Importance of Investing in Pre-IPO Companies
Pre-IPO companies are those that have not yet registered their Initial Public Offering, or IPO, to sell shares of their company on the stock market. There are many reasons why investing in these companies can be lucrative to investors, whether they are financial reasons or other benefits specific to each investor’s interests.
Pre-IPO companies have been started by top players
A new company may look good on paper, but a startup led by a seasoned entrepreneur is more likely to succeed. Such leaders have already figured out how to run a business and have a good sense of what works and what doesn’t. With pre-IPO companies, investors can get in early with someone who’s done it before.
When investors put money into pre-IPO companies, they are betting on both the team behind them and themselves—their reputations are tied to these startups. Not only does having an experienced founder help ensure your investment will yield good returns, but you’ll likely do better than if you just invested in any random upstart without built-in knowledge of their success factors.
Investing in pre-IPO companies gives you access to strong management teams. “Strong management teams are key for investing performance, especially early-stage investing where there aren’t many comparable public market comparables”, says Arun Natarajan of Bengaluru-based Venture Catalysts which helps entrepreneurs raise seed capital from angel investors.
Pre-IPO companies have solid business models
With a lower valuation, pre-IPO companies have often been around for at least a year and have shown they can make money. This is important because it means their business model works. When a company goes public, its valuation skyrockets and it has to start competing with much larger rivals.
A pre-IPO company doesn’t have these challenges – yet – which is why you can buy into solid businesses at a reduced cost. Investing in pre-IPO companies gives you first dibs on profit: Being first to invest (and profit) on an IPO lets you cash out as soon as your stock starts trading.
Meanwhile, those who buy on day one typically don’t see any rewards until late investors cash out. The best thing about investing in pre-IPO companies is being able to do so while still being early enough to gain when it trades publicly. You get great value for your investment dollar: As mentioned above, pre-IPO companies tend to be small by definition.
For example, Uber was valued at more than $60 billion on its way to becoming a publicly-traded company, while GrabTaxi started with just $7 million in funding. That means if you invested $1,000 in Uber before it went public, you could have received shares worth $7 million today had you sold them during its IPO process.
Investing in pre-IPO companies lets you take advantage of big upsides like these without having to wait for an IPO. Pre-IPO investments are subject to less regulation as the IPO regulations are stricter.
Pre-IPO companies have detailed plans
There’s often more information available on pre-IPO companies than their post-IPO counterparts. Since these startups don’t need to raise additional capital, they can spend time developing detailed business plans for invest4eors. Even if you're not interested in buying equity right away, getting involved with a pre-IPO company now will make sure your relationship is established once shares are offered to other investors or sold on public markets. The opportunity to build a relationship is a strong reason to invest now instead of later.
Pre-IPO businesses take failure seriously. In contrast to publicly traded corporations that have quarterly earnings reports and put shareholder interests first, private companies have less incentive to do anything but prioritize success over failure. That means even higher standards and better products from startup founders who aren't thinking about liquidity just yet.3
If you’re looking for a more high-risk/high-reward situation, pre-IPO opportunities can be perfect. Investing in a pre-IPO company is a networking opportunity. Everyone needs a strong network of allies and partners—and investing with pre-IPO startups is an effective way to make those connections happen now rather than later.
You can play an active role from day one. If you wait until shares are sold on public markets or offered as equity stakes through another funding round, you’ll likely play a passive role as an investor rather than as a trusted advisor or consultant with involvement right away.
Pre-IPO stocks offer better value for money
Investing in pre-IPO stocks allows you to get a hold of a company at a fraction of its market value, giving you higher returns for your investment. In comparison, IPOs may seem like a cheaper option as they’re available at rock bottom prices - but only if your investment can make it through initial hurdles.
Although some companies are looking to woo investors by quoting low IPO price values, most stock markets eventually correct post-IPO, leading to huge losses than investing in pre-IPO companies. Post-IPO corrections are so common that many financial experts advise buying shares in the primary market over the secondary one. As an investor, early access to private funds also enables you to spot valuable trends ahead of time and set yourself up with valuable investments before others have realized their potential. When buying stocks on the primary market, there are no ‘corrections’ since markets do not shift once listed on secondary platforms after the listing date. This gives you better control over your holdings and more power to decide which companies succeed or fail.
Typically, these types of stocks are reserved for high net worth individuals (HNIs) who generally invest more than $500,000 in just one deal. These HNIs also tend to know about companies long before they launch publically, letting them act first rather than react later; again giving them better control over which startups soar and which one's flounder. Overall, pre-IPO stocks offer you a wider choice of stocks and safer returns because you can get higher returns on smaller investments thanks to their low market value. If you’re looking for ways to diversify your investment portfolio, then buying pre-IPO stock can be a great option for you.
Pre-IPO stocks are less risky investments
When you invest in a private company, you’re exposed to less risk because many of these companies have yet to make a profit or they haven’t generated an income stream. In short, there’s less risk when you don’t have a public stock offering for investors to dump their shares. This means that when you invest in pre-IPO companies, your ROI will be higher compared to post-IPO stocks. Of course, there is always some level of risk since businesses can fail just like startups or new projects can come online and potentially become more successful than expected. However, it all depends on whether investors continue supporting these businesses by buying additional stocks—the key here is to look at how much money has been invested in certain industries.
Studies have shown that pre-IPO stocks tend to be less risky and more profitable. What’s even better is that they give you plenty of time to make money before their official IPO date, and they give you a chance to cash out with some great profits. Even though there are some risks involved with investing in pre-IPO companies, it’s clear that you stand a good chance of earning huge returns on your investment. With so many investors actively seeking out chances at investment gains from pre-IPO stocks, chances are slim that an opportunity will go unnoticed for long.
New, unique investments are popping up all over India, many of which are not yet publicly traded. These investments offer incredible upside potential at very low investment levels. These are some of the top reasons why investors should consider investing in pre-IPO companies before they go public. You must research all information about a business before investing. Make sure that there is growth potential and understand what risk you are assuming before plunking down your hard-earned cash.