Precise classification of private companies is crucial for effective investment in private markets, necessitating clear classification schemes not only based on industrial activity but also on lifecycle stages. Unlike public companies, private companies, which include equity, equity-like, and debt securities in their capital structures, are not traded frequently. This infrequent trading obscures the understanding of investment risks due to the absence of high-frequency price information, making common factors like value and size difficult to assess. Investors, therefore, require alternative risk proxies.

A comprehensive classification system should differentiate companies based on lifecycle phases, recognizing that startups and mature companies face distinct systematic risks. Additionally, the classification should account for customer models, distinguishing between business-to-consumer (B2C) and business-to-business (B2B) companies.

This differentiation is essential as B2B companies often experience less volatile and more repetitive sales compared to B2C companies, influencing their risk profiles and investment strategies.