How to invest in private companies
Published Wed, Apr 25, 2012 Updated Tue, Feb 16, 2021
Everyone understands the basic idea behind investing in public companies and becoming a partial owner in those corporations. Fewer people understand how to invest in private companies, although it can be a very attractive investment strategy, if done correctly. If you are interested in investing in private companies, there are a few tips for you to keep in mind, for more information CSS Partners has a wealth of knowledge and resources to check out.
When you want to invest in companies, sometimes you just have to be approached in order to get a chance to make a deal. Conversely, if you see a smaller business that you are interested in becoming a part owner of, simply contact the owner. In many cases, the owner may be looking for a way to pay for expansion or to simply pay bills. When this happens, your approach may be welcomed by the business owner. If not, the worst thing that can happen is that the business owner will say that he or she is not interested.
Use venture capital matching services
There are a number of services online that help match up venture capitalists investors with companies who need an influx of cash to be successful. Many business owners have great ideas and the persistence to make them work. They simply need capital to make their businesses work better. You could sign up for one of these services and pay a small fee to be connected to entrepreneurs who need money. You’ll have a chance to review business plans and ideas before making a decision. If you don’t like any of the business models, you don’t have to invest your money. You should only invest when you feel comfortable.
Ask the tough questions
When you are looking for a company to invest in, you can’t simply put your money into the first company that comes along. If you really want to find a good private company to invest in, you’re going to have to ask the tough questions. Arrange a meeting with the entrepreneur who wants your capital. Review his business plan and ask tough questions about the business model that he or she may not be prepared for. Find out what he or she plans to do if things go wrong. If you ask the tough questions and the entrepreneur answers them well, then you should have a good feeling about investing in the business. Most entrepreneurs are blind to the possibility that their idea may not work as well as they thought. If you can find one who is realistic and knows that things sometimes go wrong, you have a better shot of doing well in the long run.
Once you find a private company that you want to invest in, you’ll need to negotiate the terms of the agreement. During this part of the process, you need to get a fair portion of ownership in the company for your investment. Think like a Dragon from Dragon’s Den and be a hard negotiator. Some entrepreneurs may not be willing to give up much ownership in their business in exchange for capital. While you don’t want to take advantage of the business owner, you want to be able to get your fair share. Then when the business takes off, you’ll be able to reap the rewards.