The majority of Americans have not invested in private companies, commonly referred to as venture capital investing. Considering that most corporations in the United States are private, this seems odd to me. Why haven’t many of us invested in private companies before?

  1. Because we don’t have a way to find them and play the market like we do with buying and selling stocks.
  2. The government outlawed such investments for people whose net-worth was less than $1million until April 2012 when the JOBS act passed.
  3. Wall Street successfully scared most people away from investing in private companies.

Let’s examine each of these and learn why investing in private companies should be part of everyone’s portfolio.

First, where does one go to find opportunities to invest in private companies? Can you walk in Bank of America or Chase Manhattan bank today and get a list of private companies that you can invest in? Nope. Does your accountant show you companies that you can invest in? Nope. Can you call your stockbroker at Schwab or Fidelity and ask for opportunities? Nope. It wasn’t until recently that a handful of online companies started offering deals in private companies, which is why this is now possible.

Second, for many years, the law prohibited private companies from taking investment money by people whose net-worth was less than $1million, excluding real estate. The government believes that such a rule protects the “little” people from betting on private companies and suffering losses. While the spirit seems right, it doesn’t apply to the “little” people when they invest in stocks and bonds or walk into a casino and bet on slot machine or blackjacks. History shows us by 1. the market meltdown during the dotcom crash and 2. the mortgage crisis of 2008 that investing in public companies is no less risky than investing in private companies.

Third, Wall Street successfully scared most people away from investing in private companies. They call this type of investment “alternative” and use words like “illiquid” which means you can’t get your money out instantaneously. Illiquid has a negative connotation and somewhere along the line, private investment faded into the background. It was displaced by stocks, mutual funds, options, bonds, and other so called “liquid” securities which you use your cash to buy and then receive cash back quickly by selling them through a trade such as the New York Stock Exchange.  Wall Street successfully convinced the public that liquid investment is the only way to go and built an empire of making money off investors by charging commission on buying and selling stocks and bonds. They don’t want to see investors putting money into private companies because 1. they make less on investors who buy and hold for a long term, and 2. many of them do not have the expertise or experience to advise you on private investment. Thus, they came up with the term “alternative” to describe venture capital and have pretty much coached every other financial advisor or banker to advise clients against investing in private companies because it is “risky” and “illiquid”.

So—who is profiting off venture capital investment? The professional, in-the-know people who have first-hand knowledge that venture capital investing can produce extraordinary returns. The first $500,000 investment in Facebook returned more than $1billion when the investor cashed out more than a decade later. This population has been growing since the 80’s and now account for over 300,000 Americans according to one estimate.

Why don’t more and more Americans invest in private companies? Not only can it produce handsome returns, but the investment is more personal and meaningful. You are investing in products and services that you believe in, as well as watching them being accepted which is not only satisfying financially but also rewarding emotionally.

If you haven’t invested in private companies before, the first step is to understand the process and then you can learn how to be successful in venture capital investing. Here are a few rules to live by:

  1. Invest in something you understand. If you don’t understand, find a way to understand.
  2. Invest with people who know the subject and learn their knowledge and views.
  3. Learn how to recognize who knows what and who to listen to.
  4. Choose a system that works for you, whether it be a direct investment or through a fund or group.
  5. Be patient. This is a long game and be prepared to invest 10-20 years.

For those who are interested in learning more about the process of investing in private companies and how to be successful at it, the Seraph Research Foundation offers online and in-person training and education. Myself, along with my team have spent the last 20 years perfecting the model to invest intelligently. I will share with you these knowledge, tools and techniques so that you can be successful too.