Private Investors - Definition, Explained, Examples, How to Find? (2024)

What are Private Investors?

Private investors are people or firms who possess expertise, knowledge, and an interest in investing. More often than not, they put their money into companies that require capital from them to succeed and get financial returns. They focus less on speculation and more on demonstrated growth and opportunity.

Private investments can become key drivers that push demand, create capacity, enhance labor productivity, induce new technology, allow space for creative destruction, and generate jobs. This is because the focus is on growth opportunities in the invested fields and not solely on profit. The goal is to achieve long-term, responsible ownership for wealth preservation.

• Private investors are interested more in the growth opportunities provided by investment and, hence, are different from institutional investors.
• They invest for the long term and are focused on wealth creation and responsible ownership in addition to making profits.
• Angel investors and venture capitalists also fall into private investors despite their huge investment size. They invest in business ideas and provide inputs for the organization's development.
• Active management participation aids in utilizing growth opportunities.

Private Investors Explained

Private investors invest majorly in growth opportunities. They may hold investments away from the capital markets to focus on investments in high-quality organizations and infrastructure assets. They also intend to generate wealth by maintaining active, responsible ownership for longer periods. For example, private investors for real estate may buy a plot near a developing area and wait for development to reach there. This helps them get that area at a cheaper rate while not letting go of the development potential it has. Similarly, private investors for business opportunities look for emerging companies and potential organizations that have made significant progress in a short period. These organizations may take a while before becoming big, but early investment guarantees good returns at a profitable rate.

It is the small businesses usually seek a private investor's loan as an investment. For instance, angel investors and venture capitalists are two popular private investors examples. Companies can pitch ideas to such investors with detailed information about business strategies and profit margins. After analyzing the cost-benefit ratio and risk to return factors, these investors invest in the ideas. They do it in return for a share of ownership in the company or a commission.

What Private Investors do?

They typically hold on for five to eight years on average. Investors generate growth during the holding period by actively working with the management teams to improve the investment. It may be to improve the company or the asset performance, layout helpful strategic directions, or make operational changes. This is especially true in the case of private investors for businesses. For example, private investors in real estate may indulge in finding complementary acquisitions. Here, the goal is to develop a stable ownership structure and build long-term wealth. This can be achieved, especially when equity owners and the management team have aligned interests and work on improving them.

Example

Cisco Systems, an American multinational technology conglomerate, went public in the 1980-90s. They were the pioneers of the "local area network (LAN)" concept. The idea is to connect distant computers on a multiprotocol router system. Private investors bought the initial public offering (IPO). When the company went public in the '90s, its market cap was estimated at $220 million.

Cisco's market cap as of 2022 is estimated at $205.88B. The private investors and the pre and post-IPO investors realized their value on investments due to their long-term commitment.

Private investors rely on the soundness of the ideas and look at their growth opportunities to invest long term. As shareholders, they get to be a part of the decisions made. For this, they work with the management to strategize business, develop the idea, and see it evolve into bigger, better plans. In short, these investors identify the potential and nurture it, and patiently realize the profit as a means to wealth creation.

How to Find?

One can find private investors through multiple ways. Many entrepreneurs start out their business by convincing friends and family to invest in them. They can also do this by seeking out outsiders or loans. Here are two major private investors examples for the companies to pitch ideas:

#1 - Venture capitalists

Venture capital is an investment strategy that involves financing the early stages of enterprises with an original business idea. Venture capitalists frequently invest in "startup" businesses that are just ideas or business plans in the initial stages. The company may have a few employees with little or no revenue and still work on its product or business strategy. Investors profit as a shareholder from the acquisition or merger or IPO (Initial public offer) listing of the invested startups. They may also receive a percentage of a share in the organization's profit or charge a professional management service fee.

The entrepreneur must offer a business proposal to the venture capitalist to find one. It could include providing information on target markets, estimated profit margins, corporate objectives, and a road map to achieve those objectives. The companies must also provide an executive overview of the proposal's predicted financials, competitive environment, and other elements. This gives venture capitalists a detailed view of the idea and the path it chooses to take. If the plan appears profitable for the capitalist, they will invest in it.

#2 - Angel investors

Angel investors are typically wealthy or high-net-worth individuals who seek out prospective startup firms to invest in, usually in exchange for an equity stake. In addition, the investor frequently contributes specialized knowledge to help the company achieve its objectives. Angel investors can be affiliated or non-affiliated. Affiliated investors can be wealthy friends and family and are easier to find. People can find non-affiliated investors by approaching investment bankers, accountants, or other professional contacts who can help them get in touch with private investors. There are also networks or websites where businesses can pitch ideas to find one.

The money is not a private investor's loan but an investment. It is because this money must provide returns for the risk taken.

Frequently Asked Questions(FAQs)

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