I was having a conversation with my father today. We were discussing the fact that someone he knows is wanting to start a business. Dad, who is very intelligent, asked what kind of specialized knowledge this person had to run that sort of business. Interestingly enough, this guy has been waiting for someone to give him the money to start this business. A year. It is obvious that whoever this person is who is supposed to fund him, realizes that my Dad’s friend doesn’t have any specialized knowledge as well. While he may be a nice guy, and a good guy, there is never a guarantee that a business will succeed. When someone doesn’t even have a business plan or any sort of knowledge that would allow them to run a business, it would be foolhardy to invest in such a venture. It is virtually certain to fail.
So, what things should you look for when investing a private venture? Well, let’s start with the basics. As Dad put it, what sort of specialized knowledge do they have? Is there a written business plan? What is the financial condition of the proposed business owner? If there is some question about these, they are immediate red flags. Stay away, keep your wallet locked up and politely say no.
Investing in private equity doesn’t have to be just investing in one business. You could put your money in a private equity fund, where there is a professional money manager who makes the investment decisions. You could also make sure that whatever businesses you are going to invest in, you yourself have a knowledge of that particular industry. If you are going to invest in a single company, look for firms that help companies get started, either VC (venture capitalist) or firms that help new businesses run themselves. Often a good idea is not followed by good execution. There are a few firms that specialize in helping these ideas flourish.
Private equity can be a great investment, and it is often exciting to get involved in the growth of a new firm and new idea. But remember, just like any investment, you need to do your homework. And if your knowledge is not up to the task, find someone who you trust whose knowledge is up to it.