When and how to buy promising startups stocks: Investor opinion
Well-known financial expert and co-founder of Crowdability service Wayne Mulligan wrote material on how to buy promising startup shares before his IPO. We present to your attention the main thoughts of this article.
Be among the first
The sooner you invest in a startup, the more money you will receive in the end. This is one of the “golden rules” of direct investment. Here's a good example:
In 2012, when Facebook held a public offering, investors who joined the company in 2005 received 200,000% of the profits.
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 option for direct investment.
Pre-IPO Company
Companies that have not yet made public offerings of their shares are private business territories. At the same time, one should not attribute them all to “startups”.
These companies can have hundreds or even thousands of people and millions of dollars in revenue. They just have not yet 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 cites the example of his fellow investor who invested in Uber at an earlier stage of the project. Then the whole company was valued at just a couple of million dollars. In early 2014, he sold part of his package with a return of 40,000%. Simply put, for every $ 5,000 of his investments, he earned $ 2 million. The
investor who purchased these shares from Howard was a late-stage investor. He will not earn as much on them. But everything is so good: since this purchase, Uber has risen to a price of $ 40 billion. Howard's buyer is already sitting on a gain of about 1200%
Beyond the Big Game
You are probably wondering: why not everyone in this case invest in the later stages?
The answer is simple: as soon as the business takes such a turn, when the risks are minimal and the potential revenue remains at a high level, the shares of companies become extremely popular. Large institutional players come into play who can afford it.
Private investors remain aloof. Until a certain point ...
Search for those who want to sell stocks
Mulligan writes about his meeting with two familiar entrepreneurs from New York - Atish Davda and Philip Haslett (Atish Davda, Philip Haslett). They founded the young company EquityZen . Its goal is to open up the world of late investments and investments in pre-IPO companies for all investors.
Here's how it works:
- Many startups offer compensation for their first employees of the campaign.
- Since most startups nowadays remain private for a long time, do not go public IPO, some of these employees want to get their jackpot earlier (remember that for fast-growing startups, even a small package can bring millions).
- EquityZen works with such shareholders and sells their share in the company to their regular individual customers.
Employees get a little cash. The investor has access to the shares of a rapidly growing company at the pre-IPO stage. And the hope is that when the company announces a placement or goes public IPO, the investment will pay off with interest.
EquityZen has already offered their investors stakes in some promising companies. For example, ZocDoc, Palantir and Cloudera.
No guarantee
It is necessary to clarify the situation to the end: investments in pre-IPO companies also have their risks.
For example, in 2013, the Fab.com project looked like a real locomotive in the e-commerce market, rushing to its IPO. The company had hundreds of employees around the world, the expected revenue for 2013 at $ 250 million. Project managers expected an estimate of $ 1 billion.
After a year, everything changed - the company had no more than a couple dozen employees, key management figures left it. The rest of the business was sold for several tens of millions of dollars. Obviously, this was a bad investment.
Less risk, more profit
In fact, the story of Fab is rather an instructive example. It is not typical of a business, Mulligan writes. This is another reminder - you need to keep your eyes open. It doesn’t matter how convincing the company’s position in the market seems.
The rest, the investor is convinced, investments in pre-IPO companies carry fewer risks, allowing you to rely on a very serious profit.