How to Invest in Private Companies
Table of Contents
- Understanding Private Companies
- Strategic Pathways to Private Investments
- Investing in Pre-IPO Companies
- The Accredited Investor’s Guide
- The Pros and Cons of Private Company Investments
- Considerations for Investing in Private Companies
- Post-Investment Vigilance
- Investment Myths Debunked
- Ready to Invest? Questions to Ask Yourself
- FAQ
For most retail investors, investing directly in private companies can be challenging because shares of privately held companies are not available to trade on public exchanges. But due to the growing interest in private company investing, more investors can now access these companies through certain types of platforms, as well as mutual funds and exchange-traded funds (ETFs) — a trend that may continue.
According to estimates from Deloitte, funds allocated to private capital through various channels — which include private companies and other assets not available on public exchanges — could grow from about $80 billion in 2025 to $2.4 trillion in 2030.
Investors need to bear in mind, however, that investing in private companies is less liquid, less well-regulated, and less transparent than investing in public securities, which trade on public exchanges and are required to file certain documents with the Securities and Exchange Commission (SEC). This makes private-company investing higher risk, and it requires more due diligence.
Key Points
• Investing in private companies means acquiring equity in companies that do not trade on public stock markets
• These investments are highly illiquid, with capital potentially locked up for years.
• Private company investing is also considered high risk due to less regulatory oversight and transparency compared with public companies.
• Retail investors can access private companies through various means, including certain mutual funds and ETFs, early-stage angel investing, venture capital firms, and more.
• More direct private investments, like angel investing and private equity, are typically reserved for “accredited investors” who meet specific requirements.
Understanding Private Companies
A privately held company is owned by either a small number of shareholders or employees and does not trade its shares on the stock market. Thus investors can’t buy stocks online or through a traditional brokerage. Instead, company shares are owned, traded, or exchanged in private.
This gives company stakeholders more control over the organization — but they also bear more responsibility for the company’s performance and financial stability.
How Private Companies Operate
Private companies may include sole proprietorships, limited liability companies (LLCs), partnerships, or other arrangements, and they can be small businesses or global entities. But because these companies are privately held, they aren’t required to file documents with the SEC as public companies are, which puts them in a higher risk category for most investors.
Without that transparency and oversight, it can be difficult to know for certain what the value of a private company is, or track other key financial metrics like sales or profits.
Private Companies and Liquidity
In addition, because private companies aren’t publicly traded, investments in these firms are highly illiquid. Capital may be locked up for a period of years before a company is sold or goes public. These days, that period may be longer, according to a Morningstar analysis. Because private companies are attracting more investor capital, some are taking longer to go public, with the median age increasing from about 7 years in 2014 to roughly 11 years in 2025.
In order to gain access to investor capital, a private company could also undergo an initial public offering (IPO), which means that it has publicly issued stock in hopes of raising capital and making more shares available for purchase by the public.
Nonetheless, as noted above, investors interested in self-directed investing may be able to find new vehicles that allow private company investment.
The Growth Journey: Startups to Unicorns
The appeal of private company investing for some investors isn’t about trading stocks, but possibly getting in on the ground floor of the next big thing. In some cases, the goal of a private company as a startup is to become a “unicorn.” A “unicorn” company is a private company that’s valued at more than $1 billion.
Very few companies become unicorns, and for investors, a primary goal is to find and invest in companies that will become unicorns.
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Strategic Pathways to Private Investments
There are several ways to invest in private companies, though not all of them will be available to every investor. While investing online typically provides access to a range of conventional securities, investors interested in private markets must consider other channels.
Early Stage Investments and Angel Investing
Early-stage investing, often called angel investing, involves making an investment in a fledgling company in exchange for ownership of that company. This tends to be the riskiest stage to invest in, as companies at this stage are small, young, and typically unproven.
In addition, angel investors often put up their own capital, and may provide mentorship to a startup as well. That said, the risk of loss is high, as most startups fail. For this reason, angel investors must be accredited investors. An accredited investor is an individual or entity that meets certain criteria, and can thus invest in hedge funds, private equity, and more.
Venture Capital Firms
Venture capital investors typically work for big firms that specialize in private company investing. They don’t invest their own money, but rather the money of those who have put their money at the disposal of the VC company.
In that sense, VC firms aren’t like angel investors; they enter the picture later, once the company has a longer track record.
Joining Private Equity Firms
Investors can also get involved in private company investing through private equity. Private equity firms invest in private companies, like angel investors, in hopes that the equity they acquire will one day be much more valuable.
Again, this is likely not an option for the average investor, as private equity is usually an area reserved for high-net-worth individuals.
Investing in Pre-IPO Companies
Some investors attempt to invest in companies before they go public to take advantage of any post-IPO spikes in share value. There are a few ways to invest in pre-IPO companies.
Leveraging Pre-IPO Investing Platforms
There are certain platforms that allow investors to make investments in pre-IPO companies. An internet search will yield some of them. Those platforms tend to work in one of a few ways, usually by offering investors access to specialized brokers who work with private equity firms, or by directly connecting investors with companies, allowing them to make direct purchases of stock.
You’ll need to do your own research into these platforms if this is a route you plan to pursue, but also know that there are significant risks with these types of investments.
The Accredited Investor’s Guide
Certain private investments require you to be an accredited investor.
Qualifications and Opportunities
For individuals to qualify as accredited investors, according to the SEC, they need to have a net worth of more than $1 million (excluding their primary residence), and income of more than $200,000 individually, or $300,000 with a spouse or partner for the prior two years.
There are also professional criteria which may be met, which includes being an investment professional in good standing and holding certain licenses. There are a few other potential qualifications, but those are the most broad.
Exclusive Markets for the Accredited Investor
Becoming an accredited investor basically means that you can invest in markets that are typically not accessible to other investors. This includes private companies, and private equity.
Effectively, being “accredited” comes along with the assumption that the investor has enough capital to be able to make riskier investments, and that they’re likely sophisticated enough to be able to know their way around private markets.
The Pros and Cons of Private Company Investments
There are pros and cons to investing in private companies that investors should be aware of.
Advantages of Private Market Engagement
Because private companies are often smaller businesses, they may offer investors an opportunity to get more involved behind the scenes. This might mean that an investor could play a role in operational decisions and have a more integrated relationship with the business than they could if they were investing in a large, public company.
In an ideal scenario, if you invested in a private company, you’d get in earlier than you would when a company goes public. This could translate to a larger or more valuable equity stake, or possibly a more influential role. But that depends on numerous factors as the company evolves, and there are no guarantees.
Investing in a private company might also mean that you are able to set up an exit provision for your investment — meaning you could set conditions under which your investment will be repaid at an agreed upon rate of return by a certain date.
Risks and Considerations
One of the biggest risks involved in investing in a private company is that you’ll almost certainly have less access to information about company fundamentals than you would with a public company. Not only is it more challenging to obtain data in order to understand how the company performance compares to the rest of the industry, private companies are also not held to the same standards as publicly traded ones.
For example, because of SEC oversight, public companies are held to rigorous transparency and accounting standards. In contrast, private companies generally are not. From an investor’s standpoint, this means that you may sometimes be in the dark about how the business is doing.
And even though there may be an opportunity to set up an exit provision as an investor in a private company, unless you make such a provision, it could be a huge challenge to get out of your investment.
Considerations for Investing in Private Companies
Just like investing in public stock exchanges, there are some steps that investors may want to follow as a sort of best-practices approach to investing in private companies.
Conducting Thorough Research
Doing sufficient research is essential when investing in a private company. As noted, this may be difficult as there’s going to be less available information about private companies versus public ones. You also won’t be able to research charts and look at stock performance to get a sense of what a company’s future holds.
Identifying and Assessing Potential Deals
The goal of due diligence is to identify companies that appear healthy, are competitive, and that you think have a good chance of surviving the years ahead.
The Transaction: Making Your First Private Investment
Depending on how you choose to invest, making your first private company investment may be as simple as hitting a button — such as on a private crowdfunding website or something similar. Just know that it’ll probably be a bit different than buying stocks or shares on an exchange.
Post-Investment Vigilance
As with any investment — public, or private — investors will want to keep an eye on their holdings.
Monitoring Your Investment
Monitoring your investment in a private company is not going to be the same as monitoring the stocks you manage in your portfolio. You won’t be able to go on a financial news website and look at the day’s share prices. Instead, you’ll likely need to be in touch with the company directly (or through intermediaries), reading status reports and financial statements in order to learn how business is operating.
It’ll be a bit opaque, and the process will vary from company to company.
Exit Strategies and Liquidity Events
When an investor “exits” an investment in a private company, it means that they sell their shares or equity and effectively “cash out.” If an investor bought in at an early stage and the company gained a lot of value over the years, the investor can “exit” with a big return. But returns vary, of course.
Liquidity events present themselves as times to exit investments, and for many private investors, the time to exit is when a company ultimately goes public and IPOs. But there may be other times that are more favorable to investors, depending on the company.
Investment Myths Debunked
As with any type of investment, private companies are the subject of certain myths.
Setting Realistic Expectations
A good rule of thumb for investors is to keep their expectations in check. In all likelihood, you’re not going to stumble upon the next Mark Zuckerberg or Jeff Bezos, desperately looking for cash to fund their scrappy startup. Instead, you may be more likely to find a company that has good growth potential but no guarantee of survival.
For that reason, it’s important to always keep the risks in mind, as well as what you actually expect from an investment.
Common Misconceptions
Some further misconceptions about private investing include that it’s only for the ultra-rich, that every investment may offer high returns (along with high risks), and that profits will come quickly. An investment may take years to ultimately pay off — if it does at all.
Ready to Invest? Questions to Ask Yourself
Once you know more about private markets, there are still some questions to consider.
Assessing Your Risk Tolerance
Are you okay with taking on a significant degree of risk? Private company investing, with its lack of transparency and oversight, comes with more risk exposure. Take stock of how much risk you can handle financially, as well as your personal tolerance for risk,
Aligning Investments with Personal Goals
Consider how your investments in private markets align with your overall investing goals. It’s important to remember that private markets are higher risk and also less liquid. Any capital you invest could be tied up for a longer period of time than it would be with more conventional investments.
The Takeaway
Investing in private companies entails buying or acquiring equity in companies that are not publicly traded, meaning you can’t buy shares on the public stock exchanges. Because this is a higher risk type of investing, there is a possibility of bigger gains, but the potential downside of these companies is significant.
Private markets are not regulated by the SEC in the same way that conventional markets are, with less stringent reporting rules, for example.
Investing in private companies is not for everyone, and there may be stipulations involved that prevent some investors from doing it. If you’re interested, it may be best to speak with a financial professional before making any moves.
Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.
FAQ
Who is the owner of a private company?
Shares of private companies can be held by the founder(s), employees, family members, and in some cases angel or VC investors. A public company, by contrast, is owned by the shareholders.
Why are private companies riskier investments than public ones?
Public companies are required to file key documents regularly with the SEC, and this level of transparency and accountability helps to make the risks associated with those companies more visible. Private companies don’t have to share this information, therefore investors may find it hard to know what they’re getting into.
How much capital is needed to invest in a private company?
There isn’t a limit to how much capital needed to invest in private companies, but to be an accredited investor, there are income and net worth limits that may apply.
What are the time commitments and expectations?
There are no hard and fast time commitments or expectations of private investors, in a general sense. But that may differ on a case by case basis, especially if an investor takes a broader role with managing a company they’re investing in.
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