A reporter emailed recently to “talk” about investing in private companies. With the double whammy in the public equity and real estate markets last year, a lot of individual investors apparently think private companies offer some great opportunities.
They do. But if a company is already an obviously “great private company,” the odds are extremely small that an investor can get in on the deal without a private invitation — meaning an invite from a VC or private equity firm that already owns a controlling share of the company. Even the founder of a private company typically has little power to invite other investors once the VC guys get involved.
Further, if that much-sought private invitation does come, then Groucho Marx’s advice applies: beware of any club that will have you as a member. If a company’s a great prospect, venture capitalists typically want to reserve future funding rounds for themselves and their friends. By contrast, if a company is having to look beyond the early angel investors and VC funds, there’s a high probability that the investment will turn out to be a lemon.
Actually, the lemon factor is always high with early stage investments. The conventional Silicon Valley wisdom is that out of 10 investments, you can expect 7 to go bust, 2 to break even, and 1 at most to pay off big time. In fact, the insiders know and accept that the odds are far worse than that.
Most of the good angel investors I’ve known or heard about typically have a strong non-economic interest in their investment as well as a financial interest. For them, it’s fun to roll up their sleeves and get actively involved with the company, its people, and the problems the company needs to solve (technical, legal, competitive, etc.) in order to be successful. In other words, it’s not just an investment; it’s a way of life.
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