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"How to Invest in Private Companies: Things to Do and Things to Avoid"

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Popular culture and media have popularized startups as the new 'it' thing in business and have turned on many interests from all kinds of people to join the hype.

Entrepreneurs are getting in line to get that newest billion-dollar idea started, and investors are actively looking for opportunities to be the next big startup investor or incubator.

Today, we will be focusing on the investor side of things, and how to maximize profit as well as maintaining safety while making your investments.

Investing in a private company can be a risky and tedious one, and can require patience due to its generally long-term nature. However, it can be a more rewarding experience, both regarding its profitability and excitement.

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To mitigate risks and increase your chance for profits, here are some of the things you might consider doing:

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1. Speak With The CEO

No matter how famous the startup you are going to invest in is, an opportunity to speak with the CEO, or at least some of the upper management team, is a must-have.

If your investment is organized through a crowdfunding or investment platform, they usually arrange a conference call or online meeting when a face-to-face meeting is not available.

Speaking with the CEO can give you insights about his/her vision, execution, and to some extent, chemistry and affinity with yourself.

2. Understand Their Exit Strategy

How big will the business need to be before it can go into IPO (Initial Public Offering) or acquired by potential buyers? Merger and Acquisition (M&A) is also a popular option.

Their exit strategy can largely determine your returns and liquidity, so make sure you got a clear information regarding the subject.

3. Understand Their Monetizing Plan

Many companies in recent years are actually losing money and living off investors' money without any plans to change the situation.

Understand how the company you're potentially investing in make money (or lose money), and how are they planning to improve and grow.

4. Understand Their Value

Not all good companies are good investments because they might be overvalued. Understand how to calculate a company's value based on several valuation methods depending on the situation and industry they're in.

Be realistic in your expectation, aim for a low purchase price so that even when the future sale is mediocre, you can still get a good profit off it.

5. Get A Lawyer

Legal documents involved in a private company investment can be complicated. It's best to get a legal help to avoid future troubles.

6. Get Customer Data

At the bare minimum, tell to three to five person that use the product or service you are willing to invest in. Talking to customers can give you valuable data not available anywhere else.

Is there a competitor more preferred by customers? Is the price attractive? What would make them change their minds and turn to competitors? Simple answers to these questions can help you make a better decision whether the company is worth investing in.