5 Ways to Invest in Pre-IPO Stocks
The draw toward investing in pre-IPO stocks is obvious — outsized returns.
It's not uncommon for a private equity investment to 10x, 20x, or even 100x before a company's public offering. For instance, Blackbird's first $3 million investment in Canva is now worth over $1 billion, a return of 337x.
While these deals often lose money, one great investment — like Blackbird investing in Canva — can more than make up for a portfolio of losers.
And now, in 2024, it's easier than ever to buy pre-IPO stock.
Previously, you needed to have connections or be friends with a founder and have millions of dollars to invest. That still helps, but it's no longer a prerequisite.
Here's everything you need to know about investing in pre-IPO companies, including five ways to start investing in them today.
What are pre-IPO stocks?
Pre-IPO stocks refer to the shares of private companies — companies that have yet to have an IPO (initial public offering) and do not trade on a public stock exchange such as the NYSE or Nasdaq.
Private company shares may be owned by founders, employees, VC & PE firms, and angel investors.
The pre-IPO landscape has shifted dramatically over the last 15 years as outside investors (primarily venture capital and private equity firms) have poured money in. Because of all this capital, companies are able to stay private longer and reaching much higher valuations before becoming publicly traded.
Source: ETF Trends
A company's IPO used to be an event to raise money to fuel further growth. Today, for the world's hottest startups, an IPO is not a way to raise capital, it's a liquidity event for private investors to sell their shares and recognize the private market gains.
Fortunately, there are ways for individual investors to participate alongside private equity and venture capital firms by investing in companies before they go public.
The 5 best ways to invest in pre-IPO shares
1. Buy shares on a secondary marketplace
New regulations have made it possible for accredited investors to buy employee stock options. To facilitate these transactions, a number of secondary marketplace platforms have been created in the last few years.
To attract top talent, private companies offer employees stock options as part of their compensation.
By giving away equity instead of cash, these companies significantly reduce their expenses. This, however, leaves employees with valuable but illiquid equity stakes.
Secondary marketplace platforms connect investors who want to invest in private companies to employees who want to sell the stock options they've been granted. It's a win-win transaction — the employee gets cash and you get equity in private companies you otherwise wouldn't have access to.
A few of the most popular secondary marketplaces to invest in private companies are:
Each platform has different shares available for purchase, so you may need to check several of them if you are looking to invest in a particular company.
Our favorite secondary marketplace platform for investing in private companies is Hiive, where you can invest in well-known companies like SpaceX, Stripe, and Discord.
It's worth noting, however, that these platforms are for accredited investors only. Some are also only available to U.S.-based investors.
2. Become an angel investor
Another route to investing in private companies is to become an angel investor.
There aren't any specific requirements for becoming an angel investor other than having plenty of capital to invest.
Angel investors tend to pool funds, leading to investments of $200,000 to $400,000 per deal, though the exact figures can vary significantly. Many investments are several million dollars or more. In addition to having money, you need to have contacts.
Most often, the only way to get involved in deals as an angel investor is to know somebody at the company or have a mutual connection with a founder. Tapping into your business network is the best way to find deals.
While there's no formal path or set of standards, specific knowledge and experience in the industries you plan to invest in can significantly increase your chances of making profitable investments.
Most successful angel investors have run successful businesses themselves.
If you lack the connections necessary to make individual angel investments, you may want to check out crowdfunding VC platforms like FundersClub and AngelList.
However, I'm a bit wary of these platforms, as the average quality of the deals on them is quite low.
Most of the investments on these platforms have already been passed over by venture capital and private equity firms, and there are reasons why.
3. Invest in pre-IPO & venture capital funds
Instead of building your own portfolio as an angel investor, you can simply invest in funds that do the work for you.
Here are a few options:
- Fundrise Innovation Fund: Real estate crowdfunding platform Fundrise has also launched the Innovation Fund, which buys stakes in private, high-growth tech companies. The fund holds stakes in Anthropic, Anduril Industries, Canva, Databricks, and more. The Innovation Fund is open to all investors, both accredited and retail, and the minimum investment is just $10.
- Public VC firms: You can invest in publicly traded VC firms like Blackstone (BX) and investment holding companies like SoftBank Group (SFTBY) straight from your brokerage account. These are billion-dollar companies with stakes in many private companies.
- Private equity ETFs: You can buy private equity ETFs like Invesco's (PSP) or ProShares's (PEX). Both of these ETFs are actively managed and have expense ratios of 1.06% and 0.81%, respectively.
- ARK Venture Fund: The ARK Venture Fund invests in disruptive technology companies in both the public and private markets. Retail investors can access the ARK Venture Fund via SoFi.
What's more, these options are available to all investors, not just accredited investors.
4. Make indirect investments
Finally, you can make even more indirect investments in private startups by investing in publicly traded companies that own or have invested in them.
Here are a few examples:
- Disney (DIS) now owns 100% of Hulu. While there's no way to invest directly in Hulu, you can get indirect ownership by investing in Disney stock.
- Salesforce (CRM) invested in Databricks' Series G funding round in 2021. Assuming a $200 million investment, this stake would be worth around $350 million today.
- Microsoft (MSFT) has invested $13 billion into OpenAI and may now own 49% of the company. Its total stake is likely worth $40 billion.
The problem with many of these opportunities, however, is that the investments in the pre-IPO companies make up tiny fractions of the public companies' overall operations.
For example, Salesforce's $350 million stake in Databricks is just 0.14% of its $251 billion market capitalization. Even if Databricks would 100x from here, all else equal, Salesforce's stock would only move ~10%.
5. Invest on the IPO date via your broker
In the hours leading up to a company's IPO, some brokerages occasionally have some shares available for their clients to purchase.
These shares are available before the stock officially starts trading and are listed for sale at the predetermined IPO listing price.
Depending on market conditions, sometimes highly anticipated stocks increase by as much as 100% from the IPO listing price on the first day of trading.
I've only ever seen these IPO offerings on TradeStation, Webull, and TD Ameritrade, although I'd imagine there are other brokerages that do the same.
If you're a client of one of these brokerages, they'll notify you if/when they have pre-IPO shares available for purchase.
Can anybody invest in shares of pre-IPO stock?
Yes, technically anybody can invest in shares of pre-IPO stock, though the type of investment varies.
Buying shares on a secondary marketplace or becoming an angel investor are the two ways investors can gain direct exposure to private companies.
However, these methods are only available to accredited investors.
A note on accreditation requirements
You can qualify as an accredited investor if:
- You have an annual income of $200,000 individually or $300,000 jointly
- Your net worth exceeds $1,000,000, excluding your primary residence
- You are a qualifying financial professional
On the other hand, investing in funds or publicly traded companies that own shares of private companies will give you indirect exposure. These routes are available to all retail investors.
While there are ways for everyone to invest in private companies, the best and most direct methods are still reserved for investors with the most money and connections.
How to evaluate a pre-IPO investment
It's much more difficult to evaluate a private company than a publicly traded company.
For starters, private companies are not required to disclose financial information.
If they're trying to raise outside capital, most pre-IPO companies will create pitch decks with some financial performance details, but much less information than a public company is required to report.
It's also harder to find out what the company does, who it sells to, where its management team is trying to take the business, how it stacks up against competitors, and what its growth prospects are.
In general, there isn't a lot of information available to be able to form an accurate picture of the risk involved in the investment.
Therefore, evaluating a potential investment into a pre-IPO startup requires much more qualitative analysis than other types of investments.
Angel investor Julia DeWahl has created her own process for evaluating deals.
DeWahl asks herself the following 6 questions:
- Why is this the team to build a winning company in this space?
- How deep and specific is the customer pain/need?
- How will this company acquire customers?
- What's the business model, and what are the advantages and risks of that model?
- Why now?
- What do you have to believe for this to grow into a huge business?
After answering these questions, she adds the company to a spreadsheet and notes her conviction level and estimates the expected value of the business in five years.
From that sheet, she only invests in the most compelling deals.
As you can see from DeWahl's process, investing in private startups requires more “narrative building” than other types of investments. Pre-IPO investing largely comes down to making a bet on the future.
Pros and cons of pre-IPO investing
| Pros | Cons |
| Potentially high returns | Highly speculative and risky |
| Diversification outside of traditional markets | Limited financial information |
| May require accreditation status and/or connections | |
| Limited liquidity, so you may have trouble selling your investment | |
| High capital requirements |
Final thoughts
Investing in private companies is not an easy task, and the likelihood of losing some or all of your investment can be quite high.
That said, those are the risks PE firms and venture capitalists are willing to take on to gain exposure to potential 20–100x winners (or more).
Up until recently, this was a game only institutional-level investors could enter, but recent SEC regulation changes have opened the door to more investors.
As is the case with any investment — though it's especially true with pre-IPO investing — you should be aware of all the risks before investing and be comfortable with potentially losing any amount of money you invest.
Any views expressed here do not necessarily reflect the views of Hiive Markets Limited (“Hiive”) or any of its affiliates. Stock Analysis is not a broker dealer or investment adviser. This communication is for informational purposes only, and is not a recommendation, solicitation, or research report relating to any investment strategy, security, or digital asset. All investment involves risk, including the loss of principal and past performance does not guarantee future results. There is no guarantee that any statements or opinions provided herein will prove to be correct. Stock Analysis may be compensated for user activity resulting from readers clicking on Hiive affiliate links. Hiive is a registered broker-dealer and member of FINRA / SIPC. Find Hiive on BrokerCheck.
