Private Investors

Updated on March 22, 2024
Article byAswathi Jayachandran
Edited byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

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.

Key Takeaways

  • 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

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Private investors invest majorly in growth opportunities. They may hold investments away from the capital marketsCapital MarketsA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more 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 marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more. After analyzing the cost-benefit ratioCost-benefit RatioThe benefit-cost ratio measures the monetary or qualitative correlation of a project's or investment's cost with the benefits a company or individual will acquire from it. It is computed by dividing the present value of the project's expected benefits from the present value of the project's cost.read more 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.

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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 conglomerateConglomerateA conglomerate in business terminology is a company that owns a group of subsidiaries conducting business separately, often in distinct industries. It reflects diversification of operations, product line and market to allow business expansion.read more, 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 offeringInitial Public OfferingAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more (IPO). When the company went public in the ’90s, its market capMarket CapMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more 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 shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more, 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 capitalVenture CapitalVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more 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 revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more and still work on its product or business strategy. Investors profit as a shareholder from the acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more or merger or IPO (Initial public offer) listing of the invested startupsStartupsA startup can be expressed as a business in its initial phases, searching for a practical and scalable model. Often, these companies launch and market a unique idea, product, or service that in some way offers fresh benefits to the society. Reliable models aid in the rapid growth of the business.read more. 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 marketsTarget MarketsA target market consists of different groups of individuals, households, and organizations towards which a company aims to offer its products and services.read more, estimated profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more, 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 investorsAngel InvestorsAngel investors refer to wealthy investors who supply capital to budding businesses in return for a portion of their equity. read more 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)

What do private investors want?

Private investors want profits; however, they steer clear of speculation and invest in the business for the long term. Their focus is on growth and improvement, apart from making a good return on their investments.

How to find private investors for small businesses?

Individuals can pitch ideas to potential investors by demonstrating the business idea, profit margins, and competitors. Small businesses should also provide the ways and means to achieve these goals and other necessary details for the investors to decide. The investor will invest if the idea is found fruitful.

How do private investors make money?

They select potential businesses and provide ideas to make the ideas more profitable. Benefits are reaped after a long-term investment. Angel investors and venture capitalists may take a stake in equity or charge a fee as profit.

How much does a personal investor make?

The profit made by personal investors differs from case to case basis. It may vary due to the size of the investment made or the amount invested.

This has been a guide to Private Investors and their Definition. Here we discuss how to find private investors & their explanations along with examples. You can learn more from the following articles – 

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