Fuel growth, create opportunity—and profit
Companies in all stages of the business cycle need capital to run successful, competitive businesses. However, traditional funding isn’t always readily available to all organizations. Fortunately, this creates the opportunity for a win-win as business investments can benefit the investor and the company alike.
Let’s explore different types of business investments and how to get involved as an investor.
What Does it Mean to Invest in a Company?
Business investments provide capital to businesses, typically in exchange for a share in future profits of the company through equity ownership or interest income through loans or bonds.
Investors can be individuals, groups, or other companies. Three general types of investors are pre-investors, passive investors, and active investors. The first two categories take a passive management approach. The business owners and managers operate the business as they see fit. However, active investors become involved in managing some or all aspects of the business.
Investors also differ in which stage of a business they typically invest, the amount of funds provided, the level of risk they are willing to take, and the percentage of ownership they seek. Investors with more than a 50% ownership of a company are considered majority investors. With this level of ownership comes the privilege and responsibility of influencing how the business is run. Minority investors, on the other hand, own less than 50% of a business. They are more likely to be passive investors without being involved in day-to-day operations or decision making.
How to Invest in a Business
Business investments are structured in many ways depending on the investor’s preferences and the company’s needs. These are a few popular types of business investments along with real-world examples:
Crowdfunding
Crowdfunding offers a way to dip your toe in the water of business investing. Companies raise money, provide new products as rewards, or receive loans from a large pool of smaller investments online through crowdfunding. Investors can find opportunities in any industry imaginable, both for profit and nonprofit, through crowdfunding websites such as Kickstarter, Indiegogo, Crunchbase, Fundable, Mightycause, GoFundMe, CrowdStreet, StartEngine, and many others.
Most platforms specialize in a specific type of investment, so searching for a crowdfunder by industry, such as real estate, or category, such as high-growth startups, is the best way to pinpoint your preferred platform.
Example: Many successful companies have utilized crowdfunding to help fund growth and jumpstart new projects. Some of the most recognizable names include Oculus Virtual Reality who raised $2.4 million in 2012 (and later sold to Facebook for $2 billion in 2014), Allbirds who raised $120,000 in 2014, Peloton who raised $300,000 in 2013, and MVMT Watches who raised $265,000 in 2013.
Publicly Traded Companies
One of the most common ways to invest in a business is to buy shares of a publicly traded company. Investors can purchase stocks that are listed on an exchange like the New York Stock Exchange or Nasdaq. The value of the shares rises and falls based on the company’s financial performance and other investors’ willingness to purchase or sell the shares. Investors profit if the value of the stocks has increased when they sell, and when profits are returned to shareholders through dividends.
In addition to purchasing equity ownership of a public company, some businesses also have publicly traded debt which can be bought and sold in a similar manner to public equity. With debt financing, investors provide money to the business in the form of a loan that the company must pay back over a specified time with interest.
Example: The two largest stock exchanges in the world—the New York Stock Exchange and Nasdaq—combined have over 5,000 companies listed that anyone can purchase ownership of. The largest and most well-known companies are often listed on these exchanges, such as Apple, Amazon, Walmart, and Coca-Cola.
Privately Owned Companies
While it’s not as straightforward and easy as investing in publicly traded companies, it’s also possible to invest in privately owned businesses. Unlike public companies, private companies can be tricky to value as they are not required to file financial statements, may be illiquid, and can be more difficult to buy or sell. Because of these limitations, investing in private businesses is generally more risky than investing in public companies. However, there are several options available for those interested.
You may know someone personally who owns a business and is interested in your investment. This could be a neighbor who owns a local pizza shop or your nephew who is starting the next Amazon in his parent’s garage. If you are an accredited investor, you may have additional options available to you. Specialized business brokers represent private businesses looking for investment or a full sale. If you are interested in investing in pre-IPO companies, several online platforms such as Hiive, Linqto and EquityZen also offer sales of shares.
Example: Private companies from leading-edge disruptors to household names sell shares to accredited investors, including OpenAI, SpaceX, Canva, and Stripe. Others, like Hobby Lobby, rely on loans to get their fledgling businesses off the ground.
Fund Investments
Private equity, venture capital, and angel investors are all types of investment firms that earn profits by helping the companies they invest in grow. These firms pool funds from investors, typically high-net-worth individuals or institutional investors, and professionally manage those funds. Minimum investments often range from $25,000 to several million dollars.
Because these investments are high return and high risk, investors need to understand what they are buying. They often need to be accredited or qualified by the investment vehicle they wish to invest in. That said, private equity investments can potentially provide a higher rate of return with less risk than other traditional means of investments such as real estate or stocks.
Example: North American Kitchen Solutions (NAKS) is a top supplier of customized commercial kitchen hoods, fire suppression systems, and ventilation. With a strong management team and a leading-edge digital marketing strategy, NAKS has built a diverse customer base and earned a reputation for innovation in ventilation technology. Valesco supported a private equity majority buyout alongside Centerfield Capital Partners to capitalize on NAKS’ market position, identifying growth opportunities through new products, expansion, and customer acquisition.
Entrepreneurship
Business savvy individuals often choose to start their own businesses, investing their own money, time, expertise, and planning. You can start from scratch or even buy an existing business or a franchise.
Entrepreneurship requires upfront research to ensure there is a market for your product or service and to ensure you can provide a high-quality solution and sell and distribute it effectively.
Despite the allure, about 90% of startups fail—10% in their first year. The estimated failure rate for franchises is also significant, ranging from 20 to 50 percent. Even if you purchase an existing business, it’s crucial to do your research to improve your chances of success.
Business Investments Fuel Growth and Create Opportunities
Business investments drive economic growth, promote innovation, and create opportunities for investors and entrepreneurs. Whether through equity financing, debt instruments, or alternative methods like crowdfunding, these investments provide capital for organizations to expand, develop new products, and compete successfully.
There are various ways to invest in businesses, each with its own set of risks and potential rewards. By understanding the different types of investments and considering their options, you can participate in the growth of businesses and potentially reap financial benefits