How to invest in a company's Pre-IPO and not burn out

Investing is always a risk and grows along with the potential profit: if you want to earn more, be ready to lose more. Investments in pre-IPOs are high-risk assets, but their possible return is much higher than that of stocks on the stock exchange.

1. Choose "mature" companies whose probability of bankruptcy is minimal

Companies in the pre-IPO stage have not yet entered the stock exchange but will do so. This segment is attractive to investors: businesses at the pre-IPO stage usually have a sought-after product and stable revenue, but their shares' value still needs to be higher than that of public companies. Investing in private companies with high capitalization — about $1 billion- is preferable to limit the risks. For example, the capitalization of the American company Blend Labs Inc., which develops IT products for banks, is more than $3 billion. Private companies tend to grow in value faster than public ones. Over the past six months, the value of the Swedish company Klarna has tripled and reached $31 billion — companies on the stock exchange rarely show such results. But this is not the limit: the Chinese company ByteDance, the developer of the Tik-Tok service, has not yet entered the stock exchange, but it is already worth $180 billion.

2. Find out which venture capital funds have already invested in the company

Venture capital funds invest in the company before placing shares on the stock exchange. When significant funds such as Kleiner Perkins, Sequoia Capital, Andreessen Horowitz, Accel, and others buy private company shares, it signals the retail investor to follow their example. Such funds have extensive experience evaluating companies and markets, and their analytics can be trusted (but it's worth remembering that no one is immune from mistakes). Venture capital funds aim to buy shares while the company is still small and then sell them for several times more expensive.

3. Explore the market and the company's product

Companies at the pre-IPO stage are often unprofitable; their revenue still needs to cover the costs of product production, distribution, and marketing. However, investors are more interested in something other than the present, but in the future and how the company's product fits into it. What does the company sell, and what products/services? How many customers does she have now? How many will there be in 10 years?

To answer these questions, it is necessary to study the market's potential size and what place the company can occupy in it. You need to understand why the industry, particularly this company, will grow. For example, suppose an investor wants to assess the potential of Tanium, a company that specializes in cybersecurity. In that case, he must analyze whether the threat of hacker attacks will be widespread in the world in the coming years (spoiler: it will be). For example, in 2016, shares of the developer of artificial meat, Beyond Meat, were worth a little more than $6 in a private investment round. At that time, the trend towards vegetarianism, healthy lifestyles, and environmental care (cattle breeding is an essential factor in global warming) was already evident. In 2019, Beyond Meat went public for $25 per share — this gave pre-IPO investors a profit of 316%. Today, Beyond Meat shares are trading at $143. Business media and reports from analytical and consulting agencies — Deloitte, McKinsey, PwC, etc. - will tell about what is happening in the market. Their articles regularly cover current trends in the economy and business and make appropriate forecasts.

Another critical point is the company's competitive advantages, which will enable it to win the fight for the client. Such benefits may include a product, a business model, and well-known partners.

Read the full text on the website rg.