Investing is all about evaluating risk versus reward. If you invest in a private startup that becomes a Microsoft or Apple, you could earn a substantial return overnight when the company goes public. For example, an early $100 investment in Snapchat would have yielded $22,000 after the company’s initial public offering (IPO) in 2017.1
However, the trade-off is that privately held businesses (PHB) are typically riskier investments than well-capitalized public companies. They are not subject to the same stringent reporting mandates, so it is more difficult to gauge if the investment is at risk of failing when there is no transparency.2
Public companies are required by the Securities and Exchange Commission (SEC) to submit annual reports, which are audited by an independent third party, that contain extensive information about the company’s finances. And because public companies sell shares of stock, they have a source of capital to help grow and expand revenues. Thus, a public company can offer growth prospects in addition to the required transparency and monitoring.3
Another basic difference is that private companies can be more nimble and can act solely under the direction of a talented and visionary founder, while public companies may move more slowly and are subject to the scrutiny of shareholders and a board of directors.
Investing involves risk, including the potential loss of principal. It’s important to consider any investment within the context of your own goals, risk tolerance, investment timeline and the composition of your overall portfolio.
Sources:
1 Amber Deter. Investment U. April 25, 2020. “How to Invest in Startups: What You Need to Know.” https://investmentu.com/how-to-invest-instartups/. Accessed Oct. 2, 2020.
2 Christina Majaski. July 11, 2019. “Private vs. Public Company: What’s the Difference?” https://www.investopedia.com/ask/answers/differencebetween-publicly-and-privately-held-companies/. Accessed Oct. 30, 2020.
3 Ibid.
