Sophisticated Investors May Use Private Placements in Funding
Introduction
Since the advent of the Internet, considerable publicity has surrounded the efforts of a number of successful startup ventures to "go public" and sell shares of stock to the general public. This process can enable an entrepreneur (or small group of entrepreneurs) to shepherd a commercial enterprise from someone's garage into a multi-billion dollar Main Street acronym. In the past, Ebay, Facebook, Twitter, Google and many other companies that have become international household names today began as new ideas in the minds of bright entrepreneurs. The phase of "going public" sometimes represents a landmark in that money generating process.
Until businesses attain the resources to launch public offerings, however, many rely mainly upon private placement funding. In fact, this form of capitalist undertaking sometimes proves so lucrative that many large firms remain privately held and do not endeavor to sell their stocks to the world at large. Koch Industries, Cargill and some very successful multilevel and direct sales firms fall into this broad category.
Public or Private?
When entrepreneurs consider the future of their firms, often one of the earliest points of discussion necessarily involves whether or not an initial public offering (the famous "IPO") awaits the firm. There may be pros and cons associated with any private placement.
Naturally, not every benefit or detriment pertains in every case, since of course, just like people, companies prove highly individual in character. Commercial enterprises operate within unique industries and sometimes encounter very different market circumstances from one firm to another. Yet just consider these common advantages and disadvantages surrounding private placement offerings:
Some Widespread Advantages
Private placements lend themselves to closed door transactions. Consequently, the identities of powerful funders may prove more difficult for financial journalists and other to track down when private placements occur. If a backer possesses a history that generated poor publicity in the past, that sponsor's participation in a new venture may not necessarily contribute unfavorable headlines to the privately backed firm. The sponsor may furnish a startup with valuable guidance and funding without disclosing a lot of details.
Another advantage offered by private placement concerns "under the radar" investment. When famous billionaires pour money very obviously into particular industries or startups, observant financial analysts point their interest out to clients who may then begin spending money in support of competing firms. When a new technology holds promise, some wealthy "angel investors" prefer to operate from a less visible position, so that the startup they back may enjoy an opportunity to thrive in a cutting edge field without also having to ward off a horde of successful imitators. The wealthy funders may ultimately derive more profit in this way.
Some Frequent Disadvantages
Of course, private placement often holds disadvantages, too. For one thing, investors who spend resources assisting firms privately sacrifice the benefits that some strict IPO regulatory disclosure laws provide. If new technology proves groundless, or simply speculative, these investors may find themselves financing expensive research that provides few meaningful results.
An illustration occurs in the exploration and development of potentially promising mineral reserves. In the past, especially, starting a mining venture often involved the expenditure of huge sums of money before the extent of a mineral deposit could be established in full. Today, new technology has greatly assisted this process; however, any private placement funders still bear the risk that for some reason, a mining venture won't succeed or will cost far more than expected. The disclosure requirements for IPOs make companies spell out these risks in more detail.
Conclusion
Like many other aspects of money management, private placement and even private placement capital notes involves mixed blessings.
Since the advent of the Internet, considerable publicity has surrounded the efforts of a number of successful startup ventures to "go public" and sell shares of stock to the general public. This process can enable an entrepreneur (or small group of entrepreneurs) to shepherd a commercial enterprise from someone's garage into a multi-billion dollar Main Street acronym. In the past, Ebay, Facebook, Twitter, Google and many other companies that have become international household names today began as new ideas in the minds of bright entrepreneurs. The phase of "going public" sometimes represents a landmark in that money generating process.
Until businesses attain the resources to launch public offerings, however, many rely mainly upon private placement funding. In fact, this form of capitalist undertaking sometimes proves so lucrative that many large firms remain privately held and do not endeavor to sell their stocks to the world at large. Koch Industries, Cargill and some very successful multilevel and direct sales firms fall into this broad category.
Public or Private?
When entrepreneurs consider the future of their firms, often one of the earliest points of discussion necessarily involves whether or not an initial public offering (the famous "IPO") awaits the firm. There may be pros and cons associated with any private placement.
Naturally, not every benefit or detriment pertains in every case, since of course, just like people, companies prove highly individual in character. Commercial enterprises operate within unique industries and sometimes encounter very different market circumstances from one firm to another. Yet just consider these common advantages and disadvantages surrounding private placement offerings:
Some Widespread Advantages
Private placements lend themselves to closed door transactions. Consequently, the identities of powerful funders may prove more difficult for financial journalists and other to track down when private placements occur. If a backer possesses a history that generated poor publicity in the past, that sponsor's participation in a new venture may not necessarily contribute unfavorable headlines to the privately backed firm. The sponsor may furnish a startup with valuable guidance and funding without disclosing a lot of details.
Another advantage offered by private placement concerns "under the radar" investment. When famous billionaires pour money very obviously into particular industries or startups, observant financial analysts point their interest out to clients who may then begin spending money in support of competing firms. When a new technology holds promise, some wealthy "angel investors" prefer to operate from a less visible position, so that the startup they back may enjoy an opportunity to thrive in a cutting edge field without also having to ward off a horde of successful imitators. The wealthy funders may ultimately derive more profit in this way.
Some Frequent Disadvantages
Of course, private placement often holds disadvantages, too. For one thing, investors who spend resources assisting firms privately sacrifice the benefits that some strict IPO regulatory disclosure laws provide. If new technology proves groundless, or simply speculative, these investors may find themselves financing expensive research that provides few meaningful results.
An illustration occurs in the exploration and development of potentially promising mineral reserves. In the past, especially, starting a mining venture often involved the expenditure of huge sums of money before the extent of a mineral deposit could be established in full. Today, new technology has greatly assisted this process; however, any private placement funders still bear the risk that for some reason, a mining venture won't succeed or will cost far more than expected. The disclosure requirements for IPOs make companies spell out these risks in more detail.
Conclusion
Like many other aspects of money management, private placement and even private placement capital notes involves mixed blessings.