Business development companies are like venture capitalists. They look for small, up and coming businesses that are about to dominate a market and they invest in these companies. Business development companies have certain tax advantages and are able to make money from large client bases that they already possess.
What is the difference between a business development company and a venture capitalist?
Venture capital investing is restricted to so-called accredited investors, people who have a net worth of at least $1 million. On the other hand, virtually anyone can purchase shares in a business development company. This is due to the fact that business development companies have stricter regulations that govern them.
What are the benefits of investing in a BDC?
Business development companies have a lot more potential for return on investment. Because they invest in new companies, BDCs are able to put money behind the next Facebook or Google. Imagine if you would have invested in Apple computer in the 1980s – you would probably be one of the richest people in the world right now. A BDC will give you the chance to invest, and is designed for ordinary folks to get started with right away.
What are the risks to investing in a BDC?
As you probably have determined, the companies that a BDC invests in are much higher risk. So, there is a much greater chance of losing your investment entirely if one or more of the companies in the portfolio goes sour. But, there is an entire portfolio of companies that can back any investments that have gone bad. If one of the BDC’s investments is a bad one and another performs well, then the good one will serve as a counterbalance to the bad one.
There are certainly many risks to investing with a BDC. The chance of your investment going bad is still high, but also the chance for a huge reward is present. However, investing in a business development company is virtually the only chance that ordinary people will get to invest in technology firms and other companies on the leading edge of innovation. It is a real balancing act between risk and reward, but investing in a BDC will certainly pan out well over the long run given that you do your homework and only make investments that you feel will perform well.