How Investing in Pre-IPO Shares May Become The Trend of 2021

By Peter Jobes – tech, crypto & blockchain writer having worked with the Press Association and clients like Tesco, RAC and HelpUCover. CMO at Solvid.

Every investor dreams of getting in on a unicorn – a company that reaches a valuation of $1 billion or more before going public – and it’s clear to see why. After a transformative 2020, there are currently more of these companies around than ever before.

Today, there are over 400 so-called unicorns globally, and more than 20 ‘decacorns’ (companies with a valuation of over $10 billion) in existence too.

This boom in unicorns is primarily down to the exponential growth that the global technology sector is currently experiencing, which was estimated to have hit $5.2 billion worldwide in 2020.

However, another significant reason for this trend is down to companies opting to stay private for longer. In 1999, the typical US tech company went public after four years – today, however, companies are opting to stay private for 11 years or longer.

The Rise of The Pre-IPO

Why are we seeing rises in pre-IPO companies that are choosing to avoid going public too soon? One key reason can be found in the performance of other tech companies that have opted to publicly list and struggled as a result. According to Goldman Sachs, many companies that launched an initial public offering over the past two years would’ve been in a better financial state had they instead chosen to stay private.

Furthermore, it’s typically a time-consuming and costly process to take a company public. In fact, over 83% of CFOs claim to have spent over $1 million on one-time IPO costs for their businesses.

Given these factors, it’s understandable that businesses are increasingly willing to hold off the act of going public, but where does this leave investors? In many cases, the only way to get in on a pre-IPO stage company is to join their workforce – or write a multi-million dollar cheque.

On top of this conundrum, if-and-when that company does eventually come up with an IPO, the high valuation will push the market cap to potentially undesirable levels for those looking to make money as the company grows. Furthermore, by this time, much of the company’s upside will already be priced in – leaving public investors to lose out on much of the growth potential of their shares.

However, just because a company hasn’t yet entered the public market, it doesn’t mean that investors are unable to stake a claim. This is where pre-IPO shares enter the fray.

How to Invest in Pre-IPO Shares

Before we begin to look at how to invest in pre-IPO shares, it’s worth noting that this approach isn’t easy. It’s typically hard to find pre-IPO companies, and fairly tricky to find a way of investing your money – but it’s not impossible, and for some investors, it can be a highly lucrative pursuit. There are a few ways in which this investment can take place:

One approach is to speak with a stockbroker or advisory firm that specializes in capital raising and pre-IPO shares. These brokers can offer advice on how to invest with a pre-IPO organization.

Another approach is to keep your ear to the ground and listen out for details about startups or companies that intend to go public.

You can also talk to your local bankers about companies looking for investments.

Building a network of business connections can help to alert you to potential pre-IPO investment opportunities.

If you’re looking to invest significant amounts of money in an early-stage startup, you could become an angel investor who provides capital for startups that have, for whatever reason, been overlooked by other investors.

There’s also potential for investments to be made on online startup platforms like OurCrowd – but this approach especially requires a great deal of research before parting with your money.

Alternatively, Nasdaq-listed Freedom Holding Corp. (FRHC) helps ensure that retail investors don’t miss the boat by allowing them to apply to participate in companies that are set to offer IPOs over the coming weeks and months. The Nasdaq-listed retail brokerage provides a platform – Freedom24 – that enables users to participate in multiple IPOs. However, the threshold for applications begins at $2,000.

Other platforms like Fidelity also offer an IPO investing platform for individuals, but in this case, the threshold extends to between $100,000 and $500,000 in household assets – depending on the terms of the IPO itself.

Investing in pre-IPO companies certainly isn’t straightforward, but if you conduct your research accordingly and find a prospect with exceptional levels of potential that’s yet to go public, it could certainly be worth the risk.

How Pre-IPOs Could Become The Trend of 2021

One of the most significant use cases of how effective pre-IPOs can be seen in the case of Casper mattresses. The company went public in early 2020 to a wave of expectation. However its performance in the wake of going public floundered.

After offering shares to the public at $12 dollars on the 5th of February, the price fell by 56% to $6.74 by the 25th of September. Despite IPO investors losing out, early backers of Casper – including celebrity endorsers like Leonardo DiCaprio, Tobey Maguire and Adam Levine – bought into the company before it went public and had the chance to sell their stakes at the IPO price. Whether they actually chose to or not is irrelevant in this example – because by the time Casper hit the market, a heavy level of profit had already been made at the pre-IPO stage.

However, it’s worth remembering that this isn’t always the case and that the mixed bag of IPOs can also yield great profits at the time of going public. Take the example of Snowflake, a cloud-based data warehousing firm that launched an IPO in mid-2020.

Snowflake went public at $120 on the 15th of September and hurtled to $228.90 by the 25th of September – showing that pre-IPO investors and those getting in on the IPO itself can have the chance to make money when the companies they back go public.

While the growing interest in companies within the tech sector has led to much more hype around IPOs in recent months, investors are likely to spend 2021 looking for opportunities to buy into the growing number of unicorns around the world before they take the step of going public.

In a world where businesses are aiming to remain as unicorns for longer, it’s likely that the buzz around pre-IPOs will only get stronger in the future.

By Peter Jobes – tech, crypto & blockchain writer having worked with the Press Association and clients like Tesco, RAC and HelpUCover. CMO at Solvid.

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