Investing in Pre-IPO Companies

Happy Sunday Noyackers,

If you’re anything like me, your news feed is probably filled with articles about companies like SpaceX, OpenAI, and Stripe.

But although these companies are all extraordinarily well-known, they’re technically private companies.

Private companies are firms that haven’t gone through the IPO process, meaning their shares don’t trade on a public stock exchange.

But if you know where to look, it’s still possible to invest in these companies – although doing so can involve some substantial risk.

Today, we’re exploring the world of pre-IPO investments. Here’s what I’ve got in store for you:

• Looking at the differences between public and private companies,

• Why companies are staying private longer (and sometimes forever),

• And a few different platforms you can use to explore pre-IPO investing.

Finally, we’ll wrap up with an insightful interview with Phil Haslett, co-founder of the private shares investing platform EquityZen.

Let’s roll!

Private & Public: The Two Types of Companies

For most practical purposes, it’s helpful to group companies into just two groups: private and public.

• A public company trades on a stock exchange and has a ticker symbol. That means just about anyone with a brokerage account can buy stock.

• A private company, meanwhile, is the opposite – it doesn’t trade on a stock exchange and you typically have to be accredited to buy shares (if you can get access at all). 

Public companies are also much more regulated, need to furnish quarterly financial statements, and have executives who are more accountable to shareholders (well, except for companies like Meta).

Why are some companies public and others private?

All companies start out private – but some choose to transition to public life with an initial public offering (or IPO).

Executing an IPO involves organizing audited financial statements, meeting a litany of regulatory hurdles, and putting on an investor roadshow to pitch the company to public investors. 

(Fyi, we wrote about Lineage, one of this year’s hottest IPOs, back in August – check it out!) 

Historically speaking, ‘going public’ was the traditional route for every successful company. 

But these days, that’s changing dramatically. More and more companies are choosing to stay private for longer – and in some cases forever.

Companies Are Staying Private for Longer

Over the years, the universe of publicly traded companies has been shrinking.  

In 2000, there were more than 7,000 publicly traded companies on US stock exchanges. By the end of 2020, that figure had fallen to fewer than 5,000.

What’s more, based on an analysis of tech companies, the average age of companies at IPO has climbed by 7.5 years over that same time period. 

There are also companies that never go public. The number of ‘unicorns’ (private companies worth at least $1 billion) has soared in recent years.

There are a few reasons that companies might be staying private for longer:

• On the ‘demand’ side, there is much more money in private markets these days than there used to be, so companies have less need to go public.

• On the ‘supply’ side, post-2008 regulations like the Dodd-Frank Act have probably made it genuinely more expensive and burdensome for companies to go public.

But whatever the reasons, in my view, this trend has largely been bad news for everyday investors.

When IPOs lag, investors miss out

In their early years, companies often experience a tremendous amount of growth. But as they age and become larger, companies tend to stabilize, meaning growth slows down.

Sure, there are plenty of risks involved in startups and other young companies – but there’s a reason that returns in venture capital can be so much more substantial than returns in public markets.

Thankfully, in recent years, the world of pre-IPO investing has slowly become more accessible.

In direct response to the lack of IPOs, more funds and platforms are popping up to offer investors access to shares in private companies.

Investing in Pre-IPO Companies

While investing in pre-IPO companies is definitely more challenging than investing in public companies, it’s not impossible (although this space is still largely off-limits to non-accredited investors.)

If you’re interested in investing in private shares, I’d encourage you to explore a fund structure, which offers the benefits of diversification & professional management.

But you can also pursue investments in individual pre-IPO shares. 

Remember, these investments are risky. You won’t be able to access the same amount of information you can get for public firms.

Additionally, many private companies don’t like secondary trading of their shares and have legal limitations in place to restrict it.

But if you’re feeling adventurous, we’ve collected a few platforms for you to consider exploring below.

EquityZen

EquityZen is a dedicated pre-IPO investment platform that features shares of companies like SpaceX, Waymo, OpenAI, xAI, and more. They’ve executed more than 42,000 transactions since launching more than a decade ago.

Remember to stick around for our interview with EquityZen founder & CSO Phil Haslett below!

Hiive

Hiive is especially attractive because buyers don’t pay fees. Plus, they offer relatively more transparent pricing information when compared to other platforms, so you have a bit more insight into the quality of the deal you’re getting.

Augment

Finally, Augment is another platform to consider. Augment is somewhat unique as they allow you to negotiate directly with counterparties to execute a deal, which is why they bill themselves as the “Bloomberg terminal for pre-IPO trading.”

Expert Interview: Phil Haslett

To better understand the world of pre-IPO investing, we sat down with co-founder and Chief Strategy Officer of EquityZen Phil Haslett.

Phil has been in the pre-IPO space for over a decade now and has a wealth of experience on the topic. Here were our main takeaways from the conversation:

• Pre-IPO investing is not a short-term trade. Investors should always consider these long-term holdings.

• Due to their risk, private shares should be a small portion of an overall investment portfolio.

• Liquidity can be a problem in these markets. Even if you can buy shares, it might not be easy to sell them when the time comes.

Here were some of Phil’s key quotes:

“One of the rationales for pre-IPO investing is that a lot of the most disruptive companies aren’t in public markets. So really, the private markets can offer a good solution for building a portfolio.” 

“We encourage investors to think about these investments as multi-year holdings. In the next couple years, the company could hopefully go public. But there are no promises or guarantees that will happen.”

“These are illiquid assets. They’re high risk but also high potential. But the younger you skew, the more risk you can take on your portfolio. It’s much different if you're a 75-year-old retiree who can’t afford the risk of a stock going to zero.”

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