Private Investments

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What are Private Investments?

  • What are private investments?

    Private investments don’t seek funds from the public or retail investors. In addition, private funds must meet certain exceptions stated in the Investment Company Act of 1940 (3C1 and 3C7 are common). In fact, these exceptions limit the type and number of investors that can own shares in a private fund. Usually, private investors must know about the industry and other investments.

  • What is the difference between private equity and private investment?

    Private equity and private investments are similar, but not the same. On one hand, private investments buy into companies. On the other hand, private equity buys the whole company with the goal of selling it later. Further, private equity has a much larger barrier to entries than private funds. For example, private equity is funded by wealthy people, pension funds, and large endowments.

  • What is the difference between private and public investment?

    Private and public investments have clear differences between them. First, a private investment does not get public funds. Whereas a public investment usually comes from the government. Second, private investments are mainly used for increasing income through generated income or appreciation in value. Whereas public funds go toward goods, services, or infrastructure deemed vital to the country. For instance, public investments usually fund police services, military defense, clean water, sewage services, and electricity.

  • Why are private investments important?

    In general, private investments are important for a variety of ways. In fact, most technological, economical, and innovative advances started as public funds in a private sector. For example, Apple Inc. was successful due to government-funded features of the iPhone like voice recognition, GPS, and touchscreen. In addition, the Department of Defense originally invested in the Internet. Plus, NASA was also funded by the government. Further, the Apollo Space Program (sent first astronauts to the moon) led to the computer revolution and integrated circuit (core component of computer chips).

What are the Types of Private Investments?

There are four types of private investments:

  • 1) Private equity firms. While every other type of capital relates to startup capital, private equity relates to growth capital. Oftentimes, large companies turn to private equity when they need an exit strategy or type of growth that traditional financing can’t achieve.
  • 2) Friends and family. In most cases, private investors turn to friends and family for startup and small business funds first. Usually, friends and family provide startup funds because they already know and trust the founders.
  • 3) Venture capitalists. In short, venture capitalists bet on big opportunities while working for venture capital firms. So, they are betting with their employer’s money versus their own. Ultimately, their goal is to earn money from their bets. However, they usually only find a few successful ones. In fact, firms require venture capitalists to only find a dozen investments to bet over 7-10 years. Then, the firms choose a few deals out of thousands per given year.
  • 4) Angel investors. In general, angel investors are wealthy people that invest their own money into startups (usually in the early stages). Typically, an angel investor has a net worth of at least $1 million and an annual salary of $200,000 and more. Plus, angel investors commonly partner with other angel investors to create an investor pool.

How do Private Investments Work?

The type of private investment impacts how private investments work. Here is how each type works:

  • 1) Private equity firms. Companies should use private equity when they are in their later stages, need of larger sums (at least $5 million), and have assets they can leverage. In fact, Limited Partners (LPs) like endowments, insurance companies, pension funds, and wealthy individuals fund private equity firms. Usually, LPs hire private equity firms to find high potential investments on their behalf. So, private equity firms look for shown growth or opportunity instead of using speculation. They want to see that the asset will be worth more later than it does currently.
  • 2) Friends and family. While friends and family are great options for startup funds, relationships can become difficult because of common mistakes. However, there are ways to avoid this situation. For example, viewing this deal as a professional relationship in addition to a personal one. Create a written contract stating the terms of the investment and the high chance of the investor not getting their money back.
  • 3) Venture capitalists. In most cases, venture capital firms are a group of partners that raised money from LPs that want them to invest on their behalf. Plus, partners have 7-10 years to make big deals that generate big returns to give LPs and cover failed investment deals.
  • 4) Angel investors. Commonly, angel investors are the most accessible way to get startup funds, ranging from $5,000 to $5,000,000 (usually caps at $500,000). Angels may also invest in increments, requiring follow-ups on later dates, particularly when something important happens within the company. So, create a win-win situation to get the angel interested. Then agree on an investment structure.
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