In prior issues of Deal Report, we have repeated several important themes for you to consider as you build a private investing portfolio to rival your public investments.

One of those themes is that you should be prepared to continue to support a company as it grows as long as it is meeting your expectations. Growing companies need capital and many will want to tap the private markets several times before even considering an IPO. Multiple rounds of private investments are a hallmark of venture capital investing and are becoming increasingly important for retail private investing like Regulation A and Regulation CF.

Today Deal Report wants you to focus on those expectations because as a private investor you get fewer signals from outsiders about how a company is doing. With a typical public company, at least one and often several Wall Street analysts will follow the company and publish estimates for important investment metrics like revenue and earnings growth, market share, gross margin, and the like. Additionally, the entire stock market votes on the price of a company every day. In private investing, if you don’t have someone at your side you will not get any of that information. You must rely on the company’s SEC filings, public information, and your own analysis.

Most people have a psychological need to believe that they are right, and that means they can often fool themselves for quite some time when the facts turn against their earlier decisions. If you are to be a successful private investor you must overcome that need. In particular, you must decide whether a company is meeting your expectations when it comes to you for an additional investment round.

One way to help keep you disciplined is a simple one: write those expectations down. Writing down your expectations so you can review them later is among the easiest things you can do to combat your need to believe that your first instinct is right.

For every private company you purchase you should have a folder. It should have copies of the documents you signed when you made your purchase like your subscription agreement, a copy of the company’s financial filings (or at least an easy link to the company’s SEC filings), and a copy of the investor deck if the company has produced one. And this folder should have your expectations for the company at the time you made your initial investment. This folder can be virtual on your computer or it can be a physical folder in a drawer.

The expectations you have will change with each company, so we cannot provide an exhaustive list. But here are some of the things you should consider tracking right from your first investment.

Revenues: If the company is pre-revenue when will revenues start? Once revenues begin, how fast do you expect them to grow?

Profitability: Does the company have positive EBITDA? When will the company start to generate positive EBITDA, and will it stay positive? Will EBITDA grow with revenues or do you expect EBITDA to grow more quickly?

Corporate development: Is the company making the key hires you expected it to? Do the new hires have the kind of background you were hoping for?

New Products: If the company is expanding its product line, is it doing so in line with your expectations? Are the new products of the same or better quality than the ones that attracted you to the investment?

Distribution: Is the company growing its channels for selling its product or service?

Success raising funds: This is one item that too many investors overlook. When you make an investment in a private company, it is likely to be during the course of a year-long campaign to raise money. Often it makes sense to invest early in a company’s round since it may fill quickly or the company may increase the price. But once you’ve done so it makes sense to check back in with the company from time to time to ensure it is continuing to raise enough money to achieve its goals.

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Important Disclosure! These are not official recommendations. Investing is risky. Before making any

investments, we strongly advise you to discuss your investment options with your financial advisor, including whether any investment is suitable for your specific financial circumstances and needs.

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Besides broad categories like the ones above, write down whatever it was that attracted you to the company. Was there a superstar sales executive that you believed could turn the company’s products into hits? Is that person still there? If the company depends on the success of a cutting-edge technology, is it keeping up its advantage or are competitors catching up or passing the company? If there is a regulatory approval necessary for the company to succeed (approval of a medical device, issuance of a mining permit, etc.), is the company making progress towards approval?

None of these expectations should be absolute. It is a rare company that does not have at least some stumbles on the way to success. But writing down your expectations and updating them over time will remind you of why you invested in the company. And if the company is falling short on too many of your initial expectations, you can avoid making costly investment mistakes. 

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