What is Pre-IPO Investing?

Understanding IPOs

An Initial Public Offering (IPO) is initiated by private companies looking to obtain large amounts of money to grow the business by becoming a public entity that provides investors with ownership stakes in the company (in exchange for capital). Retail investors usually look at the financials, the management team and what future opportunities exist for the company when deciding whether they are interested in purchasing.

Investing in an IPO means that you own part of the company and receive voting rights at the company’s annual meeting, as well as the chance to earn dividends and potentially sell your IPO shares at a premium once the company goes public.

What Is Pre-IPO Investing?

Investment in Pre-IPO companies means buying stock before they become available on exchanges. Many firms sell pre-IPO shares through private placements at a lower amount than they intend to charge during their IPO in the hopes of luring an investor who is willing to bear the added risk associated with investing in a pre-IPO company.

Historically, only HNIs, private equity, VC and hedge fund managers had access to pre-IPO stock due to prohibitively large minimum capital requirements to buy into these shares.

Pre-IPO investing has become available to retail investors. With the introduction of dematerialised shares, which make it easier to transfer and invest in shares, this expands the pool of potential early-stage investor candidates.

Pre-IPO investing is very similar to investing on a stock exchange during both the primary and secondary market, allowing investors to successfully predict stock performance based on a company's fundamentals, finances and ability to grow.

Advantages of Pre-IPO Investing

• High Returns

By investing in high-growth companies in the technology industry or similar sectors at an early stage, investors can often realise significant returns on their investment.

• Reduced Effect of Market Volatility

Pre-IPO investments are not as affected by changes in the stock market; however, they still face company-specific risks.

• Discounted Prices

Share prices are often discounted by the company to entice early-stage investors, thus allowing for the purchase of undervalued shares.

• Long-Term Wealth Generation

The long-term investor who holds pre-IPO shares will likely experience significant financial appreciation and diversification within their portfolio.

Disadvantages and Risks

• Market Uncertainty

There is no way to accurately estimate how the market will react and whether or not the company will perform as anticipated. Losses incurred by businesses will be incurred personally by the investor.

• IPO Approval Risks

Companies are required to obtain SEBI approval before listing publicly. An investor's money may be tied up for an unknown period due to a delay, cancellation, or withdrawal of an IPO.

• Startup Risk

An investor's entire capital may be lost due to a start-up company's failure to thrive in its early stages.

The most important point in all of the investment methods is having a thorough knowledge of the company fundamentals, industry position and growth potential will lead to a long-term investment with a higher success rate.