7 Ways to Invest in Pre-IPO Stock

Investors have a range of opportunities to invest in pre-IPO stocks, in the early stage of the business, as it grows and as it gets set to list.

Buying into a private company at a pre-IPO stage can be a profitable move. Investors can see their stake grow as the business develops its brand, products, reputation and appetite from the investing public. When the company eventually lists then there is a huge opportunity to take advantage of demand and sell their shares for a windfall.

That’s because an IPO isn’t just a way for a company to raise money to fund future development, it is also a major liquidity event for pre-existing shareholders.

But there are also limitations in who can invest in private companies. It is often only available to institutional or so-called accredited investors. The latter tend to be high-net-worth individuals who use their wealth to invest directly in private companies or through private funds.

But retail investors can also access private stock such as through crowdfunding platforms or by investing in proxy stocks.

There are risks to be considered such as financial transparency and illiquidity. Unlike publicly traded stock where you can sell your shares quickly, it may take you longer to do so when the company is still private. There are no guarantees that you can cash out easily. There is also no easily observable market price created by a number of buyers or sellers, so valuation can be trickier.

How to Invest in Pre-IPO Companies

1. Secondary Marketplaces

Examples include – Forge Global (FRGE), Hiive, and EquityZen. These marketplaces connect accredited investors with existing private company shareholders, such as employees, angel investors or venture capitalists looking to sell their shares before an IPO. As per the ForgeGlobal website, accredited investors should possess earned income over $200,000 over the last two years or possess a net worth of $1 million. It adds that investors can ‘Explore live opportunities in leading private companies, use pricing insights and trends to evaluate investments and submit bids, negotiate terms and complete trades.’

It says it helps streamline the process for buyers and sellers. It provides insights into over 4,700 companies including OpenAI and Databricks.

2. Venture Capital and Private Equity Funds

These are funds which pool money from investors into typically early-stage companies. They focus on companies that have high long-term growth potential and are in need of capital to fuel their growth and development. Venture funds will often look to invest in a particular industry sector, business type, or geographic region where there is substantial growth potential. Venture funds typically aim to exit their investments through an initial public offering (IPO) or through an acquisition by a larger public or private company. According to private equity digital platform Moonfare, venture capital funds have traditionally been difficult for individual investors to access, catering instead to institutional investors by imposing high minimum investments. Retail investors can get exposure to venture capital funds via digital investing platforms such as SoFi (SOFI).

Some good examples of venture capital funds are Fundrise Innovation Fund and ARK Venture.

• Fundrise Innovation Fund – The fund has built a diversified portfolio that includes some of the top AI stocks, Machine Learning, and Data Infrastructure companies in the world. This includes OpenAI, Databricks and Anthropic.
• Fundrise invests in real estate and other assets with a low $10 minimum for standard accounts, making alternative investments accessible to beginners.
• Retail investors can gain direct exposure to OpenAI through a special-purpose vehicle (SPV). Special Purpose Vehicles (SPVs) are legal entities that are created for one specific purpose. In venture, SPVs are used to pool money from a group of investors, such as the Fundrise Innovation Fund, to make an investment in a single private company.
• ARK Venture Fund
• The fund enables everyday, non-accredited, investors to invest in fast-growing venture capital (VC)-backed private companies for a minimum investment of just $500. It has a focus on Disruptive Innovation companies.

3. Angel Investing

An angel investor is someone who invests their own money in a small business in exchange for a minority stake, usually between 10% and 25%. They either do this by themselves or within a syndicate.

They tend to be entrepreneurs or people with extensive experience in the business world. They use this knowledge to help the business grow to the next level and attract further investment.

4. Invest in Publicly Traded Asset Management Firms

You can go private by going public. An investor can do this by buying shares in listed private equity and/or asset management firms such as KKR (KKR) and Blackstone (BX), which have pre-IPO firms in their portfolios. This means that investors can indirectly invest in private firms from a whole range of sectors.

5. Crowdfunding Platforms

Often very-early-stage firms seek investment via platforms such as Wefunder. Investors can put cash into a business in exchange for equity. The idea is that the company will grow as will the value of their shareholding.

6. Indirect Investments

This could include buying stakes in listed tech titans such as Microsoft (MSFT) if an investor wants exposure to OpenAI. That’s because MSFT has a sizeable stake in the ChatGPT maker and benefits from its growth.

7. Buying at IPO

Investors can utilise online brokerages like Robinhood (HOOD) and SoFi. An investor can register their interest in any upcoming IPOs and outline the number of shares they would like to buy at a projected IPO price. In the hours before an IPO brokers offer a limited allocation of shares to their clients. This pre-buying opportunity isn’t guaranteed, however, given the huge amount of demand in the marketplace. Expect to be disappointed.

Conclusion

Buying pre-IPO stocks is available for both accredited and retail investors. There are risks involved given the nature of private companies and issues such as financial transparency. However, the rewards can be huge if investors are proactive.

There is no excuse to sit and wait until a new shiny, entrant dings that famous New York Stock Exchange bell.