Investing in private companies: Risk vs Reward

Written by Snowball Effect · Published on Tue, 27 April 2021

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Building a portfolio of investments is one way to get ahead financially. But it’s important to understand the different types of investments and what returns and benefits you can expect from each.

Here at Snowball Effect we’ve helped more than 25,000 New Zealanders invest in high-growth companies in industries ranging from technology and software to consumer goods and food & beverage. We've enabled everyday kiwis to build their very own investment portfolios.

Saving vs investing

Saving and investing are very different things. Saving money is all about setting aside money to use in an emergency, or putting it towards a significant purchase such as a holiday or car. Saving is low-risk and it’s often very easy to access saved funds when you need them.

By contrast, investing is normally a long-term financial commitment to holding shares, stocks or real estate. Investments often carry more risk but have the potential to bring in greater returns than a savings account. A wide range of investment options exist in New Zealand and the most common is fairly passive invest held through the KiwiSaver scheme.

Types of investments

Each type of investment has a different level of risk as well as potential returns. Investments can include:

  • Company shares
  • Debt funding
  • Property
  • Bonds
  • Stock
  • Cryptocurrency
  • Bank investments such as Term Deposits
  • Managed funds
  • Foreign exchange
  • Commodities such as gold
  • Hedge funds

Benefits of investing in companies

Investing in a private company can be an attractive way to diversify your portfolio but it’s not always easy to do. Since 2014 we’ve been focused on connecting great companies with people looking for unique investment opportunities. The majority of companies who raise capital with Snowball Effect are in a growth phase, so they are not yet at a point where they return surplus cash to investors through dividends. Profit is reinvested into their business to help grow revenue, which in the future could allow them to pay higher returns to investors. However, despite not receiving a return straight away, there are still several benefits in investing in a high-growth private company.

One benefit of investing in a high-growth company is that by getting in early, investors can benefit from the increase in company value as it grows. Investors should look for share price appreciation, revenue and EBITDA increases over time, and improvements in gross margin and profitability. Those who invest once the company is more established run the risk of not seeing the same level of returns.

Another benefit of investing is the chance to be part of a company’s growth journey. Many investors find it rewarding to be part of the support system that enables a company to expand its operations, hire more staff and explore overseas opportunities.

Investment risks

When investing in a growth business, a general rule of thumb is to only invest funds that you are happy not seeing a return on for a while, and possibly never. While investing in private companies has the potential for higher returns, it also carries a higher risk level.

Before investing in a private company, we encourage investors to do their due diligence and read all offer material, consult their financial advisor and ask any questions they may have.

Find out more about investing through Snowball Effect here and information on our latest public and private investor offersOur team is happy to answer any questions and can be contacted at [email protected] or by calling 0800 SNOWBALL.