Individual investors at all levels have a wide variety of options available. Although many may think that they are relegated to traditional instruments such as stocks and bonds, Richard Cayne’s blog has suggested that there are so many more opportunities for developing wealth, from property to forex.
Some terms that are often mentioned in business and finance are “private equity” and “venture capital”. They seem to be these hyper-successful companies that make and invest millions, if not billions, of dollars, and they seem to appear in every industry. It may make you feel short-changed or locked out.
“In today’s start-up world, venture capital firms seem to be the first ones in, getting huge returns on their investments for the likes of Facebook and Uber,” says Richard. “But there are a few things to remember – first, for every Facebook that makes millions there’s a CueCat that loses even more. Second, in the end, these are just terms for types of private investment.”
You may not technically be a venture capitalist, but you can invest like one. Or do you want to?
Bet big, lose big?
Venture capital (VC) is considered a subset of private equity. Both are types of private investments where private equity is known for buying out an established company, fixing it up, then selling it off (Think of RJR Nabisco and Barbarians at the Gate).
VC firms tend to invest in start-ups, providing seed money or development funds for new companies looking to grow. They are rife among emerging technology enterprises, which is probably why you hear about them all the time. Some VCs, like their private equity brethren, will exert control over the start-ups to try and ensure a high return on their investment. This requires a level of expertise from the VC that most of us may not have.
Because these investments are made early in a company’s life, often even before it goes to market, the risk of failure is extremely high. Google “venture capital fails” and see. Or you can read about the recent research by Shikhar Ghosh, a Harvard Business School lecturer, on why most VC investments fail.
Still want in on the action?
Well, technically, most venture capital firms are closed to the most of public, unless you have a significant amount of wealth. In some case, you may already be investing in venture capital as some pension funds and other institutional investors will allocate some of their portfolios to it. There are also venture capital funds that will pool money into investments they deem fit.
But you probably won’t have very much control over what investments are made and how they are executed, and you may also be hindered by government regulatory issues.
Become an angel instead
Angel investors are individual investors who get in early on a start-up. This can be as simple as loaning your neighbour money to buy a food truck in return for free tacos for life or endeavours on a much bigger scale. This can still be risky, but you can control how much to invest in what type of concern. And you may also be able to have a say in how your money is used and repaid. These opportunities are not as hard to find as they may seem. Look for local entrepreneur groups or check out crowd funding sites. They will have plenty of leads, but you’ll need to do some research on your own.
“I can’t emphasise enough the importance of doing your due diligence on any investment,” stresses Cayne. “Rich people can lose a lot of money on a questionable deal and possibly still stay rich, but that doesn’t mean it will work for everyone.”
There may also be tax benefits to these types of investments. For example, the US and Canada offer capital gains tax exemptions for certain types of small business investments, which, in many cases, apply to these ventures.
You may not become (or want to become) a high-flying venture capitalist, but there are opportunities out there you may want to consider. If this appeals to you, get in touch with Richard Cayne at Meyer International.