Yes, me–an LP!
So often, people hear about private investing and the opportunities to invest in growing companies–especially in technology–and think it’s “not for them”. This is a form of gatekeeping, which thankfully has seen changes in the last few years.
Private investing is literally that–investing in companies not traded on the public markets. This can be product or service companies, and include those based on technology and otherwise. While the Securities and Exchange Commission (SEC) does have regulations on who can invest in private companies and who should not invest as much, the means for doing so are heavily based on networking. Yes, in most instances, to be an LP, you should be an Accredited Investor, but because of the Jumpstart Our Business Startups (JOBS) Act , smaller investments can also be made in private companies for an equity stake. So let’s break some of this down!
What is an “LP” anyway?!
An LP is a limited partner, meaning someone or an entity having equity (ownership) in another entity. Limited partners invest money in exchange for shares in a partnership but have restricted voting power on company business with no day-to-day involvement in the business. In further exchange for their financial investment, they are thereby part of the ownership group and can participate, usually pro rata(per their investment percentage), in liquidity events of the entity. A liquidity event can be revenue sharing from other partnership or licensing deals, it can be the result of a merger, and most notably, the result of an acquisition by another entity. This is often the goal of private companies seeking private investors. Actually, as soon as a business starts taking on private investors, they have to think about how they will create a return on the investment (ROI) of their investors.
This “how” is something to look for when choosing a private investment.
Ok, so what’s next? What are my options?
Knowing the check is not always far out of your range is the first hurdle. Seeing things you’re interested in is next. Once you realize you can be an LP–whether for a 4 or 7+-figure amount, the pressure is off. Often, angel investing is a great way to get started. Many angel investment groups have emerged recently–based on geographic location, industry, founder profile, or otherwise. Angel investing can give you the opportunity to pool your money with others and invest collaboratively. This makes investors feel more comfortable, but also adds an element of fun.
In addition to angel investing, venture capital (VC) and private equity (PE) can also be options. In these instances, you are investing in a fund manager, who will determine the individual businesses your money will be poured into–a bit in each of the companies they choose for their portfolio. In this instance, you’re investing a minority stake in early stage, growing companies (VC), or investing in later stage companies often for full acquisition, but at least a majority stake. Either way, the fund manager chooses the companies. You invest in them, and they select the businesses. These options allow you to be a passive investor, trusting the expertise of the fund managers. It also leaves the due diligence, or vetting of the company, to someone else. If you plan to invest in a company or any sort, doing due diligence is essential! Sure, there are no promises in any kind of investing–public or private–but you want to do your part in making sure you know what you’re putting your money into. You don’t want to find out your investment will land on an episode of American Greed, and you want to have an understanding of what your investment will be used for, among many other dynamics over the lifespan of the company.
In all instances, depending on your relationships and investment amount, there may be an opportunity to put in some “sweat equity”, lending your expertise as a board member, advisor, connector, or ambassador for the business. Again, relationships are everything in this case.
So how do I get going?
Going back to relationships–because how much they matter cannot be stressed enough–you should examine yours. Are you part of a professional network with ties to entrepreneurs or finance generally? Do you and your financial advisor talk about more than just retirement and stock market investments? Do you have a lawyer friend who works in securities? Is there an angel investing group in your city or favorite industry area? All of these are ways to get a look at investment opportunities. You can also reach out to my deal sourcing company, Inrichmint, where we help investors find private businesses to invest in and do the diligence for them on the opportunities they want to pursue.
Regardless of what you choose, know the barrier between you and investing in “the next big thing” is much smaller than you might think.
Adept Advice
Invest in what interests you
Don't be scared. Be cautious!