Yes. For many accredited investors, pre-IPO investments provide an exciting and lucrative means by which to diversify a portfolio. When you invest in a company pre-IPO, you buy stock in a late-stage private company backed by venture capital. Pre-IPO companies may go public at any time via a liquidity event like an IPO.
All companies in the United States start as privately-held businesses. They may decide to go public at some point but could also stay private indefinitely. Going public means answering to outside investors and following strict regulatory regulations. That trade off is worth it in many cases, because an IPO provides the opportunity to raise a large amount of money from multiple shareholders.
These days, Pre-IPO investing is more accessible to individual accredited investors than ever. While purchasing pre-IPO stocks as an investment is inherently risky, the upside is that there’s room for soaring performance that translates to significant returns for investors.
Growing companies may have more stability than early-stage companies. They may also be a safer investment than startups.
When a company is on the verge of going public, investors expect a liquidity event. The company is purchased by another entity or is presented to investors via an initial public offering (IPO). Early investors who buy the stock before an IPO or before the company is purchased may experience significant gains on their pre-IPO investment.
Airbnb had a scheduled price of $44 – $50 on day one of their IPO. They went public at $68 per share and sold 51,551,723 Class A shares with a market cap of $47 billion. Just hours after going public, Airbnb reached $147 per share. The company’s new valuation landed at over $100 billion.
It’s worth noting that the company’s success or failure depends heavily on whether people are traveling. Airbnb became a publicly-traded company in December 2020 when travel was limited. Even so, their IPO was a huge success that more than doubled pre-IPO investors’ money.
Coinbase was worth $8 billion after accepting $300 million from outside investors in 2018. Before its direct listing, that was the most recent formal valuation of the company.
Coinbase is the largest crypto exchange in the United States. The company decided against a traditional IPO and posted shares directly to the Nasdaq, following Spotify and Palantir’s footsteps.
After its first day of trading, Coinbase’s valuation rested at $65 billion. Nasdaq assigned a value of $250 per share on day one. Investors saw their stake in the company climb to $429 and close at $328.
Sequoia Capital was the big winner when Facebook acquired WhatsApp in 2014. WhatsApp replaced SMS for its 2 billion users with its simple interface featuring instant messaging, group chat, and contacts discovery.
After investing a total of $60 million in Series A and Series B funding rounds, Sequoia Capital saw the value of their investments soar when Facebook paid $22 billion to acquire WhatsApp. The deal remains the largest-ever VC-backed company acquisition.
Nubank is the largest fintech startup in Latin America with a growing user base, $1.4 billion in funding from Goldman Sachs and Tencent, and a $10 billion valuation. Investors stand to make a decent return as Nubank grows into one of the most successful fintech companies in the world.
As the company prepares for a stock market debut, Nubank expects a valuation of more than $40 billion. Experts predict the IPO could happen in early 2022, representing one of the most significant stock market debuts from a South American company of the near future.
Many investors shy away from pre-IPO stocks. They like to see a long track record, and pre-IPO stocks can’t provide historical context. It can be challenging to understand how a company may perform under future stress if you can’t look back into its history and see how it weathered the last recession.
Evaluating the company’s management in the pre-IPO phase is tricky, as well. Since the company is privately owned, there’s no track record of how management handles challenges associated with becoming a publicly-traded entity.
A high-profile IPO generates its own form of stress, even as it produces a great deal of excitement. After the lockup period, investors may rush to sell their stake in the new company, causing a drop in stock prices. This price drop doesn’t necessarily mean that the company was a poor investment, however.
Facebook stock prices dropped 50% after its IPO. The company’s stock prices have risen steadily since then, with a 195.23% return over the past five years.
Investing in a company pre-IPO isn’t a get-rich-quick scheme. In fact, it’s wise to invest money that you don’t need to access for a while. Stock prices may fluctuate wildly after a company’s introduction to the stock market. Before the IPO, investors who purchased stock could see gigantic returns, but it’s impossible to sell pre-IPO investments until after the traditional 180-day lockout period enforced for most IPOs.
Changes in regulations during the past few years mean that accredited investors have access to pre-IPO investment opportunities previously reserved for big investment firms.
When considering the best companies to invest with, keep in mind that while you can (and should) conduct your research before choosing pre-IPO companies, it’s wise to also lean on the expertise of a firm with a proven track record of leading investors through the process of pre-IPO investing with some of the most successful companies in recent history.
IPO pricing may be hard to understand as you evaluate individual investment opportunities. While it’s crucial to research companies on your own, it’s also helpful to have pre-IPO investment experts on your side as you navigate the risks and rewards associated with purchasing pre-IPO stocks.
Ready to learn more about diversifying your portfolio by investing in pre-IPO stocks? Call, email, or fill out our information form to determine how TSG can help you invest in the private market.