With the rise of entrepreneurship, investing in someone else’s business by buying their equity has become an attractive option for many investors. By leveraging others’ expertise and efforts, it may allow investors to tap into lucrative opportunities without hands-on involvement. However, choosing the right business to invest in is tricky. Reading books written by experienced investors provides a wealth of insights on how to make informed investment decisions. By learning from their first-hand experiences, mistakes, and lessons, retail investors can develop sound judgement and maximize their potential returns.
Understand the fundamentals of equity investment
Many books on investing in private businesses cover the basics, like the differences between debt and equity financing, how to evaluate a company’s financials, as well as the risks and rewards. Books like ‘The Business of Good’ by Social Capital CEO Chamath Palihapitiya and ‘Venture Deals’ by Brad Feld provide step-by-step guidance on the entire process from sourcing deals to due diligence to negotiating terms. Understanding the fundamentals will enable investors to make educated decisions.
Learn from seasoned investors
Books written by veteran investors like ‘Venture Capitalists at Work’ by Tarang Shah provide an inside look at how top VCs source deals, evaluate opportunities and manage their portfolios. Meanwhile, memoirs like ‘Shoe Dog’ by Nike founder Phil Knight recount the entrepreneurial journey from raising early capital to taking the company public. By learning from their real-life stories, investors can gain key insights on how to pick winners and avoid pitfalls.
Understand company valuation methods
Valuing an early-stage company involves more art than science. Books like ‘Venture Capital Valuation’ by Lorenzo Carver demystify key valuation concepts and methods like discounted cash flow, comparables analysis, and VC method. By understanding how investors value companies, everyday investors can better evaluate investment risks and returns. Other books like ‘The Art of Startup Valuation’ by Galen Roadman offer practical frameworks to estimate valuations.
Master deal terms and structures
Books like Brad Feld’s ‘Venture Deals’ and ‘The Entrepreneur’s Guide to Law and Strategy’ by Constance Bagley & Craig Dauchy offer actionable advice on negotiating favorable deal terms and choosing the right financing structures. Learning how to protect downside risks while preserving upside potentials can help investors maximize returns. Model legal documents and term sheet examples make these books useful references.
In sum, reading books by experienced investors provides tremendous value for everyday investors seeking to invest in private businesses. By mastering the fundamentals, learning from experts, understanding valuation, and negotiating favorable deal terms, retail investors can make informed decisions and achieve better risk-adjusted returns.