It’s common for businesses to look for financing during the early stages of operations. However, the ideas behind some businesses is so foreign or unexplored that traditional investment companies are weary to take a chance with them. This is the purpose of private equity investment companies. They celebrate and provide funding for innovative companies such as Pinterest and Twitter, and they often require intuitive and successful businessmen to head them, such as Wes Edens of Fortress Investment Group.
Why Private Equity Companies Take a Chance on Innovation
Investment firms that offer private equity investing are often seen as valuable assets to the business world. However, there are two main reasons why they invest in forward-thinking start-up companies. First, their investments give them a chance to be on the ground level of potentially huge companies that are pushing the proverbial envelope. Second, the investors typically generate a higher return on their investments compared to other, more traditional portfolio investments such as stocks and bonds.
Risks Involved in Private Equity Investing
While these investment firms may be considered forward thinking for investing in start-up companies, they also undergo a lot of risk. No matter how interesting or grand the idea of a start-up company seems, there is always a chance that it may fail. Also, the investments that they make are illiquid, which means that they cannot easily gain access to their invested capital. For example, if a start-up company takes eight to nine years to execute an initial public offering, the investors have to wait that long before they can sell their stock in the company.
Why Investing in Forward-Thinking Businesses Is Crucial
Since there is a certain amount of risk involved with investing in start-up companies, it’s often wondered why private equity investment firms even consider giving funds to these companies. Without private equity investing, some of the most well-known companies wouldn’t be around today, including Google, which is now a huge company known around the world.
The Benefits of Being Backed by Private Equity
With such a great chance to see a high return on investment, it’s easy to see why investors are willing to take a chance on small start-up companies. However, this doesn’t explain why the companies choose private equity over traditional funding methods. Sometimes it’s because more traditional investment firms won’t take a chance on them. Another reason is because companies that are backed by private equity typically grow faster than other businesses.
Everyone Benefits From Private Equity
Private equity investing allows three major groups to benefit. First, the company that receives funding benefits because it now has access to the money that it needs to grow. Second, the investors benefit because they are on the ground floor of a company that could grow into something major. Lastly, the general public benefits because start-up companies wouldn’t be possible without private equity. Since there are nearly 7.5 million people employed by companies that receive private equity funding, it’s easy to see how it helps the economy.
In the end, private equity is often seen as a great way for small businesses to achieve success and grow into something more. The funding achieved from private equity provides business owners with the necessary funding to handle day-to-day operations. With these problems covered, they are free to focus on growing their brands.