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Lessons I’ve Learned As A Private Investor


That can become an expensive lesson when it comes to investments. Many folks refer to it as “Trader’s Tuition,” or the cost of learning. Sadly, we don’t wake up suddenly one day with the wisdom of a thousand years. We learn by watching, reading, and doing.

Fortunately, there is no shortage of opinions and resources available to those who wish to learn. Let’s add to those resources today by adding my list of what I call “Five Golden Rings,” the five characteristics I love to see in private companies.

It’s rare to find a company that will check all seven boxes. Even if one did, it doesn’t guarantee success or positive returns, but my goal is to curate private company opportunities into a smaller group of considerations where I feel I’ve done my best to create the best risk versus reward scenario.

With each passing opportunity, whether I pursue it or pass on it, the results help me curate possible opportunities moving forward and tweak my list as needed. While I can never eliminate risks, especially in the highly speculative private company opportunities, I want to have a roadmap of checklists to follow.

I’m about to share those with you right now…

 

Been There Done That

There’s no substitute for experience. Don’t get me wrong, I enjoy talking to young, hungry entrepreneurs. 

They can be successful, but raising money and growing a company comes with many challenges and pitfalls. Inexperienced owners and first-time entrepreneurs sometimes fall into the trap of falling in love with their company. 

Even worse, they can become desperate and fear failing so much that they trap their company under the weight of toxic financing.

Management that can navigate the shark infested waters of raising capital, competition, and exit strategies offer me the best chance of success as an investor in a private company. 

I don’t get concerned when I see a company founder step aside from a management or CEO position to let someone with market experience step in to help. 

As a company grows, there are more secondary tasks required of leadership that often contradict or exist outside the expertise or forte of a founder. 

In short, founders should do what founders do best. That’s usually innovating or growing the business through operations. 

Management should be adept at managing day to day monotony, positioning the company for capital needs and opportunities as well as clearly and concisely relaying the company’s vision to both Wall Street and Main Street. 

Prior exits demonstrate a base level of competence and experience that tick a box for me.

 

 We’re All in This Together

What’s better than finding a private opportunity company where you want to invest some speculative dollars?  

Finding a private company opportunity where an insider or major institution is investing alongside you.  While no guarantee of success, it shows a level of confidence in the company. I just want to make sure the investment from the insiders isn’t a head fake or throwing good money after bad, hoping my dollars aren’t their Hail Mary survival effort.

Often, founders, insiders, and seed investors have dumped not only time but also money into their company. 

Many have maximized their capital risk tolerance, but when an executive or venture capitalist or founder tells me how undervalued their company is or how great of an opportunity the current round is for me, I immediately ask, “Are you investing in this round too?”

If they answer yes, I’m immediately more intrigued. When an insider is willing to risk additional capital, I know they aren’t asking me to do something they are unwilling to do. That’s a plus in my book.

For example, one company I examined has a major bank as a 20+% shareholder. 

While discussing their upcoming offering, I asked if the bank would participate to which they informed me the bank would be buying enough shares so as not to get diluted. In other words, the bank would purchase at least 20% of the upcoming offering. 

The executive added that both founders would participate as well. That’s the level of confidence I love to see. It doesn’t guarantee success nor should be the only deciding factor but I’d rather them buying than doing anything else into the offering.

Cash is King

Another question I ask in any interview is “How much cash do you have on your balance sheet?” The immediate follow up: “What is your burn rate?”

Why? If the burn rate is going to quickly gobble up existing cash plus the intended raise, then it is a no go for me. 

I don’t want to invest in a sinking ship setting money on fire while it retreats to the depths of the ocean. But give me a company with a strong pile of cash, even after any offering, combined with a low or reasonable cash burn rate and I feel their odds of success move a notch higher.

I’m willing to consider strong patents, licenses, or access to data in place of cash. 

Data is today’s digital gold. Licenses and I think that patents create opportunities for a company to put up a moat or make themselves attractive to a buyer.

The irony here is neither cash, patents, nor data alone guarantee success, but a lack of assets greatly increases the chances of failure. 

 

The Price is Right

This one is simple. If the company is valued fairly or at a discount compared to peers or my view, then I’m intrigued. The biggest challenge here is valuation is subjective, so if my view of value/worth is overly optimistic, then my risk may be more than I initially perceived.

There are other factors that come into play here I have to consider. 

What does the overall market look like? 

Simply put, if you have a great company in a terrible market environment, it may not matter. On the other hand, if you have a subpar company in a great market, it may not matter. 

My odds for a successful investment will be impacted by the overall market conditions and specific sector conditions. When markets are hot, I have more room for error. When market conditions are bearish, I may have to tighten the purse strings.

 

Right Place, Right Time

It’s not enough to have a great product or service. Whatever the company has to offer needs to provide a solution to a major or immediate problem or it needs to vastly improve a current solution. 

A product or service searching for a problem may never find an audience because there’s no need.

This also dovetails into the growth and excitement behind the sector the private company operates. I prefer high growth sectors in the very early innings. 

This comes with the risk of more flops and aggressive valuations but for me the upside trade off works for my risk tolerance. 

Examples today include cryptocurrencies, DeFi, iGaming, eSports, alternative life sciences, biotech, green energy/tech, and smallcaps/microcaps, but that isn’t a complete list; however, when I encounter a private company opportunity in one of those spaces, I’m bound to bump it up on the list for my consideration.

The more boxes a company checks for me, the better. Nothing will eliminate the risks associated with private company opportunities, but I’ve found having a checklist to start will help me make decisions I can reflect upon and understand.