Is it wise to invest in privately held company's?

Question

I found this tech company that is doing well and would like to know if they offer private investors a chance to participate in their growth for some chance of a return if it would be wise to make an offer.

Also how much of your portfolio should you take a chance with?

I know that if it is a hot company VC's will be the ones to push private investors out. Cause they have all the cash the company needs. Their terms are also more demanding. It is a company that is in my home town and they may take consideration in local money as it is the local resources that is what makes them successful.

Answer 1

Generally speaking, it is neither wise nor unwise to invest in private companies. It depends on the particular company you are considering. You will need to do your own due diligence and determine if the company can give you sufficient return for the risk you are taking.

That said, most private companies will not take investment from individual investors unless you are planning to invest a significant amount. From the company's perspective, if they needed the cash and the company had strong potential they could get a much larger investment from a VC or strategic corporate investor. If they don't need the cash they generally don't want to dilute their ownership.

Answer 2

The devil is in the details. Generally, there is nothing inherently good or inherently bad about privately held companies. You just need to understand what your exit strategy is. If the company is planning an IPO, when might it happen? If the company is hoping to be acquired, who would the acquirer be and why would they be interested in the acquisition? If the company plans to remain privately held, when would it start paying dividends and how much?

Also, you should limit your investment in this company to a few per cent of your total portfolio value. Microcap investing is generally risky and you don't want to have too much at stake.