I’ve always been fascinated with the intersection of time and money. I enjoy how some individuals are able to maximize their productivity (by spending money) in order to increase their available time. Private investment deals offer an opportunity to learn these skills.
When I was working 60+ hours a week in 2014 as an urgent care doctor, I didn’t want to be bothered with mundane tasks. 1 hour of Urgent Care work meant an income of $130. Dealing with cooking, cleaning, laundry, organizing documents, doing taxes, and financial planning would take away from the money I could earn.
A business works the same way. The owner is able to spend their time making profitable decisions. That’s why it’s worth it to them to hire someone who will serve the coffee and beer, while that owner figures out ways of improving the business.
Most businesses are private entities and they need money to operate. Without loans, most businesses would go under. Many will get to a point where their cash flow can provide the capital they need for growth or improvement.
Money is Needed to Grow
The local bakery, for example, might get a new order from a restaurant to provide 100 loaves a week. The bakery’s capacity is limited because they have only 1 proofing oven. To purchase an extra oven would cost $15,000, which isn’t in their budget. So, the business has to either pass on this account or get a loan for that $15k.
Banks are willing to lend to private businesses but the underwriting can be onerous. Or the rates might be high. Or there might be too much of a delay.
Also, the money that comes from the bank has nothing but a numeric value. The bank isn’t likely to offer any meaningful support to that business. Many small business banks might advertise that they have a SB team but usually these are glorified salespeople who have general information, but nothing specific.
The Private Investor
As a private investor, I can lend money to local businesses in order to help them grow. It’s similar to investing in public companies, like stocks, except that I would be closing a deal with a handshake.
As a private investor, I invest both money and knowledge into the business. I can serve both as an advisor and a checkbook. In some instances, the private investor will take a board seat in order to help make decisions for the company.
Crowdfunding and syndicated deals are forms of private investing. The difference is that a middleman is added into the equation whose interests may not be aligned with the business owner or the investor.
There are a few advantages to investing your money in local businesses:
- higher potential returns
- more flexibility in structuring the deal
- growing your network
- learning new skills
- more control over the success of the business
- improving your local economy
- transparency of transactions
Our local economies are very important. Most of the time it’s the uber wealthy who invest in the cities and states where they live in order to keep that economy viable. This helps maintain their property values and attracts more talent to the city.
And if you like where you live, investing locally means that others around you will also succeed. You know exactly where your money is going and what’s being done with it. Your investment dollars aren’t going to a factory in Burma where computer screens are being manufactured by children. And you’re not feeding mega corporations who decimate forests in order to bring us blood avocados.
Private Investment Deal #1
I have had 2 recent opportunities to invest locally. I’ll write a separate post about the details of the transaction. And, if I choose to invest, I’ll track the progress over the next few years.
A friend owns 2 coffee shops in the Portland, Oregon area and has been selling a bottled beverage as one of their product lines. This product happens to be in high demand and many grocery stores and distributors have expressed interest in carrying it.
She needs about $125,000 in order to grow the product (marketing, tools, employees). It’s already selling well and the profit margins are decent.
Her and I have been talking over the past 3 years in order to address the needs of her growing business. She has been figuring out how to offer retirement benefits and health insurance to her employees.
The next step was for her to get connected with a small business consultant and start her first round of raising capital. She’s soliciting myself and 2 other investors to come up with this first $125k.
I’ll write more about this investment opportunity in the future. But thought it would be a good primer for those interested in similar situations.
Private Investment Deal #2
Another friend is a successful restaurateur. She’s owned and chef’d several restaurants and has managed to make decent money for herself.
She has since relocated to Spain and will be starting a fast-dining chicken restaurant. She has needed help with getting permits and proper working visas, which I have been able to help her with.
Next, she’ll be needing some startup capital. She will be putting up about €25,000 and is looking for another €20,000 in order to get the restaurant off the ground.
If the opportunity is right, I would prefer to be the lender rather than have that investment return go to a bank.
Investing and Losing
It’s wise to only invest the amount of money you’re comfortable losing. In investing, your money can go to zero. You’re trading risk for returns.
Buying Yahoo stock and losing 75% of your investment is a pure loss – not much of a lesson to be learned there. But investing in a local business and advising the owner and making connections and sitting in on meetings – even if you lose 50% or 100% of your investment, you’ll still walk away with a skill and some knowledge.
Finding such private investment deals happens in many ways. Your friends who are starting their own businesses, that’s probably one of the best places to start. Entrepreneurship meetups might be another source.