4 Ways to Invest in Private Companies

Historically, private companies used to raise capital from the private markets, scale, and then go public at the earliest convenient time. However, the big returns were realised after the companies were traded publicly. These days, it’s easy to raise capital from private equity and venture capital firms, and private companies are opting to stay private longer. The companies go public only after the majority of the growth has been captured and the businesses have become big enough.

With this new playbook, most of the value creation occurs before the companies go public. Unfortunately, individual investors are unable to invest in many great companies when they are at their fastest stages of growth. However, thanks to a shift in the investment landscape and regulatory changes, there are new opportunities for individual investors to invest in private companies. Read on to learn four ways to invest in private companies.

1.   Buying pre-IPO shares

One of the best ways to invest in private companies is by buying shares via pre-IPO investing platforms such as Hiive pre-IPO broker. Pre-IPO shares are the shares offered by a private company to a select group of investors before they go public. It’s an excellent opportunity for investors to invest in a company before its shares are offered to the public.

In pre-IPO investing, the dream is simple: if the company becomes successful after its Initial Public Offering (IPO), the shares could skyrocket. Companies usually offer pre-IPO shares to raise capital for developing products, expanding, or preparing for the eventual public listing.

Probably the only downside to pre-IPO shares is that they are difficult to lay off if you need quick cash since they are not on public exchanges. If you want to invest in pre-IPO shares, you will have to play the long-haul game and bank on a big pay-off once the company eventually goes public. Even then, you will have to wait for the lock-up period to elapse. This period prevents investors from selling their pre-IPO shares immediately after the company goes public.

2.   Become an angel investor

For smaller or newer businesses, accessing debt finance can be challenging, especially if the business is pre-profit, pre-revenue, lacks a strong credit history or needs huge capital to develop a prototype. This is where angel investors come in. These are high-net-worth individuals who provide funding to smaller businesses, usually in exchange for ownership equity.

Angel investing is a high-risk form of investing, but it provides the opportunity to earn substantial returns through equity ownership in innovative businesses before they hit the mainstream.

3.   Buy shares directly

There are several private and public companies that allow investors to buy or sell shares directly from the company via a direct stock purchase plan (DSPP). This eliminates the need for a stockbroker, which eliminates brokerage fees and commissions. However, DSPPs are agreements between investors and individual companies, and the terms may be different for different companies.

4.   Invest indirectly

Individual investors can also invest in private companies indirectly. The simplest way to do this is by investing in publicly traded companies that have invested in private companies that you are interested in. For instance, Microsoft owns a large portion of OpenAI, you could invest in Microsoft stocks if you are interested in OpenAI.

Endnote

This line of investment is not for everyone. It is risky, illiquid, capital-intensive, and volatile. However, there is potential for high returns. Still, you should approach investing in private companies with patience and prudence.