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Investing in private companies can be a particularly opaque black box for individuals who wish to participate in this asset class. Questions abound… seemingly simple questions: what am I looking for? What are the opportunities ? What should be my expectations? How much should I invest? How can I get in?
There are no simple answers to these questions. More often than not, any response begins – and often ends with – it depends. The uncertainty can be confusing.
I have been involved in the investment of private companies for over 20 years. I learn – and sometimes relearn – something new almost every day. It’s humiliating. But it was also enriching. Over the years and through my experiences, I have come across some realizations that serve as benchmarks for my private investment activities in the future. These are what I call my five keys to success when it comes to investing in a private business.
Who you know is much more important than what you know
As a newbie to the world of private enterprise investing, I would engage in hours of research to assess the opportunities open to me… only to realize that I would never really understand them. It took me a few years, but I finally figured out that 99 times out of 100 I could get better answers and ideas by chatting with an expert for 30-45 minutes than I could get on my own in 30-45 years.
My goal is always to be the dumbest person in the room. Or on a call in these days of COVID. Experts can make me a lot smarter about something that I could never be alone.
Take advantage of the wide range of investment opportunities
Private business investments come in all kinds of sizes and structures. It has everything from venture capital to growth capital, private equity, subordinated debt and other ways to invest across the spectrum of private companies. Each type of transaction – and even each specific transaction – has a unique profile of risk-reward characteristics.
The principles of diversification that are used in an equity portfolio are also very applicable to a private company investment portfolio. It is entirely possible to invest across the spectrum to avoid a fate similar to going all-in with one hand.
Understand your limits and respect them no matter what
Investing in a private business can be a rewarding experience – financially and otherwise -. But these opportunities have a high risk profile compared to other asset classes, such as government bonds. Anyone considering investing in this asset class should limit it to a fraction of their total investable assets.
I have seen a myriad of cases over the years where investors have “tried” to invest more money in a transaction than they probably should have. It is not an asset class to overweight, especially for a single transaction. A toe in the water is much better than diving in the deep end of the pool.
Patience is a virtue you must hold on to
One aspect of investing in a private business that surprises people when they enter the field is the time it takes for an investment to liquidate. In other words, their money can be tied up for years with little or no ability to get it out. Private companies are just that – private – so unlike a publicly traded stock, you can’t buy and sell an investment when you want to.
Experienced private business investors know that it can take a long time for a business to create value and deliver an attractive return. The term “patient capital” is considered a badge of honor. There are relatively few quick home runs. It’s an arena where, overall, playing the long game pays off.
It all comes back to the people
Ultimately, success with private businesses, like many things in life, depends on the people involved. Betting on a good leadership team first and foremost is cliché, but, as they say, there’s a reason clichés become clichés. And it’s not just about the management teams… it’s about everyone involved in an investment or a business – employees, service providers, customers, vendors, etc.
Building and operating within an ecosystem of competent people is the number one determining factor that I have seen over the years for success versus no success. The best private business investors have the connections to create and maintain these ecosystems so that success follows one investment over another. To paraphrase the famous political line, it is about the people, stupid. And I like to be the dumbest person in the room every time.
One more thing to know
Investing in a private business is not for everyone. Literally, it’s not for everyone. By law and regulation, the offering of unregistered private securities can only be made to qualified investors. Information on the requirements of accredited investors can be found here:
https://www.investopedia.com/terms/a/accreditedinvestor.asp
About Merrette Moore: Merrette Moore is the Managing Partner of Tidewater Investment Company, overseeing the operations of the company. Merrette has over 25 years of experience in finance, business management and innovation. He has been involved in over 50 private investments, acting as the lead investment representative for many of these transactions. Merrette has served on the boards of directors of several private companies as executive chairman, director or observer.
About Tidewater Investment Company: Tidewater Investment Co. is a North Carolina-based investment firm focused on direct investment in small businesses as well as healthcare venture capital. Tidewater provides unique access to subordinated debt, small business private equity, growth capital and venture capital investments for high net worth individuals, family offices and small institutional investors. The company’s investment platform offers investors the flexibility to invest on a transaction-to-transaction basis without any initial long-term obligation commitments.
For more information, please visit our website: www.tidewaterinvestco.com.
Follow Tidewater Investment Co on LinkedIn by clicking here.
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