Private venture investing – an overview

Investors thinking about investing in a private company or project need to ask a number of key questions and deal with certain issues before committing themselves to this type of investment. This document contains general information about private venture investing, and should not be construed as specific advice about a particular investment opportunity.

Why private venture investing is on the increase

A number of factors have contributed to an increased interest in private venture investing in recent years:

  • Money market returns are at historical low levels and many investors are seeking out higher returns with private venture investments.
  • A consolidation of equity is occurring as the parents of baby-boomers transfer accumulated wealth to their sons and daughters.
  • Certain local and regional economies are vibrant and growing; apparent opportunities abound.
  • Interest and enthusiasm among entrepreneurs is very high in some locales.
  • Public equity markets have produced significant gains for investors, some of whom are looking to diversify by investing profits into private venture investments.
  • Significant amounts of labour-sponsored venture capital funds (e.g. pension funds) have built up in recent years, encouraging entrepreneurs to pursue ideas in the hope of attracting this and other sources of venture capital.

Why are you considering venture investing?

Bear in mind the lament of the once burnt, twice shy investor: “Why did I ever get involved in this mess?”

The romance of venture investing fades rapidly against a backdrop of investor cash calls, poor results, overly optimistic projections and unmotivated management, to name but a few. In all cases, the full amount of a venture investment is susceptible to loss.

Security over assets (such as land, buildings and equipment) is often granted to a financial institution to cover loans. This means that those assets are not available to secure the venture investment. If a venture’s assets are liquidated in the future, investors are in theory entitled to receive a return of their capital, but only after priority-ranking creditors are paid. In reality, there is seldom enough cash to go around and equity investors are often left on the short end of the stick.

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