How to Evaluate Private Investment Opportunities

Evaluating private investment opportunities requires careful analysis and due diligence. Unlike public companies, private investments have less regulatory oversight and fewer disclosure requirements, making thorough evaluation essential.

The Due Diligence Framework

Before investing in any private offering, follow this structured approach:

Golden Rule

Never invest money you can't afford to lose, and never invest in something you don't understand.

Understanding the Offering Documents

Private Placement Memorandum (PPM)

The PPM is your primary source of information. Key sections to review:

Executive Summary: Overview of the investment opportunity
Business Description: What the company does and how it makes money
Risk Factors: Comprehensive list of what could go wrong
Use of Proceeds: How your money will be spent
Management Team: Who's running the company
Financial Information: Historical and projected financials
Terms of the Offering: Price, minimum investment, investor rights

Subscription Agreement

This is the legal contract between you and the company. Review:

Investment amount and payment terms
Representations you're making (accreditation, sophistication)
Restrictions on transferability
Dispute resolution mechanisms

Operating Agreement / Shareholder Agreement

Understand your rights as an investor:

Voting rights
Information rights
Distribution preferences
Exit provisions

Evaluating the Business

Business Model Assessment

Ask these critical questions:

How does the company make money? - Understand the revenue model
What's the competitive advantage? - Sustainability of the business
Who are the customers? - Market validation
What are the unit economics? - Profitability potential
How scalable is the business? - Growth potential

Market Analysis

Market size: Is the opportunity large enough?
Growth rate: Is the market expanding or contracting?
Competition: Who else is serving this market?
Barriers to entry: What protects the company?
Regulatory environment: Are there compliance risks?

Research Tip

Look beyond the PPM. Search for news articles, industry reports, customer reviews, and independent analysis of the market and competitors.

Evaluating the Team

Management quality is often the most important factor:

Key Questions

Track record: Have they successfully built companies before?
Domain expertise: Do they understand the industry deeply?
Skin in the game: How much of their own money is invested?
Team completeness: Are all key roles filled?
Compensation: Is it reasonable and aligned with investors?

Red Flags

Watch out for:

Excessive management fees or salaries
No personal investment from founders
High turnover in leadership
Lack of relevant experience
Reluctance to answer questions

Financial Analysis

Historical Financials

If available, review:

Revenue growth trends
Gross and operating margins
Cash burn rate
Customer acquisition costs
Lifetime value of customers

Projections

Evaluate projections skeptically:

Are assumptions reasonable and documented?
How do they compare to industry benchmarks?
What's the path to profitability?
How much capital is needed to reach milestones?

Caution

Projections are inherently uncertain. Focus on the assumptions behind the numbers, not just the numbers themselves.

Risk Assessment

Types of Risks

| Risk Category | Examples | |--------------|----------| | Market Risk | Competition, market size, timing | | Execution Risk | Team capability, operational challenges | | Financial Risk | Cash runway, funding needs, unit economics | | Regulatory Risk | Compliance requirements, licensing | | Technology Risk | Development challenges, obsolescence | | Legal Risk | IP protection, litigation exposure |

Mitigating Factors

Look for evidence of risk mitigation:

Diversified customer base
Recurring revenue
Strong IP protection
Experienced advisors
Adequate capital reserves

Deal Terms

Valuation

Is the valuation reasonable for the stage?
How does it compare to similar companies?
What's the implied return requirement?

Structure

Equity vs. debt vs. convertible instruments
Liquidation preferences
Anti-dilution provisions
Board representation

Investor Rights

Information rights (regular updates, financial statements)
Pro-rata rights (ability to maintain ownership %)
Drag-along and tag-along rights
Veto rights on major decisions

Conducting Reference Checks

Don't skip this step:

Current investors: What's their experience?
Former employees: Why did they leave?
Customers: Are they satisfied?
Industry experts: What's the company's reputation?
Competitors: How do they view the company?

Creating Your Investment Thesis

Before investing, write down:

Why this investment: What's compelling about it?
Key assumptions: What must be true for success?
Exit scenario: How and when could you realize returns?
Position size: How much relative to your portfolio?
Risk tolerance: What would cause you to lose the entire investment?

Final Check

If you can't clearly articulate why an investment makes sense and what the risks are, you probably shouldn't invest.

Red Flags Checklist

Be cautious if you encounter:

Pressure to invest quickly
Guaranteed returns or unrealistic promises
Unwillingness to provide documentation
No professional advisors (lawyers, accountants)
Related party transactions without disclosure
Lack of clear use of proceeds
Management unwilling to meet with investors
Too-good-to-be-true projections

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