How To Invest In Startups Before IPO
You’ve heard some buzz about a startup in its early stages that has the potential massive growth a few years down the road. Now, you want in. But how do you do that if the startup has yet to go through an initial public offering (IPO)?
It used to be difficult for investors to buy stocks in pre-IPO startups; you’d have to be an accredited investor, a private equity firm, or have a hedge fund. But now, almost anybody can get into pre-IPO startup investments with a little bit of research, some strategic networking, and sufficient capital. You can invest in pre-IPO startups by buying through specialized brokers, investing indirectly through firms and equity funds, or by being an angel investor or venture capitalist.
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What Is Pre-IPO Startup Investing?
It’s exactly what it sounds like: you are investing in a startup that has yet to go through an IPO. When you do this, you’re placing a stake in a startup before it has materialized its potential growth. These startups can be in a startup incubation, which are programs that help early-stage businesses take off.
The investment is given in exchange for equity, or a portion of ownership in the company and rights to its future profits. You gain returns if or when you sell these shares or stocks during a liquidity event such as an IPO or acquisition.
Benefits Of Pre-IPO Startup Investing
While not without risk, there are several benefits to pre-IPO startup investing—beyond just financial profit—that make it an attractive venture. These include:
High Returns
In the past, people who invested in companies during their IPO saw the most returns. That high value has moved into the hands of pre-IPO investors, gaining up to 90% more than those who put a stake in during the actual IPO. Pre-IPO investing can allow you to gain massive profits from a small initial investment.
Portfolio Diversification
Pre-IPO startup investing is a great way to diversify a portfolio because it adds high-risk and high-return investments that often span developing industries or emerging technologies.
Networking
By investing in startups, you’re expanding your network to include new founders, other investors, industry experts, and other individuals related to the industry or company you’re investing in. You’re also supporting a community of new leaders in their fields.
Relevance
Investing in disruptive businesses helps you stay relevant with the trends (especially those in tech) and in touch with the latest industry developments, which can help you develop an eye for future investment opportunities.
How To Invest In Startups Before IPO
Before launching their IPO, startups usually sell or offer shares and stocks through:
● Angel investors or venture capitalists who acquire a large portion of the available shares.
● Pre-IPO placements, when selected investors are given discounted stock prices right before a startup goes public
● Stock options that are offered when hiring employees for a startup, as an added benefit or compensation of employment
It’s easier to get in on the action if you’re a major player, employee, or startup affiliate. But even those on the outside can invest in startups before an IPO. Here are three ways how:
Buy From Specialized Brokers
Some stockbrokers or advisory firms specialize and take part in capital raising and pre-IPO stock buying. You can ask them about companies with potential and how you can invest in these startups early. They may be representing startups looking for buyers or have already acquired stocks they’re willing to sell.
You can look into several brokers online, such as Forge Global, Nasdaq Private Market, and EquityZen, among others.
Go Straight To The Startups
Become an angel investor yourself and approach the startups you want to invest in directly. Attend startup events and competitions that can connect you with founders, industry insiders, and seasoned investors. You can also contact financial institutions to get some information on private companies looking to share stocks.
There are also crowdfunding websites such as AngelList that you can register with to invest in startups directly.
Invest Indirectly
Suppose investing directly is inaccessible or too high-risk for you, but you still want some skin in the game. In that case, you can invest indirectly through publicly held venture capital firms or private equity exchange-traded funds. This option allows you to benefit from the explosive growth of the start-up industry, without having to be directly involved in it
Find The Right Startup To Invest In
There are thousands of startups out there. And while it’s an exciting prospect to potentially help a couple of them grow, the reality is that 90% of startups fail. However, the ones that do make it reward their early investors with high returns. So, it’s essential to do comprehensive research and build the right connections to ensure that the pre-IPO investments you make are sound ones.