How to Invest in Private Companies: A Clean‑Tech Guide

The experience of investing varies from one sector to the next, with each sector having its own unique risks and complexities. This is particularly true in the clean-tech sector where cutting-edge technologies require large capital investment and involve long timelines. In clean tech, the rewards and risks are high.

 

If you're just getting started as an investor, it's important to understand the regulatory landscape, stages of funding, and other factors involved in this type of investment. Knowing the key metrics for evaluating investments can help you mitigate risk while investing in an exciting sector defined by its innovation and impact.


What Defines Private Investments & Investor Accreditation


Private securities are exempt from SEC registration. They are not sold through a public offering and thus are subject to limited disclosure and reporting requirements.

 

Private offerings are only available to accredited investors. Historically, accredited investors have been individuals with income exceeding $200,000 annually ($300,000 jointly), or a net worth above $1 million excluding their primary residence. In 2020, this definition was updated to allow individuals to qualify "based on defined measures of professional knowledge, experience, or certifications in addition to the existing tests for income or net worth."

 

Accredited investors are allowed to participate in private offerings because they are presumed to have the financial expertise to evaluate and manage risk without public disclosures. This type of investment enables innovative businesses to raise funds quickly while allowing investors to grow their wealth.


Private Investment Vehicles & Company Growth Stages


There are five main vehicles for investing in the private market: direct investments, angel networks, syndicates, venture capital, and private equity funds. Each vehicle involves a different level of risk.

A direct investment is purchased directly from the company without help from a broker. Investors often negotiate these terms directly with company founders. Once the investment is made, the investor may offer the company governance or strategic guidance. Direct investments involve high risk and limited liquidity.


An angel network is a group of high-net-worth individuals who pool resources to invest in startups together. These individuals provide capital, mentorship, business development support, and more. Angel networks get involved with companies at their earliest stages and reduce risk for individual investors by diversifying across multiple deals.


A syndicate is a group of angel investors who work together to invest in a company. Unlike an angel network, syndicates usually have a lead backer, often an experienced angel investor, who performs due diligence, negotiates the terms, and manages the deal. Other investors in the group often invest a smaller amount. It's an ideal arrangement for someone who wants to invest in clean tech without performing their own due diligence.


A venture capital fund is a professionally managed investment vehicle that invests in high-growth, high-risk, early-stage private companies. Venture capital companies eventually exit at the IPO after providing financing, technical guidance, strategic partnership, and more.


A private equity fund is a fund managed by a private equity firm. It's a pooled investment vehicle led by an advisor who pools the money and makes investments on behalf of the fund. Often, these funds acquire stakes in established private companies, more late-stage or mature companies. These funds usually have an investment horizon of 10 years or more.


Early- Vs. Late-Stage Funding

Understanding the stages of funding is important for clean tech investors.

 

  • Seed funding: This early-stage funding usually supports prototypes and lab work.
  • Series A: This early-stage funding helps build teams and launch products.
  • Series B: This late-stage funding helps businesses that have shown potential for success. Series B funding helps companies grow their customer base and expand production capacity.
  • Series C: This late-stage funding helps successful businesses expand their product line. At this stage, companies are also preparing for an IPO or acquisition.

 

In clean tech, the capital needs are often greater, and timelines are longer. Early rounds of investment emphasize development and validation, while later rounds focus on deployment and scaling.

 

The risk and return change as the company matures, with early rounds offering the highest potential rewards and, correspondingly, the highest risks. Private investment vehicles allow investors to choose their degree of risk and control. Direct investment, for example, offers high risk, a high level of control, and a high return. Private equity, on the other hand, carries less risk, potentially lower returns, and less control. Investors who want a strong, diverse portfolio with balanced risk may choose varying investment vehicles.


Evaluating Clean-Tech Private Firms


Learning to evaluate clean-tech firms is one of the most important things an investor can do to ensure success.


Technology Readiness Levels

One way to measure clean-tech firms is by evaluating their Technology Readiness Levels (TRLs). TRLs were developed by NASA to measure the maturity level of a technology on a scale from 1 to 9. TRL ratings have been widely adopted across many industries and can help investors measure risk assessment. Different investor vehicles will invest in companies with technologies at different levels on the scale.

 

Financial Projections

Financial projections help investors determine how much money a clean-tech company may make and spend in the future. Financial projections also help the investor determine when the company will start to make a profit if it hasn't already.

 

Burn Rate

The burn rate is the rate at which the company spends its money. Companies that spend money too quickly may run out before raising more.

 

Capital Requirements

A company's capital requirement is how much money the company needs to reach its next milestone.

 

Other Considerations

In addition to capital requirements, burn rate, and financial projections, there are other considerations.

 

  • IP Position: IP, or intellectual property, refers to the patents, trademarks, and unique technologies that ensure the company can deliver unique value to customers. A strong IP position helps protect the company's future profits.
  • Competitive Moat: This refers to the other factors that give the company an advantage over competitors. The competitive moat may include strong brand recognition, exclusive contracts, and so on.
  • Scalability: The scalability of a company is its ability to grow quickly and efficiently to meet customer demand.


Environmental, Social, and Governance (ESG) Performance

ESG is a set of standards that investors use to measure impact on Environmental, Social, and Governance issues. Investors care about ESG because companies with poor ESG may face public backlash, fines from regulatory agencies, and more. High ESG reduces risk and makes the company more sustainable and profitable.


Potential Pitfalls

Clean-tech companies are vulnerable to regulatory shifts that can increase costs. Additionally, unproven technologies can be costly to develop, build, and scale. One way to mitigate these risks is to work with a team of experts to take advantage of vetted opportunities.


Risks, Time Horizons & Exit Strategies

Investment involves risk.

 

  • Illiquidity: Private company shares can't be easily sold. There is no daily trading and buying of these shares, and long development cycles in clean tech means that some investors are locked in for many years.
  • Failure risk: A high percentage of clean-tech companies fail. This can be caused by failure to develop or scale the technology, regulatory shifts, lack of technology adoption, and capital constraints. Earlier-stage companies are at higher risk of failure, but all private investments have this risk.
  • Capital loss probability: Capital loss probability is the risk of losing all or most of the capital investment.

 

Investors can mitigate their risk by investing in many companies, diversifying by subsector or technology type, diversifying by stage entry and geography, and by investing in funds or pooled investments where the risk is shared over many investors.

 

Exit Strategies

Early-stage venture capital investors must usually wait 5 to 10 years before they can see a return on investment, while later-stage growth equity investors typically wait 5 to 7 years. Exit paths for investors are as follows:

 

  • An initial public offering (IPO) is when the company sells its stock to the public on the stock exchange. Once there is an IPO, the business takes its place among other public companies and must follow standard reporting regulations.
  • Mergers and acquisitions (M&A) occur when a company is acquired by another firm.
  • Secondary sales occur when the investor sells their shares to another private investor, making an early exit.
  • Recapitalization, when the company restructures equity and allows the investors to cash out some of their investment.


Regulatory & Tax Considerations for Private Investors

Regulation D 506(b)/506(c) allows private companies to raise capital from private, accredited investors, while Regulation A is an exemption from registration for public offerings for some smaller companies. There are crowdfunding exemptions as well.

 

Private businesses are required to adhere to specific rules around investment, including accreditation verification that requires companies to verify that investors qualify for the private investment exemption. Companies are also required to provide a private placement memorandum (PPM), which details risks and investment terms to investors.

 

Investors are required to pay capital gains taxes, although taxes may be exempt on qualified small business stock (QSBS). Clean tech credits and deductions help investors save money and invest again. An example of this is the Clean Electricity Investment and Production Tax Credits. Final rules of these tax credits were published in January 2025.

 


How CS Access Fund Supports Private Clean-Tech Investing

CS Access Fund facilitates investments in private clean tech companies. Unlike other companies, CS Access Fund operates as a direct investment arm to eliminate intermediary costs. The team at CS Access Fund has more than 40 years of combined investment experience.

 

We use our deep knowledge of private investing and clean technology to support investors and nurture startups. With a curated deal flow process, extensive portfolio guidance, commitment to transparency, and media support for partner companies, we help investors protect their assets and reach their investing goals.

 

To learn more, contact CS Access Fund today.