How To Invest In Startups Before Their IPO

How To Invest In Startups Before Their IPO

Every investor out there is looking to make their money go the farthest when investing. One of the best ways to accomplish this is by investing in undervalued assets that get more valuable over time. Regardless of the asset class, whether it be real estate, bonds, gold, or stocks, the whole game of investing is spotting an opportunity before others and riding out your winners. On Wall Street, this game usually starts with an IPO. The initial public offering is the beginning of a companies history and the best chance to invest on “the ground floor”.

Well, unfortunately for these bankers, we have a secret to share with all of you.  The IPO isn’t the ground floor and there’s a way to get ownership in these companies far far earlier. In fact, there is a whole industry built in between the point before an idea is formed and when it goes public on the Nasdaq. This, my friends, is what we call private market investing. And contrary to popular belief, you can get a piece of it too.

A Primer On Markets

It’s important to explain the difference between private markets, public markets, and the event that combines the two…The IPO (or public listing) .

What is the Private Market?

Private markets are really where most companies in the world live. Private refers to privately owned. Your local coffeeshop is in the private market. A bookstore is in the private market. A seed stage startup is in the private market too. Within the private market, a company is owned by its founders, investors, maybe a private equity firm, but the key is that it is private. It is under no obligation to share business details with anyone other its own stakeholders.

What is the Public Market?

The public market is a collection of companies that "the public" owns stock in. Any company listed on the Dow Jones is a public company. For you millennials out there, any company listed on a trading app is public too. When you log onto Robinhood and buy three shares of Tesla, you can do this because it’s a public company. All of these companies have quarterly earnings calls where their investors mean learn about the health of the company. They have reports where everyone can see if the company hit its goals or not. And depending on their outcome, people sell or buy more stock. The idea is that it’s publicly accessible for anyone to see. This is very different from how the private market works.

In almost every case, most public companies started off as a private one. It started off with a few founders and some investors. Then grew into a board, which helped hire a leadership team, which produced excellent business results. Executing over a long enough time frame, a company may be able to IPO. IPO stands for initial public offering and it means that for the first time, the “public” are going to be able to buy shares in this company (usually from the private shareholders), to allow the early risk takers to cash out and help the company move into the next stage of its development as a public company.

The Real Money Is Made In The Private Market

The private and public markets are very different from eachother. The public markets, by definition, are open. We know who is IPOing, we know who is doing well after IPO and who isn’t, and we know who the executive team of the company is. This is quite the opposite in the private markets. The private market is ran by crazy founders who want to change the world and the VCs bold enough to back them. Yet usually when most people hear about a startup that’s funded, they’ve already raised millions and it’s assumed  too late for any retail investor to learn more and invest.

For a while, society has just accepted the fact that they aren’t meant to get into these deals, but something happened in the last few years challenging this preconception. What changed? People realized how rich these early investors were getting by investing relatively small amounts of money into startups in the first few years of existence. The money people make in startups is pretty mind boggling.

Jason Calacanis wrote a $25,000 scout check into Uber which turned into over $100M at IPO. Jeff Bezos invested $250,000 into Google which is now would be worth $1.6B. Lightspeed invested $8M into Snapchat that is now worth over $2B! How is this possible? Well it’s because when these people/firms invested in the companies, they ere only worth a few million dollars. A $100,000 check in startup with a $5M valuation gets 2%. Aside from expected dilution events, 2% of a company trading on the Nasdaq is a nice chunk of change, as you can see from the above examples. Even .25% of a billion dollar company is quite significant.

It’s crazy to me to think that some investors’ journey ends at the IPO and for others, it starts. In my view, one groups makes far more money than the other and I think most people want to be in the private markets, but just don’t know how. Luckily thanks to many different factors, there are several ways to to join our friends Jason and Jeff and investing in companies in the private markets, getting in on the action well before the IPO.

3 Ways To Invest In Companies Pre-IPO in The Private Market

Start angel investing directly and building a reputation

Contrary to popular belief,  most private market investors do not have a very good reputation. Many are known for dragging their feet on decision, re-negotiating deals, lying about investment speed, and even just lying about being an investor altogether. What founders really want are investors who won’t take up much of their time, wire money fast, and stay out of their way unless told otherwise. If you can get a reputation like this among a group of founders, you’ll be far ahead of the pack and will likely get deal flow earlier than the investors founders hate working with. As long as you’re an  accredited investor, you can invest as low as even $1,000 into some deals.

Join a Few of Syndicates And Invest Along The Leads

New investors often join syndicates before they invest directly. A investment syndicate is an SPV where multiple people pour their capital into a single deal, but it only takes up one line on the startup’s cap table. Every syndicate has a lead, who generally is the one with the relationship to the founder. When they come across a deal they think their syndicate would like, they share it with the group. As long as you're an accredited investor, you are able tp join syndicates on websites like AngelList. This is a great option if you want to invest but don't have direct deal flow yourself.

Invest Via Equity Crowdfunding

There are so many retail investors who are locked out of investing in startups because they aren’t an accredited investor. Platforms like Republic and SeedInvest allow anyone to invest in startups (thanks to RegCF). This is a great place to start investing if you aren’t very wealthy but you want to dip your feet with investing before the IPO..WELL before the IPO. For these sites, the minimum investment is only $50 or $100.

Turns Out Investing Before the IPO Is Actually Pretty Easy

If you take the time to understand the private markets, understand who the players are, and recognize the markets that are on the rise, I’d argue it’s easy to make money as an angel investor betting before the bell rings on IPO day. Sure, it make takes a second before you see your investment pay off, but imagine getting your pay dat when all those Wall St. hedge fund managers are just getting introduced to the company. I believe understanding private market investing is a superpower worth learning. Not only can you brag to your friends that you “got into a startup pre-IPO”, but you can actually get rich from it too.