3 - 5 minutes readWhat is Pre-IPO Investing?

Nowadays Pre-IPO Investing is much popular. Investing in start-ups early in their development has been shown to produce exponential returns. This usually entails purchasing during the IPO (Initial Public Offering) stage. However, if you know how to buy Pre-IPO stock, you may be able to get in even earlier and reap even greater gains in a shorter period.

What is Pre-IPO Investing?

There are no assurances, and pre-IPO investments are fraught with danger. Still, if you have money to invest and are ready to take a risk in exchange for a high potential return, Pre-IPO investments are worth considering.

What is Pre-IPO Investing?

Pre-IPO Investing (equities) are shares sold to investors by a private firm before it goes public (before its IPO). Most companies that sell Pre-IPO stock do so through a process known as Pre-IPO placement. Institutional investors, such as hedge funds and private equity firms, as well as a few retail investors, frequently purchase these shares.

Mechanism of Pre-IPO Investment

Share brokers are in charge of pre-IPOs. If you wish to invest in a Pre-IPO, you must first locate such a broker and indicate your desire to do so. The broker will tell you which firms are currently accepting pre-IPO investments and how much each share costs. The brokerage fee for enabling the purchase will also be communicated to you by the broker.

If you accept the pricing and brokerage fee, you must transmit the investment funds to the broker, who will then transfer the funds to the company. As a result, the shares will be transferred to your Demat account by T+0 evening or T+1 morning at the latest. When you see the ISIN numbers of the unlisted shares in your Demat account, the purchase is considered complete.

Alternatively, you might invest in a pre-IPO through a mutual fund. To allow investors to invest in late-stage companies, certain mutual fund houses establish limited-subscription Pre-IPO mutual funds. Previously, only High Net Worth Individuals (HNIs), Foreign Institutional Investors (FIIs), and Domestic Institutional Investors (DIIs) were permitted to invest prior to the IPO (DIIs). Pre-IPOs are currently available to regular investors as well. While a retail investor can only invest up to INR 2 lakh in an initial public offering (IPO), there is no such limit on Pre-IPO investments. As a result, based on your risk profile and financial competence, you can invest as much as you wish.


You may also read about: What is Grey Market impact on IPO?


Advantages of Pre-IPO Investment

For a variety of reasons, private equity companies and experienced investors flock to Pre-IPO investments in start-ups.

Return on Investment (ROI) that is exponential

The first and most important reason for pre-IPO investing is the profit potential. Pre-IPO investments can yield huge profits for investors. Let’s see how Pre-IPO returns stack up against the overall stock market.

The stock market has traditionally returned an average of 10% per year since its inception. That’s before you factor in inflation.

In the stock market, Snapchat and other technological stocks have a lot of promise.

How to Stay Away From Stock Volatility

Another advantage is the absence of stock market volatility. Economic events like the 2008 financial crisis or the COVID-19 pandemic can have a significant impact. As a result, public company stock prices usually plummet.

These occurrences, on the other hand, have a significantly smaller influence on Pre-IPO investments. They’re less susceptible to sociological and economic variables that cause stock market fluctuations. However, the events may still have an influence on businesses. And this will have an effect on your investment.

What is the Best Way to Invest in a Pre-IPO Business?

Investing in a company before its initial public offering (IPO) is difficult. Finding Pre-IPO company is normally challenging and finding a strategy to invest your money is much more difficult. But it’s not out of the question. It can be done in a few different ways.

  • Consult a stockbroker or advice business that specialises in capital raising and Pre-IPO stock. They can provide you with guidance and advise on how to invest in a pre-IPO company.
  • Keep an eye on the news for information about start-ups or companies that are planning to go public.
  • Consult your local lenders for information on enterprises seeking funding.
  • Make business contacts.
  • Become an angel investor and gain recognition in the angel community. Angel investors are individuals who invest in start-ups when most investors would not.
  • Invest in start-ups through internet platforms like OurCrowd.

You may also read about: What is an IPO listing?


Conclusion

Investing in Pre-IPO shares can be a smart approach to develop long-term wealth. You can obtain enormous returns on your investment if you invest in the right firm at the appropriate moment. Pre-IPO investing comes with dangers, just like any other investment, but the rewards can be enormous. It’s an investment opportunity you shouldn’t pass up if you have the finances and an acceptable risk profile.