Investing in a private business

[pythagoras]

Hi Folks,

Does any one have insights into why a [private, not publicly listed or traded) business would decline an individual investor (with $1,000 to invest), yet accept investments from the likes of:
- Sequoia Capital China;
- Horizons Ventures; and
- Main Sequence Ventures

just to name a few?

Has any one ever had success with investing directly into private businesses? Or is it cost prohibitive for the business (legal and other administrative costs) to contract with small-fry (like me) investors?

Thank you.

Kind regards,

Py

 

[galumay]

I would invert your question, why would a private business want to sell a meaningless fraction of their business to an unconnected individual?

Generally a private business will have only 1 or 2 shareholders and as a business owner I can tell you I never think about the value of those shares, I am only interested in the free cash flow the business provides to me as an owner. I would never consider selling a tiny share of the business to a stranger.

 

[Value Collector]

Hi Folks,

Does any one have insights into why a [private, not publicly listed or traded) business would decline an individual investor (with $1,000 to invest), yet accept investments from the likes of:
- Sequoia Capital China;
- Horizons Ventures; and
- Main Sequence Ventures

just to name a few?

Has any one ever had success with investing directly into private businesses? Or is it cost prohibitive for the business (legal and other administrative costs) to contract with small-fry (like me) investors?

Thank you.

Kind regards,

Py

$1,000 is a very small investment, think about it if you were running a private company an needed investment capital, would you want to attract 1 large institutional investor that is going to invest $10,000,000 or would you rather have 10,000 small investors that all put in $1,000 each.

communicating and reporting to 10,000 small investors would be alot more expensive than one institutional investor, the cost of dealing with small investors can be prohibitive, especially given the extra rules they have to follow when dealing with retail investors vs wholesale investors.

 

[pythagoras]

I would invert your question, why would a private business want to sell a meaningless fraction of their business to an unconnected individual?

Generally a private business will have only 1 or 2 shareholders and as a business owner I can tell you I never think about the value of those shares, I am only interested in the free cash flow the business provides to me as an owner. I would never consider selling a tiny share of the business to a stranger.

From that perspective, it makes sense.

I suppose i may have to wait for 2nd-3rd round which by then will probably be listed on the ASX; and of course at a higher value.

Thank you.

 

[Value Collector]

Generally a private business will have only 1 or 2 shareholders and as a business owner I can tell you I never think about the value of those shares, I am only interested in the free cash flow the business provides to me as an owner. I would never consider selling a tiny share of the business to a stranger.

“Private Businesses” do come in all shapes and sizes, there are private businesses with many shareholders.

Take the Mars company for instance it’s valued at around $127 Billion dollars, and has its shares spread across many of the founders decedent family and manager shareholders, who every few years will trade shares.

At one point they even brought Berkshire Hathaway in as a shareholder, partly to make sure there was a semi liquid market for family that wanted to cash in part of their holdings, and to make sure such trades where conducted at fair valuations.

having Berkshire there with a standing bid at each auction meant the sellers always got a fair price weren’t taken advantage of the other family member buyers due to illiquid private market.

 

[pythagoras]

$1,000 is a very small investment, think about it if you were running a private company an needed investment capital, would you want to attract 1 large institutional investor that is going to invest $10,000,000 or would you rather have 10,000 small investors that all put in $1,000 each.

communicating and reporting to 10,000 small investors would be alot more expensive than one institutional investor, the cost of dealing with small investors can be prohibitive, especially given the extra rules they have to follow when dealing with retail investors vs wholesale investors.

I see your point about $10m vs my $1k.

There just seems to be a major advantage for foreign investors into startups getting on the ground level.

This particular business has been 'forecast' to be worth several billion by 2028-2030, due to its already in-place global partnerships and the current growth trends for the particular product.

In Australia there is only one competitor (which i have invested in), however, it doesn't have the reach and partners this particular start-up has.

 

[Value Collector]

There just seems to be a major advantage for foreign investors into startups getting on the ground level.

There just seems to be a major advantage for foreign investors into startups getting on the ground level.

Capital markets are global, "foreign", "national", "local" it really doesn't matter, sometimes all that matters is your size and how easy you make transactions for the company that needs the capital.

There will be deals where being a large whole sale investor gives you and advantage and there will be other deals where being a small guy managing $100K or less of assets gives you an advantage, the trick is to find the little sweet spots where you can make money.

----------------

Try not to think of capital markets as being "foreign capital" vs "Aussie capital", capital is fluid it flows around the world looking for a home and will be deployed where ever the allocators of that capital think they can make a return.

You might be Australian, but that doesn't limit you to investing on this one island, sure there is plenty of great ways to invest on this island but there are plenty of other great investments around the world too.

If you can't beat them join them, if you are worried google is taking to much market share in Australia, buy google.

 

[galumay]

“Private Businesses” do come in all shapes and sizes, there are private businesses with many shareholders.

True, there are exceptions that have large registries.

 

[qldfrog]

I see your point about $10m vs my $1k.

There just seems to be a major advantage for foreign investors into startups getting on the ground level.

This particular business has been 'forecast' to be worth several billion by 2028-2030, due to its already in-place global partnerships and the current growth trends for the particular product.

In Australia there is only one competitor (which i have invested in), however, it doesn't have the reach and partners this particular start-up has.

Are you not answering your own question:
You mention partners and connections, usually, this is what you look for in new investor, not just the $ but, for a cashed up investor some cash flow and overdraw facilities, a marketing network, a country exposure, leverage etc.
By the time they draw a share agreement, your one k will go in smoke under various fees and even if 1k is left, what for?
At best you could join a syndicate which could get a minimum of a few hundred k in one go...
That's called a fund?

 

[pythagoras]

Are you not answering your own question:
You mention partners and connections, usually, this is what you look for in new investor, not just the $ but, for a cashed up investor some cash flow and overdraw facilities, a marketing network, a country exposure, leverage etc.
By the time they draw a share agreement, your one k will go in smoke under various fees and even if 1k is left, what for?
At best you could join a syndicate which could get a minimum of a few hundred k in one go...
That's called a fund?

Well firstly, i didn't wish to presume to much; thus asking [a] question(s).

I had a look at the investor list, and couldn't find a single attached fund that i could then invest into.

Maybe it was magical [read wishful] thinking, that if i contacted the business some one may be kind enough to grant me my wish, take my $1k and furnish me with some stocks. hahaha.

 

[qldfrog]

Well firstly, i didn't wish to presume to much; thus asking [a] question(s).

I had a look at the investor list, and couldn't find a single attached fund that i could then invest into.

Maybe it was magical [read wishful] thinking, that if i contacted the business some one may be kind enough to grant me my wish, take my $1k and furnish me with some stocks. hahaha.

look at it that way, that was daring and why not;
but you need to up the $..Anyway that is the spirit, kudo
To be honest, if they were to take the $1k, it would be a sign to run away...
Back to the boring XAO

 

[pythagoras]

....
but you need to up the $.. ...

Back to the boring XAO

I'm only 37, i suppose i have a couple years left to gather the funds, or be appointed MD of a fund.

 

[Value Collector]

I'm only 37, i suppose i have a couple years left to gather the funds,

reminds me of this scene.

 

[kenny]

If you wish to deploy $1K into private businesses, there are a number of platforms that will showcase early stage businesses where that may be accepted. Equity crowdfunding platforms such as Equitise, Venturecrowd, Birchal and Pozible all provide a marketplace and a source of much needed capital for early stage private businesses.

Other platforms such as On Market, Wholesale Investor and various "corporate advisor"-type websites spruik similar offerings and its very much a case of Caveat Emptor. Being a "Sophisticated Investor" helps access and as others have mentioned, a larger investment cheque also.

Due Diligence is essential and having a clear investment thesis paramount.

The other good point already mentioned is the ability for you to demonstrate value as an investor to the business above and beyond the dollars you are offering. Introductions into your network of relevant connections, business development opportunities, helping with recruitment of new hires and industry expertise would all help your proposal.

Good luck!