There are a few things you should know before investing in private companies. First and foremost, understand the risks involved. While there is the potential to make a lot of money by investing in private companies, there is also the potential to lose everything you put in.
Before making any decisions, weigh the pros and cons of investing in private companies. On the plus side, private companies often have high growth potential. They also tend to be less volatile than publicly traded companies. However, there are also a few downsides to consider. Private companies are often less transparent than public companies and they tend to have more debt.
Startup investing comes with different degrees of risk
The level of development for a private company often influences how risky it is considered as an investment. For example, approximately three-fourths of angel investments do not succeed. The probability for success becomes greater the more developed and profitable a private company becomes. Many private firms aspire to go public in order to provide financial stability for those who founded the company or other investors; however, some companies may find that remaining private has additional advantages which are mentioned above. Family businesses may also prefer privacy and the handing of ownership across generations. These are important matters to be aware of when deciding to invest in a private company.
There are a few things to keep in mind when you're planning your investment:
Now that you’re allowed to invest in companies, you can be like a venture capitalist. While platforms like Netcapital already do some of the due diligence on companies for you, you should also do your own research and decide for yourself whether a company is a good investment. Angel investors usually use 4 Ts when deciding whether to invest in a company.
The four main components are:
1. The team - A startup cannot succeed without a great team behind it. Be sure to asses their skills and see if they have what it takes to execute the idea properly.
2. Technology - Does the company use new and innovative technology? Is there something that sets them apart from other startups in terms of their product?
3. Traction - If a startup has a lot of engaged users, this is usually a good sign that the company will be successful. They should also be making some revenue at this point as well
4. Terms: A key element in assessing terms is comprehending the company's valuation and how your investment could turn into cash soon.
Keep an eye on risks
Although high-risk, startup investing can be extremely lucrative. The SEC used to only allow a small group of investors to put money into startups because of the risks associated with this type of investment. However, if you take the time to understand these risks before diving in headfirst, you can limit your losses and maximize your gains by diversifying your portfolio. Some risks to consider include:
There are several risks associated with starting a business, including:
- Product risk: that the startup will fail to meet customer expectations
- Market risk: loss due to poor performance of financial markets involved
- Financial risk: inability to pay back debts or meet other financial obligations
- Team risk: lack of experience among team members may lead to problems down the road
Investing in a Pre-IPO company
Pre-IPO investing, also called "angel investing" or "startup investing," provides seed money or operating capital for small businesses at the very beginning or shortly thereafter. This type of investment is riskier than some others, but it has the potential to make angel investors much more money than if they invest in a proven company.
Different startup stages
Pre-IPO shares are shares in a company that has grown past the risky start-up phase, is earning revenue, and is planning an initial public offering. Here's when Pre-IPO shares become available:
Phase 1 - Start up
Phase 2 - Growth
Phase 3 - Maturity (Pre-IPO)
Phase 4 - IPO
After the IPO:
Phase 5 - Post-IPO Growth
Phase 6 = Public Maturity
Liquidity
The greatest ROI is usually realized once/if the company goes public, however. Bear in mind that if you purchase after the IPO, there is a lock-up of 3-6 months during which shares cannot be sold by insiders such as the company’s owners, managers, employees, and early investors.
Why Buying Pre-IPO Shares is Beneficial
When you invest in a company's pre-IPO shares, you're investing after the startup stage into a company that is hopefully growing and making some revenue.
Diversify your investments for more stability and growth potential. With crowdfunding platforms, you can track your portfolio and get updates on its progress. And don't worry if you don't have much to start with--you can begin investing with only $100. Choose the companies you want to invest in based on factors that matter to you, then watch them (and your money) grow over time! Note that private companies usually take longer than public ones to generate returns though, so be patient!
1. Make sure you understand the risks involved before making any decisions by doing your research.
2. Consider both the pros and cons to help make a decision that weighs the potential rewards against the risks.
3. Minimize your risk by investing in a variety of different companies so you have portfolio diversification.
4. Keep an eye on how your progress is doing by tracking movements in your portfolio and readjusting as necessary. Outlook for investments should always be done with a long-term mindset.
Crowdfunding Platforms
Below are some Funding Portals/Broker-Dealers you can browse deals on:
Wefunder and SeedInvest are pretty stringent with the companies they allow on their platforms. So far, Wefunder owns approximately 80% of all Reg CF offerings ($1 million in 12 months). Their deal flow is fantastic, so you'll have plenty to browse through.
Crowdfunding platforms have made it easier for potential investors to get involved with startup companies. However, not all businesses that apply will be accepted onto the platform- so take a look at what the selection criteria is. It's also important to determine if the platform takes an investment stake in each of the startups and how much research or due diligence is done on their part before they're brought to prospective investors.
Look for platforms that offer the chance to speak with the founder, as this provides an opportunity to ask questions and learn about the company directly from its source. Additionally, entry points on crowdfunding platforms can differ drastically; it is possible to find one that requires an investment as small as $10 or one that demands $5,000+. Even though some platforms may have higher asks initially they are still lower cost than investing in larger private markets.
Information about private companies is not readily available to the public (they are "private"). If you want to know more, you would have to directly request information from the company. They might be willing to share if they're trying actively solicit your investment, but otherwise probably not.
According to SEC guidelines, non-accredited investors have a limit on how much they can invest in crowdfunding ventures during any 12-month period:
- If your annual income or your net worth is less than $107,000, you can invest up to the greater of $2,200 or 5% of the lesser of your annual income or net worth.
- However, if your annual income and net worth are both equal to or more than $107,000, you're allowed to invest 10% of your annual income or net worth—whichever number is smaller. This amount cannot exceed a total investment sum of $107 000 overall for 12 months.
It is ill-advised to invest all of your money into a startup company even if you have the funds to do so. The ideal amount an investor should contribute is less than what they would be okay with losing in case the business goes under or takes longer than expected to be profitable. Experts generally also recommend making several small investments in a few different startups versus one big investment in one startup. In fact, AngelList even writes in its investing guidelines that you should “only invest if you have enough capital to make 15-20 startup investments.
Diversification provides a form of protection: If you spread your investments out among five startups, and four of them fail, then you at least still have one winner. However, it's important to note that "your total losses will likely exceed your gains," as AngelLis points out.
There are other benefits of investing in addition to returns
When you invest in startups, you get first-hand knowledge of how these businesses are working to solve difficult problems or enable the advancement of new technologies. With large companies that make up the S&P 500, there is a little risk but also limited potential for growth. On the other hand, a successful startup has much more room to grow exponentially. This extremely appealing quality is what investors would be buying into if they put their money towards a young company.
You might want to invest in startups because you believe wholeheartedly in the idea of the company. People often invest in causes or companies that they want to see more of succeed in the world.
Personal connections can be a great way to invest in new projects. Maybe you have a brother who is launching a great new product, or perhaps it’s your neighbor. Being supportive of a project you know about can help lead to success. A lot of people invest in startups because they’re in a network and are supportive of a project they know.
Many investors find startups appealing because of the sense of fulfillment it gives them. They take pride in helping someone found a business, watching something new come to fruition, learning about different industries or getting involved with cutting-edge technologies from the beginning. If this is something an individual is committed to doing, he shouldn't hesitate to get started.
Investor newsletters
One way to hear about great startup investing opportunities is to sign on a newsletter. For example, Angels and Entrepreneurs provide a great deal flow for its subscribers. Another great source of startup deals is Palm Beach newsletter. They provide excellent analysis of various public and private investment opportunities.
If you're considering investing in private companies, here are the top startup investment opportunities in 2022
1. SapientX
They have created a voice assistant powered by AI (artificial intelligence) that can engage with users as their best friend would. They are currently working with car companies, appliance manufacturers, smart home devices, and vending machine creators to add voices to a new generation of products.
The voice technology offered by this company is highly accurate, with a conversational accuracy of up to 99%. In comparison, Siri and Alexa are only 75% and 72.5% accurate respectively (ZDnet). Additionally, their assistants speak 40 languages and dialects, allowing us to reach 5.5 billion potential users. The software is complete, with prototypes delivered to Mitsubishi, Yamaha, Murakami, NEC, Haier*, KTM* and 20+ more companies.
You can invest in SapientX on Startengine.
2. AvaWatz
AvaWatz offers decision-intelligence services and specializes in Cobots - collaborative air and ground robots. Using AI and advanced knowledge network technologies, their cooperative robotic services are programmed to handle tasks too dangerous or time-consuming for humans. Their initial target audiences include transit systems, airports, and surveillance missions across government agencies (e.g., private firms, and defense departments), with a working prototype that has been piloted by the U.S Air Force.
AvaWatz is a provider of Robot as a Service (RaaS), with a prototyped platform that has been under development for years in partnership with the U.S. Air Force and the Department of Homeland Security. Their technology is scalable and can be used for both government and civilian applications beyond its current scope.
They are currently raising on Starengine, where you can invest in this top AI company.
3. GenesisAI
GenesisAI is a startup that allows companies to buy or sell AI products and serviceThe marketplace offers a wide range of AI services, including data labeling, object detection, and facial recognition.
GenesisAI has raised a total of $5 million from investors such as CFV Ventures, Startfast and more.
You can invest in GenesisAI on Netcapital. They have a notable advisor on their team: professors from Harvard and MIT. GenesisAI's CEO Archil Cheishvili is a serial AI entrepreneur.
Conclusion
There are many different types of risks when it comes to investing in private companies. From the startup phase all the way to an IPO, there are a variety of things that can go wrong. However, with a little research and due diligence, you can make informed decisions about which startups to invest in. Some of the best private companies to invest in for 2022 include SapientX, AvaWatz, and GenesisAI. All three of these companies are using artificial intelligence in innovative ways to change their respective industries. If you're considering investing in AI startups, these three should definitely be on your radar.
Disclaimer: The following is not financial advice. Do your own research.