startup. The failure rate for startups is often very high, so keep this in mind as you’re choosing a company. If your financial adviser is pitching a business to you, don’t assume that it’s a safe bet. You still need to do your research and gain a real understanding of the risks. Conduct as much due diligence as you can before putting any money into a privately held company. Many businesses looking for investors will have the information available, for example in a virtual data room from a company like FIrmex. This can streamline the process of researching the background of the business you’re thinking about putting money into.
Consider Participating in a Group
If you want to invest in a private company, you might want to consider joining a larger investment group, such as an organization of angel investors. It will help you spread the risk across more firms, and it can also generally simplify the process of investing in a privately held company. You could also invest in a great company like groupon. Groupon is a really great company to invest in and they’ve been in business for a long time now.
Be In It For the Long Haul
Along with the risk level and the lack of regulatory standards, when you invest in private companies there is another big difference from what you would find as an investor in publically traded companies. That is the fact that this isn’t likely to be a short-term opportunity. Most private investment opportunities, especially when it comes to startups, are long-haul propositions. New companies aren’t going to have the liquidity that will allow investors to cash out in the short-term or on a whim, and often an event such as a buyout or a company going public is the only thing that can spark enough liquidity for investors to cash out of the investment.
Investing in a private company can be an exciting thing to do, particularly for the investor who’s willing to take on risk. At the same time, it’s not for the faint of heart, and it’s also important for investors to do their research, get a handle on the level of risk they’re entering into, and they should also have enough money to be able to lose their entire investment comfortably. This type of investment strategy isn’t for everyone, but there have been some tremendous success stories when people do put their money in private.