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Next-Gen (Pre-IPO) Winners – Spot the Global Technology Leaders Before They Go Public

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November 11th, 2020




Carmine Meoli

Pre-IPO Deals: Invest in High-Potential Companies Before They Go Public The average time for a tech company to go from startup founding to their Initial Public Offering (IPO) has almost tripled. Most market observers agree that factors such as the current market dynamics, an internationally flourishing Venture Capital (VC) ecosystem, and access to cheap capital due to low-interest rates incentivized many companies to stay private much longer than those founded before 2000. Some of the world’s most recognized and successful brands are still privately held corporations. The latest generation of tech companies such as Uber, Airbnb, Palantir, and Lyft have been raising billions of dollars in private markets prior to making their stock market debut. Access to these companies’ stocks has been limited to a small number of players in the exclusive VC and hedge fund community. At Stableton, we are on a mission to break down entry barriers to private markets and provide access to exclusive late-stage venture as well as pre-IPO deals.

The biggest changes in the VC industry Until recently, most investors either had no or only limited access to alternative investment strategies. In the last years, however, VC and startup funding has increased significantly, and some people even forecasted a “new tech bubble”. The American venture capitalist and blogger Mark Suster shows in his blog “Both Sides of the Table” that the funding spikes in the VC industry have gone overwhelmingly to “mega-rounds” of late-stage investments with round sizes of 100 million USD or more. “This huge increase of capital is really just money that used to be invested post-IPO, so more value is captured by VCs who traditionally sold post-IPO”, Suster explains. The placement of pre-IPO deals usually occurs when there is a high demand for the company to go public. These are the advantages of pre-IPO investments Pre-IPO deals are considered to be the most relevant late-stage investment opportunities. Investing in growth equity positions at late-stage companies with a clear plan to become public within a certain timeframe reduces the risk of early-stage investing and decreases illiquidity periods. In our blog post on late-stage investing, we wrote that “the key to return in late-stage venture investing is that the investment comes in a very advanced stage of value creation, often a bit before the stock finally goes public”. Interesting examples for pre-IPO investments that provided outstanding returns in short time windows include the videoconferencing tool Zoom and the digital scrapbooking platform Pinterest. In September 2020, Zoom topped a 100-billion USD market capitalization for the first time before ending the session at 129.1 billion USD. According to MarketWatch, the videoconferencing company added “an eBay worth of market cap”. Pinterest shares rose more than 28 percent in their public debut and the social media company raised around 1.4 billion USD at a roughly 12.7 billion USD valuation after their IPO in spring 2019. This made Pinterest the most high-profile listing of a U.S. social media company since Snap Inc in 2017. Pre-IPO and late-stage growth investments can also enhance the performance of traditional portfolios. Experiments by Steve Crossan, Venture Partner at firstminute Capital, show there is “very little or zero chance” that venture capital portfolio sizes in general between 100 and 150 lose money. Late-stage and pre-IPO investing significantly reduces the required portfolio size. What are the risks associated with pre-IPO investing? Among the drivers of the shift from public to private equity are investors seeking higher returns and lower risks. One of the biggest benefits of pre-IPO investment is avoiding stock market volatility. Depending on the company, pre-IPO investing is not as strongly affected by external influences such as the 2008 financial crisis or the 2020 pandemic. Nevertheless, pre-IPO investment does not completely protect investors from risks. Just like the stock market, late-stage and pre-IPO investing comes with risks. Even the most promising startups are not guaranteed to succeed and might never make it to the expected IPO. To address the probability of failure, some growing startups offer shares at a discounted price. Successful late-stage investments often reach the pre-IPO stage after one or two years and then go public after its final private financing round. Diversified portfolios with low investment minimums reduce the risks for pre-IPO investors significantly. Why now is the best time for pre-IPO investments With COVID-19 wreaking havoc on the global economy, now is the ideal time to invest in innovative companies looking beyond the current market uncertainty. Especially the tech industry has produced many winners of the pandemic. “[T]he VC industry has been seeing more and more interesting opportunities outside of the Bay Area and other traditional hot spots. Post-COVID, I believe this trend will still continue. The best companies will continue to draw interest regardless of where they are located”, said George Bischof, Managing Director of the late-stage venture capital firm Meritech Capital Partners, in an interview with “Forbes”. By backing startups or growth companies that innovate, solve real-life problems, and have a positive impact on our society, investors contribute to a better world. What to consider when investing in pre-IPO companies As we explained in a previous blog post, late-stage and pre-IPO investing is a lot less about hype and more about data analytics and sustainable as well as profitable growth due to attractive unit economics. However, most investors are not in the position to see enough investment opportunities and deals to make informed pre-IPO investment decisions. A non-transparent and fragmented market, gatekeepers, high minimum investments, and limited availability of relevant data or information aggravate the issue. It is therefore a major challenge for investors to identify the right investment opportunity at the right time and getting access to the selected growth companies during this short time. Stableton sources profitable pre-IPO investment opportunities Gateway and aggregation platforms like the Stableton Marketplace enable investors to discover opportunities faster and execute transactions more efficiently. The experienced Stableton team sources and identifies pre-IPO investment opportunities directly and across an ever-increasing network of deal-sourcing partners. Products are pre-screened and validated which reduces the risk level for investors. This enables the Stableton investors to participate in private market investing through a single bankable security without the hassle of paperwork. Stableton investors can co-invest alongside world-class venture capital firms, hedge funds, and industry experts like Goldmann Sachs, Visa, and Banco Santander. Stableton Marketplace users regularly receive insightful reporting and news updates on their investments. Stableton aims to break down entry barriers to private markets and provides access to exclusive late-stage venture as well as pre-IPO deals. Investment amounts start as low as CHF 10,000. By enabling low investment minimums, the diversification that is essential for such investments is much easier to accomplish. We work with a large network of top-tier investors, institutions, and investment professionals to develop outstanding investment opportunities and unlock chances to invest in pre-IPO companies.

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