A friend of mine was offered an opportunity to invest in a late-stage private equity company last year. The story he was told was that he could invest at $2.25 per share. They expected to complete a final round at twice that price within a few months and then go public. It sounded like an opportunity to double his money in short order. To me it sounded risky.
There are cases where companies have a short-term funding need and are willing to give a sweetheart deal to tide them over. There are also cases where companies desperately need cash but getting it might not change their fortunes.
How do you tell the difference? It’s extremely difficult to do the due diligence needed to properly evaluate opportunities like this. Most people in this situation accept that they will either double their money or have their money cut in half. Knowing this, they only invest an amount they can afford to lose (my friend did that).
The company in this story did go public last month but did so at a 50% loss for my friend. Ouch! I’m telling this story not to fault that company or its investors. I’m telling you that story because you won’t hear it from your friends. They only tell you about the ones where they double in money.
About the Author: John O’Connor
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