When and how to buy stocks of promising start-ups: Investor Opinion

Well-known financial expert and co-founder of Crowdability service, Wayne Mulligan, wrote a material on how to buy shares of a promising start-up before his IPO. We bring to your attention the main thoughts of this article.

Be among the first

The sooner you invest in a startup, the more money you end up with. This is one of the "golden rules" of direct investment. Here is a good example:
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In 2012, when Facebook conducted a public offering, investors who joined the company in 2005 received 200,000% profit.

However, some investors do not want to wait so long to increase their capital. Others do not want to invest in young companies unknown in the market. Therefore, they often use a different form of direct investment.

Company Pre-IPO

Companies that have not yet publicly publicized their shares - this is the territory of private business. At the same time, they should not be referred to as “startups”.

These companies may have hundreds or even thousands of people and income of millions of dollars. They just have not decided to become public.

Accordingly, when investing in them the risks are much less than when investing in typical startups. But the potential gain is still very high.

Uber example

Mullingan gives an example of his fellow investors, who invested in Uber at the earlier development stage of the project. Then the whole company was estimated at only a couple of million dollars. In early 2014, he sold part of his stake with a return of 40,000%. Simply put, for every $ 5 thousand of his investments, he earned $ 2 million.

The investor who acquired these shares from Howard was a late stage investor. He will not earn them as much. But everything is fine: since this purchase, Uber has risen to a price of $ 40 billion. Howard’s buyer is already sitting on a gain of about 1200%

Outside the Big Game

You are probably wondering: why shouldn't everyone invest in the later stages?

The answer is simple: as soon as the case takes a similar turn, when the risks are minimal, and the potential revenue remains at a high level, the shares of the companies become extremely in demand. Major institutional players who can afford it come into play.

Private investors stand aside. Until a certain point ...

Search for those who want to sell stocks

Mulligan writes about his meeting with two acquaintances of businessmen from New York, Atish Davda and Philip Haslett. They founded the young company EquityZen . Its goal is to open up the world of late investments and investments in a pre-IPO company for all investors.

Here's how it works:

1. Many startups offer as a compensation for their first employees a promotion.
2. Since most startups in our time remain private for a long time, do not go to an IPO, some of these employees want to get their money sooner (remember that for fast-growing startups, even a small package can bring millions).
3. EquityZen works with such shareholders and sells their stake in the company to their regular individual customers.

Employees have a little cash. The investor has access to shares of a fast-growing company at the pre-IPO stage. And the hope that when the company announces the placement or goes to IPO, the investment will pay off with interest.

EquityZen has already offered its investors shares in some promising companies. For example, ZocDoc, Palantir and Cloudera.

No guarantees

It is necessary to clarify the situation to the end: investments in the company's pre-IPO also have their own risks.

For example, in 2013, the Fab.com project looked like a real locomotive on the e-commerce market, rushing to its IPO. The company had hundreds of employees worldwide, with an expected revenue of $ 250 million for 2013. The project leaders expected an estimate of $ 1 billion.

A year later, everything changed - no more than a couple of dozen employees were left in the company, key management figures left it. The remains of the business were sold for several tens of millions of dollars. Obviously, it was a bad investment.

Less risk, more profit

In fact, the Fab story is rather an instructive example. It is not typical for business, Mulligan writes. This is another reminder - you need to keep your eyes open. No matter how convincing the company's position in the market seems.

In the rest, the investor is convinced, investments in pre-IPO companies carry less risk, allowing them to rely on very serious profits.