Meditations
EquityZen's Blog On Startups and Their Economics

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 on EZ Advantage - check them out.

Investor Type

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.

Conclusion

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.

comments powered by Disqus

Back to blog homepage

Stay up to date

I've got equity

I'm an investor

Search the Blog

We've partnered with Wealthfront to provide our clients with sophisticated, low-cost investment management services.

Full terms: here

Tags

Recent Posts


Check out our Knowledge Center for more resources.