What To Research Before Investing In a Private Company: The Current Investors (Part II)
Phil Haslett | August 10, 2015
This is the second installment discussing what you should research before making a private secondary investment. This week, we'll talk about Current Investors. In case you missed last week's post, please click here: Part I
Available information about private, venture-backed tech companies can be limited when you're assessing a secondary investment (that is, buying shares from a pre-existing shareholder). However, the company's current professional investors are usually well-known. EquityZen provides this information on our Trending
page, and you can also check Crunchbase
There are a few different types of professional investors (that is, anybody that makes venture investments for a living) to keep an eye out for. It's important to understand the difference as different investors have different motivations.
• Venture Capital
: VC's are looking for outsized returns, and have non-permanent capital. That means that they money they have raised from their Limited Partners (LPs) needs to be paid back in a finite amount of time (typically 10 or 15 years). Because of that, VCs are motivated by liquidity: they need their portfolio companies to eventually be acquired or go public, so that they can cash in and return $$ to their LPs. (Examples of VCs: Sequoia Capital
, Andreessen Horowitz
, Index Ventures
• Strategic Investors
: Strategic investors are usually large companies from a similar sector that are investing to establish a relationship with the private company. "Strategics", as they are known colloquially, do not have LPs and can typically be more patient with their investments. Additionally, the involvement of a Strategic can provide a private company with a natural acquirer down the road. (Examples of Strategics: Salesforce, Google, Facebook, Oracle)
• Institutional Funds
: Institutional investors include Hedge Funds and Mutual Funds. These investors typically invest later in a company's life-cycle, once they've had visibility into a proven revenue and growth model. (Examples of Institutional Investors: BlackRock
, Tiger Global Management
, T. Rowe Price
WHAT: The Investor's Track Record
While past performance is not always indicative of future results, it would make sense to follow the investments of successful firms. Fortunately, VCs have a knack for bragging about their investment portfolio, usually on their own website
. Some VCs have even offered up their historical return: Institutional Venture Partners boasts their incredibly impressive 43.2% IRR on their website
Some researchers in the space have also published the most successful investors (Check out CB Insights' piece: "Which Venture Capital Firms are Best at Spotting Unicorns Early?
WHEN: What Stage is the Company In?
Different investors in different staged companies. For example, Y Combinator
acts as an accelerator and early-stage investor. Therefore, expect lower valuations and a longer time to eventual exit. Institutional Venture Partners, on the other hand, looks to invest in companies "with over $10 million in revenue
". By knowing what stage the investors typically invest in, you can get a handle on when a company may be looking to go public or get acquired.
Research the current investors of a company to help make your secondary investment decision. Ask WHO/WHAT/WHEN: who are the investors, what have they invested in historically, and when do they typically invest? While you can't always get as much information about a private company as a public one, you can learn a lot from the professional investors that are already involved.
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