Is investing in private companies the future?
Robinhood, Trading 212, eToro, many of us have heard of these platforms. They have become increasingly popular in recent years and have exploded in popularity during the pandemic due to their ease of investing from your mobile phone. Although I hold a controversial opinion on these platforms, they have surely made investing a whole lot easier. These platforms allow individuals to trade on the public market by purchasing or selling shares or derivatives of shares. I am interested in learning more about investing opportunities outside of these platforms and in the ever-evolving private market.
Types of private investing
Most companies want to remain private in order to operate with less publicity around their financials. Investing in private companies can be broken up based on the company’s growth stage. For instance, when an entrepreneur is first starting a business, he or she usually receives funding from a friend or family member on very favorable terms. This stage is referred to as angel investing. Past the start-up phase is venture capital investing when a group of more savvy investors comes along and offers growth capital, managerial know-how, and other operational assistance. At this stage, a firm is seen to have at least some long-term potential. Past this stage can be mezzanine investing, which consists of equity and debt. Later-stage private investing is simply referred to as private equity; it is a roughly two trillion-dollar business with many large players.
Angel Investors
Venture Capital and Private equity investing are reasonably straight forward. Both consist mainly of large institutes. Angel investors is the investing group that I shall discuss in further detail. Most of us have seen Dragons Den. Several high net worth individuals with many connections sit around and criticise ideas until they find one that they do not need to criticise quite as much. High net worth angel investors often invest alongside seed venture capital funds and government agency funding. It seems that anyone from a friend to one of these Dragons can be classified as an angel investor.
HBAN or Halo Business Angel Network is a network that links investors with businesses. It is just one example of many whereby medium to high net worth individuals can go to network. To invest with this network the minimum stake is €20,000 for an individual investment within a syndicate per deal, or €50,000 for an individual direct investment deal. This network allows you to remain anonymous until you find the right company to invest with. There is also a small membership fee attributed to this provider.
In the US you must meet a requirement to be accredited as an angel investor. This means that you have an annual income of at least $200,000 or a net worth of at least $1 million excluding your primary residence.
If you are not a high net worth individual or a friend of an entrepreneur, where can you go to invest in the private market?
Crowdfunding
There are many crowdfunding platforms that allow individuals to invest, like Trading 212 but in private companies. Many of these platforms require a minimum of €100. SeedInvest is an example of one of these platforms. This platform, like many, only accepts roughly one percent of startups to regulate the companies that get listed. Kickstarter is a similar platform but generally people use it to see projects come to life and not as a means of making a profit. It is creative oriented, with projects like films, games, music, and arts being displayed. Individuals pledge small amounts of money and if the company hit their target funding then, and only then, are their cards charged for the investment. Projects on the platform retain 100% control over their business.
With this new age of online crowdfunding, almost anyone has the opportunity to invest in a once exclusive industry.
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Conall Whelan
