Think about getting in on a company before it goes public—before the publicity, before the stock takes off on day one, and before most investors have even heard of it. Pre-IPO investing has that appeal.
It’s where you invest in a company just before it goes public on the stock exchange. The upside? Immense. The danger? Immense, too. But to angel investors who understand the arena, it’s one of the most rewarding bets in the portfolio.
Let’s establish what it is, why it matters, and how you can join it without losing your money.
What is Pre-IPO Investing?
Pre-IPO investing involves purchasing stocks from a privately held company before it lists on a stock exchange via IPO. Pre-IPO shares are non-public company shares that can be bought and sold before the company goes public.
It's like going to the party hours before everyone arrives. The beverages are cheaper, fewer individuals are flooding the room, and the prime spots are all your own. However, you're also on the premises before the host has closed up the place.
Pre-IPO investing means purchasing shares in a non-public company. These stocks are available to a list of investors that includes venture capitalists, institution-based investors, private equity firms, high-net-worth individuals, and angel investors through selected deals. The majority of pre-IPO deals are available to accredited investors due to regulations.
Pre-IPO investments are one popular means through which companies raise funds from investors before going public.
Why Pre-IPO Investing is Attractive to Angels
For angel investors, this stage is exciting because:
Higher growth potential – The company is about to go public, and valuation jumps can happen quickly. It’s important to carefully evaluate the company’s prospects and long-term growth potential when considering pre-IPO opportunities.
Shorter holding periods – In comparison to early-stage investments that may take 7-10 years before exit, pre-IPO deals can generate liquidity 1-3 years later.
Proven track record – You're not investing in a concept; you're investing in a company that has actual momentum.
Pre-IPO investing requires a decent amount of funds and can be a deterrent to some investors. But keep in mind that excitement can cloud one's judgment. Not all pre-IPO deals give you better returns.
Rewards: Why Pre-IPO Investing Can Be Lucrative
1. Early Access to Growth
If you purchase shares before a company goes public, you usually pay below the IPO valuation. After going public, the stock can surge, providing immediate paper profit.
For example, investors who bought Facebook shares before the IPO reportedly paid around $30 per share. When it debuted in 2012, it opened at $38. Today, it trades at a value much higher than that.
2. Shorter Path to Liquidity
Startups in the early stages can take years to exit. With pre-IPO deals, a few months or a couple of years is a reasonable exit. The reason is that the IPO is on the horizon.
A successful IPO allows investors to realize their gains in cash, providing liquidity that was previously unavailable.
3. Stronger Business Fundamentals
At this point, a company is likely to have:
- Proven product-market fit
- Strong revenue sources
- Existing leadership groups
- A clear growth plan
You’re not guessing, you have data.
4. Potential for Massive Returns
Once a company goes public and fares well, pre-IPO investors can reap multiples on their investment shortly. Such is the “home run” situation that appeals to angels.
The Risks: Why Caution is Crucial
What works well once may not work again, and future results cannot be guaranteed when purchasing pre-IPO companies. These investments are speculative, and the recurrence of previous performances might not happen.
Stock options are awarded to employees as part of the compensation packages in non-public enterprises. Equity-based compensation arrangements can be illiquid and risky since stock options can be worthless for a significant period before an IPO or a Secondary Sale occurs.
Just because a company is going public doesn't guarantee anything. Security is a concern, and strong due diligence is needed to protect your investment.
1. Overvaluation
When your unit is allotted, the stock could already be priced for perfection. If the environment changes or the IPO is a disappointed performer, you may be owning a hot air balloon.
2. Illiquidity Before the IPO
Even if the IPO is just months away, you may still be invested in your shares until a certain lock-up period ends (often 6 months post-IPO). If the stock drops during that period, you are not allowed to sell.
3. Market Volatility
Pre-IPO valuations can fall rapidly when investor sentiment shifts. Poor quarters, regulatory problems, or declines in the stock market can affect or even terminate an IPO.
4. Limited Access to Information
Unlike public companies, private companies don’t disclose everything. You may get less transparency around their financial health.
5. Dilution Risk
If the company raises another round before the IPO, your stake may shrink unless you invest additional funds.
How to Invest in Pre IPO Companies?
That’s the great question for angels: How, exactly, do you get in?
If you want to buy pre-IPO stock, there are now several ways to start investing in private markets. You can use specialized brokers, invest indirectly through venture capital funds, participate in a secondary marketplace, or invest directly via angel investing and crowdfunding. You can also invest indirectly by putting money into funds or companies that own stakes in pre-IPO businesses, instead of buying shares yourself.
Some online platforms allow access to pre-IPO investment opportunities for individual investors and retail investors. On the other hand, some of them specifically serve high-net-worth clients seeking access to these deals. You may need to verify your status as an accredited investor to meet regulatory requirements.
Usually, only significant institutional players got a shot at pre-IPO stock. Institutional investors purchase large amounts of stock under those deals in the majority of pre-IPO placements. However, the past few years have made it accessible to everyone—if one knows where to find it.
Some examples of regulated platforms that allow pre-IPO investing are Hiive Markets and Hiive Markets Limited. They are registered broker-dealers and members of FINRA/SIPC. These platforms let investors access private securities and pre-IPO investment opportunities.
Some links on this website are Hiive affiliate links. Clicks from readers on these links may provide compensation to the website, but this is not financial advice. Activity from a user resulting from interaction on these platforms might impact platform revenue or results.
Information herein is provided for general information purposes only and is not a research report or a research report on a security. The opinions contained herein are not necessarily those of the company or its affiliates.
Here are a few methods to answer the question, “How to invest in pre IPO companies?”:
1. Angel Syndicates and Networks
Joining an angel syndicate gives you access to deals that you might not find alone. Syndicates often pool funds to meet minimum investment requirements for pre-IPO rounds.
2. Secondary Market Platforms
These platforms can help you buy shares from early employees or existing investors before the IPO. Examples include:
- Forge Global
- SharesPost (now a division of Forge)
You’ll need to meet accreditation requirements, and prices can vary. Monitoring user activity on a secondary marketplace can help investors assess demand for pre-IPO shares and evaluate the credibility of private markets platforms.
3. Venture Funds Invested in Investee Companies at Late-Stage
Some venture funds target late-stage businesses. When one invests in the fund, one indirectly has a basket of pre-IPO holdings.
4. Direct Deals through Connections
You can acquire your stock from founders, executives, or major stockholders themselves if you have a connection to them. The acquisition is through due diligence and a legal agreement.
5. The Best Pre IPO Investment Platform for You
There is no single solution to the best pre IPO investment platform. It is conditional upon:
- Your accreditation status
- Your network
- Your risk tolerance
- Minimum investment amounts
Do your research. Compare fees, deal quality, and liquidity options.
What to Consider Before You Invest
If you are investing in pre-IPO companies smartly, emphasize fundamentals. When exploring pre-IPO opportunities, please ensure that you have a clear plan. Select opportunities that align with your overall investment goals and your risk appetite.
1. Financial Health
Search for revenue growth, profitability (or a viable route to becoming profitable), and reasonable debt levels.
2. Industry Outlook
Is the market growing? Is the company a leader, or is it also just another startup?
3. Competitive Advantage
What’s the moat? Technology, brand, partnerships—something that keeps competitors at bay.
4. IPO Readiness
Ensure the company has strong leadership, solid governance, and proper compliance systems in place for a smooth IPO.
5. Exit Strategy
Don’t simply hope for an IPO. What’ll happen when it gets delayed, let alone canceled? Secondary sales do exist and can be an alternate option.
Case Studies: Lessons from the Field
Winner - Airbnb
Late-stage investors in Airbnb invested at valuations of about $18 billion before its IPO in December 2020. Its market cap shot up to over $100 billion within a day of trading. That’s a big gain within months.
WeWork: A Cautionary Story
WeWork’s valuation stood at a staggering $47 billion in early 2019. When it went public in 2021, its valuation was a very low level of around $9 billion. The late-stage investors suffered a tremendous loss.
Pre-IPO Investing versus Early-Stage Angel Investing
How Can Angels Play It Smart?
Diversify – Don’t dedicate all your funds to a single pre-IPO transaction. Diversify across stages and sectors.
Utilize Networks – Investor clubs, syndicates, and industry events can be a gateway to better deals.
Do Your Homework - Review financials, leadership, competitive positioning, and IPO readiness.
Know Regulations – Know relevant regulations, including securities regulations and investor accreditation rules, as these impact your entry and compliance when making pre-IPO investments.
Know the Lock-Up - Know when you are allowed to sell and what happens if the stock takes a nosedive before then.
Stay Updated – Keep tabs on the company’s IPO timeline, filings, and market conditions.
The Bottom Line: Pre-IPO investment is exhilarating. You make investments in companies on the verge of going public, where a faster exit and strong returns are possible. It is, nonetheless, risky. Overvaluation, illiquidity, and volatility can change a winning proposition into a losing proposition.
The point is to treat it the same way you would treat any angel investment—perhaps even more so. If you are asking where to invest in pre-IPO companies, start small, learn, and get connected through reliable networks or a trusted pre-IPO investment platform that suits your strategy.
Learn How to Invest in a Smart Way
At Angel School, we believe the best investors are those who stay well-informed. Our Venture Fundamentals course provides insights on sourcing, assessing, and closing deals—whether early-stage, mid-stage, or pre-IPO.
You get access to the tools, frameworks, and strategies to make the right investment decisions and steer clear of costly mistakes. Since in the angel investment world, knowledge is power, pure profit.
Join us today to learn how to invest in pre IPO companies and elevate your investments to the next level!
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