The term IPO is familiar to many investors and beyond investors. Initial public offerings of companies on the stock exchange became really popular in the last couple of years, when almost any stock offering brought tens, and sometimes hundreds of percent of profit on the first day of trading.
These success stories were widely covered in the media, and a real IPO fever began among investors. The demand for participation in placements was so high that not all applications were satisfied. While those investors who managed to get an allocation received only a share of the submitted application.
With an IPO, everything is clear. This is a fairly well-known investment tool. But what about Pre-IPO? Less people know about it. But this is a way of investing with potentially even higher returns than an IPO.
Let’s show with examples:
Shares of IT company Snowflake, which could be bought at the Pre-IPO for $15-$20, rose to $250 on the first day of trading on the stock exchange. By the way, one of Snowflake’s investors is Berkshire Hathaway (owned by Warren Buffett Foundation).
As early as 4 months later, these shares rose to $429 apiece.
This is not an isolated case. For example, DoorDash shares, which could be bought at the Pre-IPO for about $50, cost $182 a share at the IPO.
The very next month, the price reached $256 per share.
As you already understood, Pre-IPO is an investment in private companies before they go public. Unlike participation in an IPO, when investors receive shares on the day of listing on the exchange, in a Pre-IPO you can buy part of the company even before it is listed.
These are real venture capital investments. Direct purchase of the company’s securities before its listing on the stock exchange.
Most people associate venture investments with financing large capital in start-ups by funds or private investors at very early stages.
Many traders might think that we are talking about “garage startups”, or companies at the early stages of development.
In fact, when we speak about Pre-IPO:
- Firstly we mean already established companies that have already successfully completed several rounds of financing and are already approaching their entry into the stock exchange.
Analyst agencies, which select the most promising private companies to offer to investors, sift startups through a series of strict criteria for sustainability and investment attractiveness.
Let’s agree that this is already a much safer investment than startups at the idea level.
- Secondly, modern financial technologies have made venture investments in private companies available to all users of popular trading platforms. Later we will tell you how you can invest in the best private companies before they go public.
Right now, some of the most interesting pre-IPO companies are: SpaceX, Revolut, Clubhouse and many other big names.
What are the benefits of investing in a Pre-IPO?
- First of all: Low competition. IPO is a tool known to almost every investor. The popularity of the IPO is so high that investors may not get the full allocation of their application and get only a fraction of the shares. Only because demand exceeds supply.
But Pre-IPO does not have such a feature. You can purchase any number of shares in a private company. Many investors simply do not know how to invest on the OTC (so-called, “over the counter” market). Even before, this tool was available only to investors with large capital.
- Another benefit – Potentially very high returns. At the beginning of the article, we already showed several examples. You might have heard about the high yields of participation in IPOs. Dozens and even hundreds of percent profit on the first day of trading. Now imagine that this stock could have been bought even cheaper at the Pre-IPO.
The IPO procedure itself is the attraction of investments through the sale of shares. While you bought papers before that. Before the capitalization of the company increases on the day of listing.
What is also important – There is no lock up period, like stocks bought during an IPO. Securities purchased on the basis of an initial placement application cannot be sold within a certain period (usually 3 months). This is a measure that protects companies from collapses and speculation in the first months of trading. Pre-IPO companies do not have such restrictions. You can sell paper just as easily as you bought it.
Why then do so few people use this tool though it is so lucrative
- First, as it was already mentioned, until recently the market of private companies was simply inaccessible to investors without large capital. Ordinary private investors and traders simply could not participate in trading in the shares of a private company. Venture investments were the privilege of a “closed club” of large funds and professionals.
Secondly, there is (so far) no wide information field around Pre-IPO investments. Like, for example, around IPOs or around public companies. A large number of private investors know only about standard exchange instruments.
Modern technologies make Pre-IPO available to a wide range of investors
Real venture capital investments are now available to investors and traders through popular brokers. Now you can also take part in stock trading at the Pre-IPO stage.
- You do not need large capital for investment. You can buy shares of Pre-IPO companies with convenient lots and even small amounts.
- Access to a large number of Pre-IPO companies. There is a selection of a number of interesting businesses that may soon go to IPO. You can choose those in whose success you believe more.
In addition to the already mentioned SpaceX, Revolut and Clubhouse, you can invest in Bitpay, Kraken, Clarna, Thrasio right now. These are world famous companies that are just getting ready for their IPO. But you can buy some of the shares now. In a convenient and familiar terminal. Transactions can be concluded in a platform familiar to many traders like popular MT5.
How to make money on Pre-IPO companies?
In fact, you don’t even have to wait for an IPO to multiply the capital invested in the shares of a private company.
Prior to the IPO, the business also raises additional money through so-called investment rounds. The company is developing step by step. At each round, new venture investors are added, which means that the price of the company (capitalization) increases. The following rounds are usually distinguished:
- Pre-seed – investment at the idea stage
- Seed – investment at the launch stage
- Round A – growth and scaling of an already finished product
- Round B – growth and scaling of an already successful company
- Round C, D, E, etc. Subsequent letters indicate only the sequence of rounds.
So, on each of these rounds, new investors are added, increasing the total price of the company.
It’s easier to show with an example. Glovo, a well-known food delivery service, raised $450 million during its last round (F) of investments. Before that, the company was valued at about $455 million. Capitalization doubled in just 1 round of investments. This means that the price of each individual share also doubled.
Larger and more well-known companies, such as SpaceX, hold such rounds worth hundreds of millions of dollars several times a year.
SpaceX Financial Rounds in 2021-2022
When you invest in a private company, you partially own it. Each additional inflow of capital brings profit, including to you, due to the revaluation of the value of the company, and hence your share.
Venture investments are no longer a tool that is available only to large investors and funds. Now you can also claim high returns by investing in a business before it goes public.
Modern technologies make private traders one step closer to professional investments. Try investing in shares of Pre-IPO companies! Become a part of the world of venture investments – the most advanced area of financial markets.
Check the availability of IPO and Pre-IPO instruments on your broker’s platform.