Pre-IPO: What it is, How it Works, and Why you Should Invest

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  • 06 Dec 2023
Pre-IPO: What it is, How it Works, and Why you Should Invest

Key Highlights

  • A Pre-IPO stock is a stock of a company that has not yet gone public.
  • Pre-IPO companies have a solid business model.
  • Many Pre-IPO companies have been around for at least a year and are profitable.
  • Often, Pre-IPO companies have more information available than their post-IPO counterparts.

Pre-IPO stocks are stocks of companies that are yet to go public. You will be one of the company's important shareholders and a part of its growth as a Pre-IPO investor. It is also possible to earn a huge profit when the company goes public.

You might not get an allotment if an IPO is oversubscribed. This is one reason why some investors choose to invest in pre-IPO companies. Before going public, many companies opt for Pre-IPOs to reach out to investors and gather capital.

Interested investors can invest in the company's growth before it goes public. However, a lack of awareness makes Pre-IPOs less accessible to everyone. Previously, Pre-IPO shares were only available to banks, hedge funds, private equity firms, and a few other entities.

You can now invest in Pre-IPOs if you have a bank account and a Demat account. Additionally, a company can now dematerialise its shares, allowing everyone to invest in them and conveniently transfer them between accounts.

Share brokers handle the majority of Pre-IPOs. Investing in a Pre-IPO requires the help of a broker. Pre-IPO companies and their details, such as brokerage fees and share prices, are disclosed by your broker.

If you wish to invest in the Pre-IPO, you must send the investment amount to the broker, who will transfer the amount to the company's account. Shares will be delivered to your Demat account by T+0 evening or T+1 morning. The transaction is complete once you see the ISIN number of the shares in your Demat account.

Fund houses are another way to invest in Pre-IPOs. AMCs often offer limited-subscription Pre-IPO mutual funds. In this way, investors can invest in companies at the end of their development stages.

Investors can benefit from investing in Pre-IPO companies for a variety of reasons. Some of them are:

  • Pre-IPO is launched by top player

On paper, a startup may look good, but it's more likely to succeed if an experienced entrepreneur leads it. These leaders have already mastered the art of running a business and have a good sense of what works and what doesn't. Investing in Pre-IPO companies allows investors to get in early with someone who has done it before.

Investors who put| money into Pre-IPO companies are betting on both the team behind them and their reputations. Your investment will likely yield better returns if you invest in an established company with an experienced founder than if you invest in an upstart without knowing their success factors.

  • Business models of Pre-IPO companies are Profitable

Often, Pre-IPO companies have been around for at least a year and have shown they are profitable. In other words, it means their business model is working. A company's valuation skyrockets when it goes public, and it has to compete with much larger companies.

These challenges don't exist in Pre-IPO companies - yet - which is why you can purchase solid companies at a low price. If you invest in Pre-IPO companies, you get first dibs on profit. You can cash out as soon as the stock begins trading when you're first to invest (and profit).

One of the benefits of investing in Pre-IPO companies is being able to do so early enough to gain when they go public. When you invest in Pre-IPO companies, you can benefit from big upsides without having to wait for an IPO. Moreover, compared to IPOs, Pre-IPO investments are subject to less regulation.

  • Pre-IPO companies have detailed plans

Pre-IPO companies often have more information available than their post-IPO counterparts. Since these startups do not need to raise additional capital, they have more time to develop detailed business plans for investors.

Getting involved with a Pre-IPO company now remains advantageous, even if you do not intend to buy equity right away. The relationship you establish will be important when shares are offered to other investors and sold on the public market. It is better to invest now than to wait later if you want to build a relationship.

In Pre-IPO businesses, failure is taken very seriously. Comparatively, private companies have less incentive to do anything but prioritize success over failure than publicly traded companies with quarterly earnings reports. This means even higher standards and better products from startup founders who haven't thought about liquidity yet.

Pre-IPO opportunities can be a great way to increase your risk/reward ratio. It is a networking opportunity to invest in a Pre-IPO company. Thus, making connections with Pre-IPO startups is an effective way to build those networks now rather than later.

From the very beginning, you will be able to play an active role. Rather than playing an active role as a trusted advisor or consultant, you'll play a passive role as an investor until shares are sold on public markets or offered as equity stakes in another funding round.

  • Pre-IPO stocks offer better value for money

With Pre-IPO stocks, you can invest in a company at a fraction of its market value, resulting in higher returns. As compared to IPOs, they're more accessible due to the low prices. However, only if the investment makes it through the initial hurdles.

Even though some companies quote low IPO price values to woo investors, most stock markets correct post-IPO, resulting in greater losses than investing in Pre-IPO companies. Many financial experts recommend buying shares on the primary market rather than the secondary market, as post-IPO corrections are common.

Investing in private funds early also allows you to spot valuable trends ahead of time and set yourself up with valuable investments before others. In the primary market, there are no 'corrections' because the markets do not shift once stocks are listed on secondary platforms. As a result, you have more control over your holdings and can decide which companies succeed or fail.

A high-net-worth individual (HNI) generally invests a huge amount in a single deal when investing in these types of stocks. They also tend to know about companies long before they launch publically, allowing them to act first rather than react later, again giving them greater control over which startups succeed and which fail. Because of their low market value, Pre-IPO stocks offer you a wider selection of stocks and safer returns. It is possible to diversify your investment portfolio by purchasing Pre-IPO stock if you are looking for ways to do so.

  • Pre-IPO stocks are less risky investments

Investing in companies before they go public can seem like a safer bet because these companies are usually not making much money yet or maybe not making any at all. So, there's less risk because there aren't a lot of people buying and selling their shares like in the stock market.

But remember, there's always some risk because businesses can fail, just like how some new ideas can suddenly become super successful. Whether a company does well or not also depends on whether more people invest in it. So, it's important to see how much money is being put into certain types of businesses.

It would be helpful to clarify that Pre-IPO investments are subject to risks but can offer high returns. For example: While there are risks associated with investing in Pre-IPO companies, it's important to note that these investments offer a good chance of earning high returns. As many investors actively seek Pre-IPO stock opportunities, there's little chance that such opportunities will go unnoticed for long.

Conclusion

Due to the fact that they are not listed yet, Pre-IPO investments offer substantial return potential at low investment costs. It might be helpful to mention that investors should conduct thorough due diligence and consider seeking advice from financial experts or professionals before investing in pre-IPO companies.The experts at Kotak Securities can help you with your investments. When a company is still in its early stages of growth, you can make a lot of money investing in its stock.

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FAQs on Pre-IPO Investing

Pre-IPO investments can give investors early access to high-growth companies before they become publicly traded. If the company performs well after the IPO, it could result in significant returns.

Pre-IPO companies can help diversify your portfolio and expose you to innovative industries. These companies can improve portfolio performance when they hit the growth path post-IPO.

The attractive valuations of Pre-IPO companies result in substantial gains for investors. These shares are available at a low price. Furthermore, it allows investors to invest in startups and innovative technologies that are not publicly available.

Yes, you can grow your capital investment through Pre-IPO investments. Even though these investments are highly risky, they can generate the highest returns in the long run. When the company goes public, you can earn multiple times more if the company does well.

Higher fees, limited transparency, and the possibility of financial loss are the risks of Pre-IPO.

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