Investing in private companies means putting capital into businesses not listed on public stock exchanges like the NYSE or Nasdaq. This strategy offers a unique opportunity to get in on the ground floor of high-growth ventures before they become household names. The primary goal is to pursue substantial returns that are increasingly difficult to find in mature public markets.
Why Investors Are Turning to Private Companies
For decades, the stock market was the default arena for building wealth. Investors would buy shares in established giants and rely on their steady growth and dividends. But the game is changing. A significant shift is underway, with high-net-worth individuals and family offices increasingly looking beyond traditional stocks and bonds to strategically allocate capital into private markets.
This isn’t just about diversification; it's a calculated move to capture higher growth potential. Many of today’s most dynamic companies, especially in tech and biotech, are staying private for much longer. Consequently, a huge portion of their explosive growth occurs long before an IPO, locking public market investors out of those critical early-stage returns.
The Allure of Pre-IPO Growth
The real magic of investing in private companies is gaining access to that pre-public growth curve. Think of it as investing in a sapling with the potential to become a towering oak, rather than buying a plot in an already mature forest. While the risk is higher, the potential for exponential returns is a powerful draw.
The data supports this trend. Global private market assets are projected to nearly double from $15 trillion to almost $30 trillion by 2033. Specifically, the private equity sector is forecast to deliver an annualized return of 13.5% through 2035—a figure that significantly outpaces public equity’s projected 5.6% over the same period. For a closer look at these numbers, you can explore the market projections from Adams Street Partners.
Key Drivers for Private Market Allocation
Beyond the raw numbers, a few key factors are pulling sophisticated investors into private deals:
- Access to Innovation: Private markets are the lifeblood for disruptive startups and emerging technologies. Investing here provides direct exposure to the innovations that will define entire industries for years to come.
- Reduced Market Volatility: Private company valuations are not subject to the daily whims and emotional swings of the public stock market, offering a welcome buffer against short-term noise.
- Greater Influence and Involvement: Unlike passively holding shares in a public company, private investors often have an opportunity to contribute. You may be able to lend your expertise and network to help a young company find its footing and succeed.
Your Pathways into Private Market Investing
Once you’ve decided that investing in private companies fits your financial strategy, the next question is: How do I get started? Unlike buying stocks with a few clicks, the private markets have distinct entry points, each with its own set of rules, capital requirements, and level of involvement.
Consider these pathways like different ways to summit a mountain. Some routes require you to be an expert climber with your own gear, offering unparalleled control but also the most risk. Others are like joining a professionally guided expedition, where you rely on seasoned experts to manage the journey.
Direct Investing and Angel Syndicates
The most hands-on approach is direct investing—placing your capital straight into a startup or an existing private business. This route gives you maximum control and the potential to directly influence a company's success, particularly if you can bring your own expertise to the table. However, it also demands the most from you in terms of sourcing deals, conducting due diligence, and staying involved post-investment.
A related approach is investing through an angel syndicate or angel group. Here, you pool your money with other accredited investors to back a promising company. It’s an intelligent way to gain the benefits of direct investing while distributing the workload.
- Shared Due Diligence: The heavy lifting of vetting a company is shared among experienced members.
- Increased Firepower: Syndicates can write larger checks, opening the door to more competitive deals.
- Collective Wisdom: You can tap into the diverse knowledge of the other investors in the group.
Essentially, an angel syndicate functions like a small, specialized team focused on a single venture. Your individual check might be smaller, but your collective impact can be significant.
Venture Capital and Private Equity Funds
For many investors, funds are the most common and practical route, offering professional management and instant diversification. In this model, you and other investors—known as Limited Partners (LPs)—pool your capital. A professional management team, the General Partner (GP), then makes the investment decisions.
A Venture Capital (VC) fund is like a high-tech scouting party searching for the next transformative company. They place bets on early-stage, high-growth startups with disruptive potential, often in fields like software, AI, and biotech. VCs embrace high risk for a chance at massive returns, understanding that while most investments may fail, one or two huge winners will more than compensate for the losses.
Conversely, a Private Equity (PE) fund typically targets more mature, established companies. Their strategy often involves acquiring a controlling stake, actively improving operations to drive growth, and then selling the company for a profit. If VC is about planting saplings, PE is about harvesting an entire orchard. For a closer look at this world, our guide explains how to invest in private equity.
Investing in a fund means you're betting on the manager. You trade direct control for professional oversight and access to a portfolio of companies you could never source or vet on your own.
The Rise of Online Platforms
Recently, a new wave of online platforms and equity crowdfunding sites has emerged, disrupting the traditional landscape. These platforms act as digital marketplaces, connecting accredited investors with a curated menu of private investment deals. They have dramatically lowered the barrier to entry, often allowing smaller minimum investments than traditional funds.
Think of these platforms as a hybrid approach. You get to review individual deals, much like a direct investor, but within a structured, pre-vetted environment. This provides more choice and flexibility to build a custom portfolio of private companies, one deal at a time. It’s an excellent way to begin investing in private companies without the large capital commitments required in the past.
Comparing Private Investment Channels
To clarify the options, this table breaks down the key characteristics of each channel. Use it to determine which path best aligns with your capital, timeline, and desired level of involvement.
Ultimately, there is no single "best" method. Each of these pathways offers a different mix of risk, reward, control, and effort. The right choice depends on your personal capital, time, risk tolerance, and investment objectives.
How to Properly Vet a Private Investment
In the world of private markets, enthusiasm is abundant, but conviction is priceless. Building that conviction before writing a check requires a methodical, unsentimental due diligence process. Unlike public markets, where information is standardized and plentiful, private deals demand that you become part investigator, part analyst, and part business strategist.
Your primary job is to look beyond the slick pitch deck and scrutinize the fundamental pillars of the business. This isn't just about avoiding bad investments; it's about deeply understanding the good ones so you can confidently commit capital for the long term. A structured approach is your best defense against a compelling story that lacks real substance.
The infographic below illustrates the common routes investors take into private markets, each demanding its own style of diligence.
Whether you're investing directly, through funds, or via a platform, one thing remains constant: a rigorous vetting process is the bedrock of success.
Assessing the Business Model and Market Opportunity
Every great investment starts with a great business. But what does that truly mean? For starters, the company must solve a real, significant problem for a clearly defined customer base. A clever product that no one is willing to pay for is a hobby, not a business.
You must validate the market size and the company’s potential to capture a meaningful share of it. Is this a niche solution for a small group, or can it genuinely scale and redefine an industry? Look for hard evidence of product-market fit—early customer traction, glowing testimonials, and low churn rates are powerful signals.
Evaluating the Management Team
An idea is only as good as the team executing it. In early-stage deals, you are often betting more on the jockey than the horse. The founders and key executives must possess the right blend of vision, deep domain expertise, and a relentless drive to succeed.
Scrutinize their track record. Have they built and scaled a business before? Do they have direct experience in this industry? Equally important are their coachability and integrity. A team that is transparent about challenges and open to feedback is far more likely to navigate the inevitable roadblocks ahead.
A strong management team can pivot a mediocre idea into a success, but a weak team will almost certainly run a brilliant idea into the ground. Their character and capability are non-negotiable.
Diving into the Financials
The numbers must tell a story that aligns with the business narrative. This requires a deep dive into the company's financial health, from its historical performance to its future projections. Do not take their financial model at face value; you need to pressure-test the assumptions behind their revenue forecasts and cost structures.
Analyzing financial statements is a critical skill for any private investor. You need to understand the balance sheet, income statement, and cash flow statement to gauge profitability, liquidity, and solvency. For a deeper look, check out our guide on how to analyze financial statements. This knowledge will empower you to spot red flags and assess how efficiently the company uses its capital.
This level of scrutiny is more important than ever. The global backlog of PE-backed companies has surged to over 12,500, representing nearly nine years’ worth of inventory at recent exit paces. This pile-up underscores the critical need for investors to focus on asset quality and thorough due diligence to identify the strongest opportunities.
Understanding Valuation
Valuing a private company is more art than science, as there's no daily stock price for reference. Investors typically use a few common methods to arrive at a reasonable valuation range.
- Discounted Cash Flow (DCF): This method projects the company's future cash flows and discounts them back to their present value. It's a forward-looking approach based entirely on the company's ability to generate cash.
- Comparable Company Analysis ("Comps"): This involves examining the valuation of similar private or public companies. You might look at revenue multiples (e.g., valued at 5x annual recurring revenue) from recent deals in the same sector.
The goal isn't to pinpoint a single "correct" number but to establish a valuation that provides a margin of safety and a compelling risk/reward profile. For a structured approach, consider using a comprehensive due diligence checklist template. It can help ensure you cover all your bases during the evaluation.
Managing Risk and Navigating Illiquidity
While the outsized returns of private market investing often grab headlines, they come with a different set of risks than public markets. Understanding and accepting these challenges is the first step to success. The most defining—and often the biggest mental hurdle for new investors—is illiquidity.
Unlike stocks or bonds that you can sell with a click, your capital in a private company is effectively locked up. There is no open market for these shares. That money is committed for the long haul, often for five to ten years or even more, until a “liquidity event” like an acquisition or an IPO occurs.
Think of it as planting a vineyard instead of an annual corn crop. The corn farmer sees a return in a single season. The vineyard owner, however, must patiently cultivate the vines for years before they yield valuable grapes. Investing in private companies is the vineyard; it demands a long-term perspective and capital you can afford to set aside.
The Illiquidity Premium and Its Trade-Offs
This lack of immediate access isn’t a flaw; it's a core feature of the asset class. In exchange for tying up their capital for years, investors demand a higher potential return. This is known as the “illiquidity premium,” a major reason why private market returns have historically outpaced their public counterparts.
However, this trade-off requires a disciplined approach to your broader portfolio. You must ensure you have sufficient liquid assets to cover your financial needs while this portion of your capital matures. For high-net-worth families, this means making a strategic allocation—only a percentage of their overall wealth—to these less flexible investments.
Beyond Liquidity: Understanding Core Investment Risks
Illiquidity receives most of the attention, but it is far from the only risk. Several other factors can determine an investment's outcome, and you need to be prepared for them.
- Execution Risk: This is the risk that the team cannot successfully execute their plan. A brilliant idea is meaningless without a team that can build the product, acquire customers, and scale the business. Thorough due diligence on the founders' track records is your best defense.
- Market Risk: The team might execute perfectly, but the market they are targeting could shrink, change, or never fully materialize. A disruptive new technology could render their solution obsolete, or a shift in regulations could undermine their entire business model.
- Management Risk: In small, agile companies, key person risk is significant. The departure of a visionary founder or a star engineer can have a massive negative impact on the company’s future.
The hard truth of private investing is that most early-stage companies fail. Success often depends on one or two major winners in a portfolio generating enough returns to cover all the losses and still produce exceptional overall performance.
Mitigating Risk Through Diversification
While you cannot eliminate risk in this space, you can manage it. By far, the most effective tool for this is diversification. Spreading your capital intelligently is the best way to protect yourself from any single investment failing.
A well-constructed private portfolio should be diversified across several key dimensions:
- Industries and Sectors: Avoid concentrating all your capital in one area, like fintech or biotech. Spreading investments across different sectors cushions the portfolio from a downturn affecting a specific industry.
- Company Stages: Balance the high-risk, high-reward bets on early-stage startups with more mature, later-stage companies that may offer more predictable, albeit lower, returns.
- Investment Types: Consider mixing direct investments, where you have more hands-on involvement, with fund investments. A fund provides instant diversification across dozens of companies managed by a professional team.
By building a thoughtful, diversified portfolio, you position yourself to weather the inherent volatility of private markets. This approach maximizes your chances of capturing the returns that make this asset class so compelling.
What's Driving the Private Investment Market Today?
To succeed when investing in private companies, you must look beyond individual pitch decks. It’s about understanding the broader currents shaping the entire market—where capital, innovation, and talent are headed. Savvy investors know how to spot these macro trends to better position their portfolios for the future.
The private markets are constantly shifting, influenced by new technology and the economic climate. Right now, a few key areas are attracting significant attention from both venture capitalists and corporate strategists, creating exciting opportunities for informed investors.
The Innovation Boom: AI and Enterprise Software
We are in the midst of a massive innovation cycle, with artificial intelligence at its epicenter. AI isn’t just another tech trend; it's a foundational shift, similar to the internet. It is poised to remake every industry, presenting a generational opportunity to invest in the companies building that future.
The excitement is palpable, and capital is flowing to support it. Venture capital is showing strong signs of a comeback, with global startup funding reaching $91 billion in a recent quarter—an 11% year-over-year jump. A significant portion of this is driven by enthusiasm for AI. Private investment in generative AI alone hit $33.9 billion, a massive leap from the prior year. For a deeper dive into the numbers, you can explore the full venture capital trends on Crunchbase News.
This wave of investment is pouring into a few key areas:
- Enterprise Software (SaaS): Companies are eager for AI-powered software that can automate tasks, analyze data, and enhance team productivity. This opens a vast market for startups creating specialized AI tools for industries like healthcare, finance, and logistics.
- The Next Wave of Fintech: Financial technology remains a hotbed of innovation. Companies are using AI for everything from fraud detection and trading algorithms to personalized wealth management, aiming to make financial services more efficient and accessible.
- The AI "Pick-and-Shovel" Play: Powerful AI models require immense computing power and data infrastructure. This has created a secondary boom for companies that build the "picks and shovels" of the AI gold rush—specialized chips, cloud services, and data platforms that form the ecosystem's backbone.
How Private Equity is Adapting
It’s not just the venture world that is adapting its strategy. Private Equity (PE) firms, which have traditionally focused on more mature companies, are getting creative to find returns in a crowded market. One of the most significant trends is the rise of the “buy-and-build” strategy.
Instead of acquiring a single large company, PE firms are now more likely to purchase a solid "platform" company and then bolt on numerous smaller, strategic add-on acquisitions. It's a powerful method for accelerating growth, realizing cost synergies, and consolidating fragmented industries.
The buy-and-build model is a disciplined way to create value. It's less about financial engineering and more about strategic operational improvement, turning a collection of smaller businesses into a dominant market leader.
This shift has real implications for investors. It demonstrates that opportunities are not limited to flashy tech startups. Tremendous value is also being created in traditional, established industries through smart consolidation and operational expertise.
By monitoring these powerful trends—the AI boom in venture capital and the strategic shifts in private equity—you gain the context needed to properly evaluate an opportunity. It helps you see past the hype and focus on the fundamental forces creating real, long-term value in the private markets.
Understanding the Legal and Tax Landscape
Investing in private companies involves more than just picking a winner. The process truly begins with the paperwork. Unlike buying public stocks, every private deal is governed by its own set of legal documents that define your rights, protections, and obligations. Getting this part right is absolutely critical to protecting your investment.
The process usually starts with a term sheet. Think of this as a preliminary agreement before final contracts are drafted—a non-binding blueprint that outlines the core terms of the deal. From there, you will move to binding legal agreements, such as a shareholder or operating agreement. These are the documents that truly matter, dictating everything from your voting rights to what happens when the company is eventually sold.
Critical Legal Documents and Structures
This is where sharp negotiation skills are essential. Knowing how to redline contracts effectively is a must. The structure of the deal itself also has a massive impact on your liability and your influence in the business.
You will typically encounter a couple of common structures:
- Limited Liability Companies (LLCs): A popular choice for good reason. LLCs shield your personal assets from business debts and offer significant flexibility in how the company is managed and taxed.
- Limited Partnerships (LPs): This structure is common with funds. A General Partner (GP) manages the operations, and the Limited Partners (LPs)—the investors—are passive. Your liability is capped at the amount you invest.
Determining the best structure helps align the deal with your risk tolerance and desired level of involvement.
Navigating the Tax Implications
The tax side of the equation is just as crucial as the legal setup. Gains from private investments are almost always treated as capital gains, but the tax treatment can vary dramatically. The key factor is your holding period. If you hold an investment for more than one year, you will generally qualify for more favorable long-term capital gains tax rates. Our guide on how to reduce capital gains tax delves into helpful strategies.
For early-stage investors, there's a significant tax incentive to know: the Qualified Small Business Stock (QSBS) exemption. If your investment meets certain criteria, you could potentially exclude 100% of your capital gains from federal taxes—up to $10 million or 10 times your initial investment.
This tax provision was specifically created to encourage investment in growing U.S. companies. It is essential to work with your legal and tax advisors from day one to determine if an investment qualifies for QSBS. Getting this right can dramatically change your after-tax return, making it one of the most important due diligence items.
Answering the Big Questions on Private Investing
Exploring the world of private companies naturally raises a few key questions. Understanding the timelines, allocation amounts, and real differences between investment options is the first step toward building a smart strategy and managing your own expectations.
Let's address some of the most common questions from investors new to the private markets.
What's a Realistic Time Horizon for a Private Investment?
In private investing, patience is not just a virtue—it’s a prerequisite. Unlike public stocks that can be sold in seconds, private investments are inherently illiquid.
You should be thinking in terms of 5 to 10 years, and sometimes even longer. Your money is locked in until a "liquidity event" occurs, which is typically a company being acquired or going public through an IPO. The bottom line: only invest capital you are certain you will not need in the short or medium term.
How Much of My Portfolio Should I Put into Private Deals?
There is no single magic number. The right allocation is a personal decision that depends on your risk tolerance, total net worth, and long-term financial goals. That said, a common guideline for accredited investors is to consider allocating between 5% and 15% of their total portfolio to private markets.
This provides meaningful exposure to the high-growth potential of private deals without compromising the diversification and liquidity of your broader portfolio. It's about striking a balance between pursuing significant upside and protecting your existing assets.
What's the Difference Between a VC Fund and an Angel Group?
Both invest in young companies, but their structures—and your role as an investor—are very different. Understanding this distinction is crucial for choosing the path that fits your goals.
- Venture Capital (VC) Fund: This is a professionally managed pool of capital. A VC firm raises money from many investors (Limited Partners, or LPs) and builds a diversified portfolio of startups. As an LP, your role is completely passive. You are entrusting the fund manager's expertise to do the work.
- Angel Group: This is more like a club. It is a network of successful individuals who pool their own money to invest directly in startups. Angels often take a hands-on, advisory role, using their experience and connections to help the company succeed.
When you invest in a VC fund, you get professional management and instant diversification across many different deals. Angel investing, on the other hand, offers direct involvement and more control over a single investment, but it demands significantly more of your personal time and energy.
Navigating the nuances of the private markets requires a steady hand and real experience. At Commons Capital, we specialize in helping high-net-worth clients build and manage sophisticated portfolios that match their long-term vision. To see how we can help you strategically access private market opportunities, visit us at https://www.commonsllc.com.
