The biggest companies in the country, with current market valuations above $1 trillion, all share one thing in common: they are all tech startups. This is perhaps one of the most crucial reasons why experienced investors are looking for future pre-IPO technology startups.
Given the ever-changing nature of technology and its clear argument for significant financial benefit, it is not shocking that tech startups are springing up left and right during this time, and this trend is surely going to produce multi-million dollar worth companies in the future.
For these same reasons, these high-growth firms are excellent investment prospects, and investing in a pre-IPO technology startup is an even better decision that can yield many benefits. Before we get into the intricacies that define how we can invest in a startup, let’s understand what exactly is a pre-IPO startup.
What is a pre-IPO Tech Startup?
Pre-IPO stands for “pre-initial public offering. This is the point at which the founders of the company sell shares of their technology startup before they are listed for trade on the stock exchange. Investing in the early stages of a startup empowers the founders to obtain more funds for operational and business expansion purposes.
If early investments sound too risky for a certain set of investors, they may choose to invest in pre-IPO proposals in the second or third round of fundraising. This approach enables investors to have a better understanding of the marketability of the (tech) startup in question. Now that we are acquainted with the intricacies of the pre-IPO concept, let’s have a look at 7 ways through which investors can pour in funds in a pre-IPO tech startup.
7 Ways to Invest in Pre-IPO Tech Startup
Although there is risk in investing in pre-IPO tech companies – just as there is in the stock market – the perceived benefits outweigh the possible risks, especially in the industry that dominates the business world and has broken the trillion-dollar barrier. That being said, here are the 7 ways through which you can invest in pre-IPO technology startups.
1. Look out for pre-IPO tech startups
Banking establishments, lending companies, and accounting firms usually have a pre-existing clientele of early age startups who are looking for early age investors. These entities can help investors in identifying potential investment opportunities.
If you are a seasoned investor, you can also get in touch with your stockbroker or investment consultant who can help you in investing in early-age tech startups. Also, there are trading and broking companies that specialize in identifying pre-IPO tech startups and assisting investors in putting their money on the right bet.
2. Establish a robust business network
When you intend to invest in pre-IPO technology startups, sophisticated market connections are integral. These market connections can connect you with leaders of the industry and, subsequently, lucrative investment opportunities in the near future. Startup incubators and accelerators are excellent channels for your investment in high-performance tech companies and for participating.
Established startup projects from major companies such as Y Combinator and Quest Ventures have paved the way for growth for some of the largest technological names, such as Airbnb and Dropbox, and have an excellent track record of generating immense value for the investors.
Also, if you’re part of these business networks, you might hear something before others regarding companies moving towards an IPO. There is often a lot of rumor in the stock market. A prime example can be seen with the suspected redwood materials IPO that has been talked about endlessly ever since the CEO said he wouldn’t rule out going public. If you were part of the right network you might be able to get a jump on the IPO planning or, indeed, realize that it’s something that will never happen and instead look to purchase the stock privately.
3. Analyse the startup directories
When you decide to invest in pre-IPO technology startups, analysing startup directories is extremely worthwhile. In addition to the opportunity for identifying new cutting-edge startups, these directories can often help you to witness first-hand how well the goods and services provided by the startup are received by customers.
Of course, a few startup directories are less reputable than others and, as a result, technology entrepreneurs become less reliable and less reliable by their association with them. With that being said, investors need to perform their due diligence to analyse tech startups that are listed on reputable startup directories such as Crunchbase, ProductHunt, and similar.
4. Leverage crowd-funding platforms and secondary markets
Crowd-funding platforms such as AngelList, Republic, and Webull, along with secondary markets provide a transparent picture behind the intricacies and the processes of a pre-IPO placement to potential investors.
Pre-IPO investors can also analyse market news and other relevant information regarding a startup that is underway going public. Additionally, investors can also reach out to the founders directly to offer financial incentives in exchange for the shares in their company.
5. Attend startup pitching events
Startup pitching contests are crucial for early-age startups to secure valuable investments from seasoned industry veterans or established market players. These pitching competitions provide the investors with the opportunity to get a brief idea regarding the startup in which they want to invest.
Moreover, investors also get a brief idea about the business plan, go-to-market strategy, revenue models, risks, and an analysis of the target audience during such events. Attending these events is perhaps one of the most enticing investment avenues for an investor looking to invest in early age startups.
6. Become an angel investor
With the right approach and appropriate planning measures, becoming an angel investor has become a relatively simple endeavour. And once the investments of an angel investor go public, they stand to reap tremendous benefits. If you are already in the circles of accredited angel investors, the path to becoming an accredited angel investor becomes relatively smooth.
Only accredited angel investors are allowed to participate in pre-IPO or security offerings. Angel investors also need to specify the percentage of their portfolio that constitutes angel investments. This is crucial as angel investing reaps the rewards in the long term when the startup reaches its potential.
7. Look out for a syndicated angel list
A syndicated Angel List represents a realistic way for investors to reach other like-minded angel investors and raise the capital required to promote a certain pre-IPO technology startup. In strict contrast to venture capital (VC) firms who pour in millions of dollars in the hopes for a higher ROI, syndicated angel list investors usually cap their investments (usually a few thousand dollars) which makes it sensible for the startup community.
One of the advantages of being a unionized angel is that you are not a single investor. Therefore, you have to do less paperwork. Building a tech venture alliance raises your visibility as an angel investor with other firms you have invested in. These founders will then refer you to other pre-IPO tech startups, which might meet your requirements. Through this approach, you will also discover the startups with the greatest potential for success.
Conclusion
Pre-IPO technology startup investments definitely pay off financially. But still, there is some kind of risk involved, just as with any other investment avenue. You must take the time to examine viable opportunities to find the best pre-IPO technology startup. Furthermore, this investment approach will allow you to remain at a pace, so you don’t invest too much too early.
