How to Evaluate Pre-IPO Investment Opportunities?

Roshni Khatri

22nd Sep'23
How to Evaluate Pre-IPO Investment Opportunities? | OpenGrowth

In the past, everyday investors were limited to publicly listed companies on stock exchanges, while pre-IPO investments were reserved for high-net-worth individuals. Times have changed, and now even the average investor can purchase shares in growing companies. While investing in startups carries risks, it also offers the potential for substantial rewards not typically found in the public market. Pre-IPO businesses warrant serious consideration for investment.

Let's delve deeper into this topic!

What is pre-IPO investment?

Pre-IPO investing involves companies raising capital before they go public on stock exchanges. This process typically includes selling shares to High-Net-Worth Individuals (HNIs), hedge funds, and other external investors. Notably, these investments occur before the company has prepared a formal prospectus for public trading. However, it's important to recognize that this type of investing carries significant risks.

The risks associated with pre-IPO investing include:

  • Illiquidity: Pre-IPO shares are not easily tradable like publicly traded stocks. They lack the liquidity of stocks on established exchanges, making it challenging to buy or sell them quickly.
  • Selection Challenges: Choosing the right companies to invest in at this stage can be difficult. Investors need to conduct thorough research and analysis to identify promising opportunities, as information about pre-IPO companies may be limited.
  • Potential for Loss: Investing in pre-IPO companies carries the risk of losing the entire investment if the company doesn't perform well or fails to go public successfully.

Despite these risks, there are potential benefits to pre-IPO investing. If timed correctly and invested in the right company, it can yield significant rewards.

Pre-IPO investing involves buying shares in a company before it undergoes an Initial Public Offering (IPO). An IPO marks the company's transition from private to publicly traded status. Initially, only financial institutions, private equity firms, hedge funds, and select groups had access to pre-IPO shares. However, this has changed.

Nowadays, with the advancement of technology and the dematerialization of shares, Individuals can participate in pre-IPO investing by carefully selecting companies that show promise and understanding their growth trajectory. These shares can be stored electronically in digital wallets, making the process more convenient for investors.

In essence, pre-IPO investing offers the potential for substantial gains, but it should be approached with caution, thorough research, and a clear understanding of the associated risks.

So in short, it is essential before investing the sums in IPOs that what can you learn from an IPO as it can guide you through the whole process of investing. 

Investing in Pre-IPO

The most compelling argument in favor of pre-IPO investment is its potential for significant profits. It offers the opportunity for some of the highest returns on investment, especially in the tech sector, where many companies have substantial growth prospects. However, the window of opportunity to reap the most significant rewards is often before the company goes public, and now you have the chance to be part of this excitement.

Another advantage of pre-IPO investing is its relative isolation from stock market volatility. Unlike publicly traded stocks, which can be greatly affected by events like the 2008 economic downturn or the 2020 pandemic, pre-IPO investments tend to be less impacted by such external factors. However, it's essential to remember that these events can still affect the performance of the companies themselves, potentially impacting your investment.



Pre-IPO Investing Strategies

The market for stocks offers a variety of asset schemes for investors to select from. Only the most competent managers have the knowledge and confidence to invest in unlisted shares, while the majority of investors stick to minor public firms and safe repeating plans. In India, there are thousands of new companies that have the opportunity to be very valuable when they go private. This includes firms operating under the auspices of significant institutions and multinational companies, as well as more modest enterprises that have regularly increased their revenue and profit. 

Pre-IPO shares are more challenging to buy since they have been investments for a while without a track record. A thorough grasp of the sector is necessary to analyze and estimate the  scope of an opportunity for a small company with limited prior experience. Despite the enormous potential rewards, pre-IPO investors can also take advantage of a variety of advantages. Only the best technical and managerial minds are permitted to invest in this set of assets. The possibility of making such major expenditures can only be taken seriously by specialists with the capacity to gather in-depth information and understanding about developing enterprises and how they operate. 

In addition to increasing their portion of the income, many buy pre-IPO shares to have a certain say over the boards of directors and stockholders. A brand has a life of its own after becoming public. Before the company becomes accessible to everyone, investors need to get interested if they wish to influence policy. For the most cautious entrepreneurs, unlisted shares are exclusively sold by a small number of LLPs and organizations as portfolio investments. 

Ways to invest before IPO

Discovering the proper companies to invest in is challenging, and figuring out how to do it is much more challenging. There are nonetheless a number of ways to invest in these thriving enterprises, including:

  • Employ a business that specializes in pre-IPO stock and raising money. They are going to give you direction and suggestions on how to put money into a pre-IPO company. 
  • Follow the most recent information about the most successful startups.
  • For details on companies looking for financing, speak with your neighborhood banks.
  • Expand your company's network.
  • Become an angel investor and engage in private equity deal sourcing to gain credibility in the network of angels and access promising pre-IPO investments.



Benefits and Drawbacks of Participating in Pre-IPO Businesses

The following are some pros and cons of pre IPO investing businesses. Find out some benefits of pre IPO investments.


  • High potential for profit: When non-listed firms become public, the potential for significant gains is higher. Initial shareholders can profit by purchasing the company's shares at a lower price before they become available on a public exchange. 
  • Exposure to creative businesses: These businesses frequently use cutting-edge technology and provide goods and services that have the potential to upend markets. By contributing seed money, you may invest in startups early on and profit handsomely after they go public. 
  • Reduced price: The reduced costs of the stocks allow you to make a profit from the gap between their pre-IPO and post-IPO values. When the business becomes public, you may see larger earnings. 
  • Diversification in Action: Add pre-IPO firm shares to your portfolio to diversify it. The earnings growth of unlisted firms is typically not associated with that of the larger market, which helps to lower total risk. 
  • Rewards for early investors: Initial investors may receive benefits from some businesses, including lower stock prices, first access to new offers, and admission to shareholder gatherings. 


Find some prime disadvantages of investing in Pre IPO:

  • Great risk: High risk is involved when putting money into a brand-new business with no previous trading or operational track record. It is challenging to forecast the company's potential achievements without proper data. Participating in these young companies might result in huge losses because numerous new enterprises fail. 
  • Lack of knowledge: It might be dangerous to invest if you don't have full knowledge of the firm beforehand due to the lack of a brokerage and underwriters.   
  • Minimal IPO strategy: There is no guarantee that the business will be accessible to everyone, particularly considering that starting an IPO requires fulfilling a number of requirements, which might take 2-3 years. 
  • Banking issues: It may be necessary to lock in your investment portfolio for a lengthy period of time because the equities of these firms are not traded like those of public corporations. Investing in unlisted businesses might have its disadvantages. 

Risks associated with Pre-IPO

Before you put your money on the line, it is critical to comprehend the dangers associated with pre-IPO shares. 

  • Early-stage businesses and startups are more likely to fail. These are investments that are inherently hazardous. Participating in a business that hasn't been tried and true might lead to a complete loss of cash. 
  • It might be difficult to estimate these firms' true value. These assessments frequently rely on estimates and assumptions, which can lead to either an exaggeration or undervaluation of currencies.
  • Shares of privately owned businesses are frequently inaccessible, which means there are few opportunities to sell them in the future. You might not be ready to sell your shares quickly if a firm doesn't go public for many years or never does.
  • By providing consistent income, dividends contribute to the growth of the intrinsic value of your securities. These businesses could choose to deposit the payouts to encourage quicker growth, which could prevent them from paying dividends. 
  • The corporation could elect to issue additional shares in the future in order to raise more cash, which would lessen the likelihood of profits by reducing the cost per share.



To conclude, we can say that Initial public offering (IPO) investing is a common trend across the world. In the corporate sector, there are individuals who are sustainable and likely to succeed. Several individuals rely on stock purchases and sales to boost their income. As unpopular as it may be, purchasing pre-IPO shares from firms will really help you make a lot of money. Purchasing an enterprise's stock while it is still in its initial stages of development can yield large returns. Besides this, you can also look for the most anticipated IPOs in 2023 to have better returns and updates. 


OpenGrowth is constantly looking for innovative and trending start-ups in the ecosystem. If you want more information about any module of OpenGrowth Hub, let us know in the comment section below.

A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.


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