Pre-IPO investing is when you invest in a private company before its initial public offering (IPO). An IPO is when a company’s shares trade on a public market for the first time. In the past, pre-IPO investing was limited to accredited investors, private equity firms, hedge funds and a few other groups. It is also available to non-accredited investors on a company-by-company basis through crowd funding sites such as Kickstarter. Eagle Private Equity’s Pre-IPO fund is intended to invest in these companies on a portfolio basis which will spread the risk across several Pre-IPO investments.
Should You Invest in Pre-IPO Companies?
Let’s use Snapchat (NYSE: SNAP) as an example, which went public in 2017. If you invested $100 in the early days before it went public, your $100 would have turned into $22,000. That’s a 21,900% gain!
Snapchat and other technology stocks have great potential in the stock market. Although you can see that early investors make some of the biggest gains before they go public. You can now participate in Pre-IPO investing as well.
Another benefit is avoiding stock market volatility. Depending on the company, pre-IPO investing isn’t affected as much by events such as the 2008 financial crisis or the 2020 coronavirus pandemic. On the other hand, the events can still impact companies. And that will impact your investment.
However, just like the stock market, pre-IPO investing comes with risk. And sometimes it’s a lot of risk. Startup companies aren’t guaranteed to succeed. When an individual investment fails, there aren’t any returns. Just losses.
But companies know this risk exists. To make up for it, companies often offer shares at a discounted price. This brings in investors, but it also protects the company. If it grows successfully and is sold/goes public with an unsuccessful IPO, the company still has funds raised from private investing.
Investing in pre-IPO companies isn’t always easy. But if you find the right investment, pre-IPO investing certainly could be worth the risk