A family can draw on an experienced investor’s expertise and research when assessing a company. The investor’s decision to commit capital to that company can provide further reassurance. How much reassurance the family should draw from that commitment depends partly on whether the investor’s terms and circumstances are comparable to the family’s.
The investor may, for example, be a fund that backed the company at an earlier, lower valuation. The family may be considering joining a later funding round at a higher price. The higher the price the family pays, the more the company’s value needs to grow for the family to earn its expected return. Cambridge Associates highlights this difference in entry valuations as a potential concern in co-investments. The business may have improved enough to justify the higher price. But the fund’s earlier investment does not, by itself, show that today’s price is attractive for the family. Beyond price, investors in private companies may have different rights to receive information, influence important decisions or sell their holdings.
Even identical terms can have different financial consequences. An amount that is small for the investor may represent a substantial share of the family’s investable wealth. A loss or a request for further funding could therefore affect each differently.
The time each can wait may also differ. The investor’s willingness to hold for ten years provides limited reassurance if the family may need its money sooner. Yet both investors may face restrictions on selling when they wish.
The family and the investor may also have different objectives. The family may not know every reason behind the investor’s decision. It should therefore limit how much reassurance it draws from the investor’s participation.
Experienced investment teams already assess these differences. For a family principal, the useful question to ask the team is: “Which reasons for the other investor’s commitment also support our investment, and what do we need to assess separately?” Significant differences may justify negotiating different terms, investing a smaller amount or declining the opportunity.
The family can reasonably rely on the investor’s expertise without duplicating all the research. It still needs to understand why the investment, on the terms offered, suits its own financial capacity and objectives. When the investment’s prospects or the family’s circumstances change, that understanding helps the family assess whether to stay invested, provide more funding or seek an exit where one is available.