Investment Strategies
Pre-IPO Investing: What Every Financial Professional Should Know
What are the advantages – and some of the risks – of investing in a company before it makes its debut on listed equity markets? The author of this piece considers the territory.
The following article examines the risks and opportunities of investing in a firm before it lists on the stock market. It examines some of the details that investors – and their advisors – should understand. The author is Julia Khandoshko, CEO at the European broker Mind Money. She has written guest articles for this news service before (see here). The editors are pleased to share these ideas, and we urge readers who want to comment to get involved in the conversation. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com
When you think about investing in a company before it goes
public, what first comes to mind? Risky startup gambles? For
many, the IPO, the moment a company hits the public market, is
still seen as only an “official” chance to get in on the action.
But what if the real growth happens before that moment?
According to Nasdaq data, the average company today spends more
than a decade and reaches a valuation of more than $1 billion
before it even files an IPO. This means that much of its value
creation happens behind the scenes (1). That is the realm of
pre-IPO investing. It offers savvy investors a chance to
participate in some of the promising growth stories before they
become headline news.
So, let’s disclose the fundamentals of pre-IPO investing, explore
why it’s drawing more attention from industry professionals, and
point out the risks and valuation puzzles that come with it.
One step earlier, several steps smarter?
It’s obvious that when a company launches an initial public
offering, it opens its doors to public investors by listing
shares on a stock exchange. This is typically the final stage of
the investment cycle, where shares become publicly tradable and
ownership moves from private hands to the open market. At the IPO
stage, investors buy stocks that are already liquid, meaning they
can sell or trade them freely.
But there is pre-IPO investing that happens before this moment,
in a less formal and often more private stage. It refers to
investing in companies that are still private but preparing for
an IPO in the future.
Evidently, unlike IPO shares, pre-IPO ones usually aren’t
tradable on public exchanges yet. Investors either hold them
until the company goes public or exit through later private sales
or secondary markets.
In its core essence, pre-IPO offers investors a unique chance to
get in on companies after they’ve already moved beyond the risky
early startup phase and before their value is fully recognised by
the public markets. By giving this opportunity, the company
strives to commercialise its product, showing real business
traction, yet hasn’t completed the strict process of readiness to
face the public market.
The key difference? IPO investors buy shares in a company that is
fully market-tested and regulated, while pre-IPO investors take
on more risks (but also the potential for higher returns) by
stepping in earlier, often at lower valuations. Pre-IPO sits
squarely between venture capital and public equity, offering real
opportunities for those who understand its complexities.
More allocation, more upside – but with
risks
The IPO stage, when a company finally goes public, tends to
attract a flood of investor interest. And this surge often leads
to one common frustration: low allocation. Imagine applying to
buy $100 worth of shares but ending up with just $2. This
scenario is typical during hot IPO waves, such as the one that
happened before the Covid-19 pandemic.
Pre-IPO investing allows investors to avoid this bottleneck. Due
to this, investors can often secure a larger allocation of
shares, strategically gaining a more substantial stake in a
company’s growth. This early access can transform into
potentially greater returns because, as a rule, pre-IPO
valuations, come in lower valuations than IPO prices.
Still, benefits never come alone, and they are in most cases
accompanied by risks. Companies at this stage may lack the
stability and transparency expected of firms that are already
publicly listed. Financial reports might be less robust, and
business performance could fluctuate.
Anyway, for investors willing to accept these risks, pre-IPO
provides a compelling reward: the chance to participate in growth
before its value becomes fully priced by the public markets. In
some well-known cases, companies with already high private
valuations saw their market cap grow by more than 350 per cent
(from about $46 billion to more than $250 billion) within the
first year post-IPO (2). Pre-IPO investing lets the
investor enter an established business at a way more
attractive price point – before it fully converts into
a public market asset.
The pre-IPO minefield? What investors should watch
closely
For companies approaching an IPO, the pre-IPO phase is an
important dress rehearsal. Yet it’s also the stage where many
businesses stumble, often in ways that can quietly undermine
investors’ returns.
The most common mistake is mispricing. A company may occasionally
launch a pre-IPO round during market volatility periods, elevated
interest rates, or sector downturns. This makes it harder to
attract investments or may even lock in an unfavourable valuation
just before the debut.
Failures in roadmapping also take place. Many firms fail to
clearly define what kind of businesses they’re building
– high-growth tech disruptor or stable cash-flow generator?
Investors need clarity: why this company, why now, and what’s the
path to liquidity? Allocation interest drops faster when
management can’t explain investment cases with precision.
Operational transparency is another blind spot. While there is no
full market scrutiny yet, investors expect solid data. Sloppy
reporting, unverified performance metrics, or vague financial
disclosures erode trust and credibility. Openness and
transparency are key currencies at this stage. Savvy investors
should request detailed cap table breakdowns and pre-IPO term
sheets, as well as understand liquidation preferences to estimate
downside risk. These documents help clarify ownership dilution,
control structures, and exit priorities.
Eventually, a lack of investor communication strategy can sink
even the most promising rounds. Companies that treat the pre-IPO
phase as a transactional funding exercise, instead of a long-term
relationship-building process, often misfire. Investors want
responsiveness, updates, and a sense of shared strategic
vision.
Final word
Pre-IPO investing isn’t just a high-risk venture for
thrill-seeking investors; it’s a crucial segment of modern
capital markets. For professionals who know how to assess timing,
valuation dynamics, and execution risk, it presents the value
long before the public markets catch on.
In a market where early insights beat late reaction, those who
approach the pre-IPO phase with discipline will be the ones
writing tomorrow’s success stories.
Footnotes
