Pre-IPO Investing: 7 Ways to Invest in Tech Startups

Posted by Mo Rassolli on Sep 13, 2021 09:09: AM
Mo Rassolli

Pre-IPO technology startup investments pay off financially. 

However, there is some risk involved, just as with any other investment avenue.

This article explains what Pre-IPO Investing is and how you can use it in investing in tech startups.

What is a pre-IPO?

Pre-IPO or pre-initial public offering is a private placement of substantial blocks of shares before the stock is listed on a public exchange. Private equity firms, hedge funds, and other institutions that are willing to buy large stakes in the firm are often the buyers. Buyers in a pre-IPO placement typically receive a discount from the price disclosed in the prospectus for the IPO due to the amount of the investments being made and the risks involved.

It's a way to raise money before going public and offset the risk if the IPO price is overly optimistic and does not rise quickly after it opens. 

This is favourable for investors interested in the new companies in any field, especially with the more sophisticated tech space.

Why does investing in tech startups pre-IPO make sense?

Here are four benefits on why you should invest in tech startups pre-IPO.

Exponential ROI

One of the biggest reasons many seasoned investors choose to invest pre-IPO is its exponential return of investment.

You're investing in a business that's on its way up. If the company does well, you will gain significantly from its growth in the long term. It's not uncommon for million-pound startups to turn into billion-pound public companies, especially in the tech industry.

When the tech company goes public, you can sell your shares at a considerably greater price.

For example, venture capitalists can expect a modest 10x ROI in 4-5 years. And these investors continue to receive passive income over time. Also, for most investors, a fair expectation of over 15x ROI growth can be expected.

Avoid stock volatility

Because shares have not yet been made public, pre-IPO investments are less likely to affect societal events that cause stock market swings.

For example, despite the stock market's general fall due to the coronavirus outbreak, tech startups like Netflix continued to grow swiftly.

Shorter holding times

Suppose you decide to invest with a tech startup pre-IPO. In that case, the lock-up period will take 3 to 24 months between the underwriters and company insiders, preventing investors from selling any shares of stock for a set amount of time.

Proven success rate

When it comes to stock value growth, tech firms have a good track record. In the last decade, the dividend value of tech stocks has climbed by around 25% per year.

Seven ways to invest in pre-IPOs:

Investing in a startup before its initial public offering (pre-IPO) is challenging, but it's not out of the question. 

Here are several ways to invest in pre-IPOs.

 

1. Check out for pre-IPO tech startups.

Usually, banking establishments, lending companies, and accountancy firms have a pre-existing clientele of early-stage startups seeking early-stage investors. These organisations can assist you in locating potential investment opportunities.

You can also contact a stockbroker or advice firm that specialises in capital raising and pre-IPO shares. They can provide you with advice and assist you on how to invest with a pre-IPO company.

2. Establish a strong business network.

If you want to invest in tech startups before they go public, you'll need to establish strong business networks. These networks can help you get in touch with industry experts and lead to profitable investment opportunities shortly.

Also, if you want to invest in high-potential tech startups, startup incubators and accelerators are great platforms to join and participate in.

These programs and events can assist new tech startup pre-IPO investors like you to meet fellow investors while also learning more about up-and-coming tech firms and their products and services.

3. Analyse the startup directories.

Analysing startup directories is incredibly beneficial when deciding to invest in pre-IPO technology startups. These can often let you experience first-hand how effectively the goods and services given by the startup are received by clients, in addition to identifying new cutting-edge startups.

4. Leverage crowdfunding platforms.

Secondary market and crowdfunding platforms (such as Trendscout) make pre-IPO placements' inner workings and processes more accessible and visible to potential investors.

Pre-IPO investors in tech startups can also keep an eye on the latest news and information about companies that plan to go public.

5. Attend startup pitching events

A pitch competition is a competition in which entrepreneurs present their business concept to a panel of judges hoping to win a cash prize or funding.

Startup pitch competitions are crucial for entrepreneurs to get their company before experienced investors and industry leaders get the funding to scale. It allows you the opportunity to get an overview of the startup in which you may want to invest. 

It's also an excellent way to meet other investors.

You can also get a brief overview of the business plan, go-to-market strategy, revenue models, risks, and an analysis of the target audience during the event.

Attending these events is one of the most attractive investment opportunities for investors interested in early-stage startups.

You can also reach out and mentor young entrepreneurs at these events. As a result, you improve their startup's (and your investment's) chances of success.

Examples of startup pitch competitions to attend here in the UK are The Pitch, Rising Stars, and MSDUK Innovation Challenge.

6. Become an angel investor.

Angel investors are individuals with excess cash and an interest in investing in startups. Most angel investors are seasoned business entrepreneurs who could mentor new startups as well., Depending on the risk associated with the startup, they usually require 20-30% equity or more.

Once investments are made before these startups go public, becoming a tech startup angel investor could be incredibly beneficial.

However, only accredited angel investors are allowed to participate in pre-IPO and other securities offerings.

Naturally, becoming an angel investor and establishing oneself in the angel community is a long process that doesn't end in accreditation.

You should also decide how much of your overall investment portfolio you want to dedicate to angel investments. Ideally, you should only invest between 5% and 10% of your total capital in it.

And because angel investments have limited liquidity, it will take time for you to see a return on your investment.

7. Look out for a syndicated angel list.

A syndicated angel list is a valuable funding avenue where you can connect with like-minded angels and raise funds to advance a specific tech startup pre-IPO.

One of the advantages of joining a syndicated angel list is that you won't be investing as an individual. As a result, the amount of paperwork you must complete is reduced. 

Also, building a tech venture alliance increases your profile as an angel investor with other firms you've invested in. 

These entrepreneurs will then introduce you to other pre-IPO tech businesses that may be a good fit for your needs. You can then find out which firms have the best chance of succeeding using this approach. 

Summary 

Pre-IPO investing is a way to raise money before going public. 

Although it has risks, it has extraordinary potential rewards and is worth looking into.

If you want to know more about pre-IPO investing, you can talk to someone from our team.

Rest assured that someone from our team will get in touch with you to answer all your questions.