High net worth (HNW) investors looking to make investments in the private market with budding startups that interest them and align with their passions have the opportunity to create a diverse portfolio with the potential for big returns. With more opportunities to invest directly in startups shaking up their industries, more investors are looking to act as their own venture capital firm, funding the businesses they see making seismic impacts in their markets.
HNW investors need to keep an eye out for the most successful, lucrative and impactful categories for their portfolio. Emerging digital technologies continue to be lucrative, and categories like health care tech, education tech, financial technology, gaming, media and green technologies are all areas primed for innovation.
Where do you start? Ensure you have a firm selection criteria that meets your core values and passions. If you have experience in the space, even better. For those looking to make impactful investments in sustainability, for example, make sure you identify those who comply with ESG standards. Beyond that, HNW investors can also consider one or more “stunning outliers” that meet their criteria and are deemed likely to create or define an altogether new category the market has not seen.
Diversification & Tax Benefits From the Private Market
HNW investors looking to invest in companies that align with their values should consider partnering with early-stage investment groups to eliminate the work of having to research individual startups that align with their values and goals, as the investment companies are already investing in a diverse portfolio of startups. They do the work of an advisor with none of the fees and with tax benefits like Qualified Small Business Stock (QSBS).
When both the investor and the firm satisfy specific criteria, QSBS protects the investor from capital gains taxes after a specified length of time (five years), making a business investment even more appealing. While traditional investments are great, it’s also crucial to keep a look out for unorthodox investment options that benefit HNW investors. Many HNW investors have realized that having access to entrepreneurial startups should be a critical component of their entire portfolio mix. These investors should be aware of the QSBS exclusion. Not only are they missing out on important private market appreciation, but they’re also missing out on some major tax savings if they don’t engage in venture capital this way. This tax saving certainly adds to their IRR.
By partnering with early-stage investment groups, HNW investors can be reassured that they will be presented with startups that align with their passions and beliefs as the early-stage investment group is constantly evaluating how startups are making a meaningful impact in their industries and how they’re creating potential returns.
Understand Your Risk Management Options When Acting as Your Own VC
Almost every startup business model includes fundraising, but many entrepreneurs lack a systematic process for discovering and ranking potential HNW investors, many of whom work outside of traditional venture capital or angel investment groups.
Given that investment companies are typically led by experienced industry professionals, there is already a level of risk management when it comes to vetting their startup investments. These groups are more likely to be open to alternative funding strategies, like a patient capital approach, which will help ensure long-term success.
Traditionally, advisors can guide clients on how to diversify their portfolios, but that same approach is often not an option for retail investors and hasn’t really taken off in the startup investing space. When you invest with these companies, the professional research and expertise is built into the investment process.
New opportunities emerging in the private market are giving HNW investors options to bring new technologies, ideas and impact into their personal investing strategies. Through diversification, little-known tax benefits and working alongside professionals in the startup investing space, these individuals can make meaningful investments.
Eric White is the president of Seismic Capital Company.
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