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Pre-IPO is risky but the rewards can be great



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Nancy Tengler, Special to USA TODAY
Published 7:00 a.m. ET Sept. 27, 2020

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If you’ve ever sleept on a Casper (CSPR) mattress you would agree that the online retailer not only revolutionized sleep, but also the mattress purchasing experience. So, it would make sense that when the company went public earlier this year, devotees jumped at the chance to own the shares, right?

Wrong.

In fact, after offering shares to the public at $12 on Feb. 5, the price has declined by about -56.14% to $6.74 on Sep. 25. Early investors – luminaries like Leonardo DiCaprio, Adam Levine and Tobey Maguire – jumped in before the company went public and had the opportunity to sell their shares at the IPO price. But whether they did or not is not the point. By the time the average investor had the opportunity to buy the shares, a great deal of profit had already been made.

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Still, for every CSPR there is a Snowflake (SNOW). SNOW came public on Sept. 15 at $120 and the stock reached $228.90 on Sep.25. If you were an early investor you made money. If you were lucky enough to buy in at the IPO, you’ve made money. But the undeniable fact is that companies are staying private longer and the lion’s share of the easy money is made by insiders and early investors. 

What’s a retail investor to do? Enter pre-IPO investment platforms like SharesPost and EquityZen.

Early investing

Pre-IPO investment platforms have revolutionized and democratized the process. No longer just in the purview of celebrities or large mutual fund companies, individuals can now buy shares in companies before the initial pubic offering on their own (or with the help of their financial advisor).

I recently had the opportunity to speak with Phil Haslett, Chief Revenue Officer of EquityZen.The platform works alongside private companies to match insider sellers with buyers. This can take some time, but all trades are approved by the private company to avoid insider selling conflict.

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Investors must register on the EquityZen platform and be accredited, but rather than requiring a $100,000 or even a $1,000,000 investment, Haslett states that the minimum investment is an attainable $10,000.

Haslett reminds that when Amazon (AMZN) went public in 1997 the valuation was $438 million and the company claimed around a mere $16 million in revenue. In other words, there was plenty of future growth to be had. Contrast that to UBER’s, public debut on May 19, 2019 when revenue from the company’s ridesharing products had grown from $3.5 billion in 2016 to $11.3 billion by the close of 2018. Based on the initial offering price of $45 UBER was valued at $82.4 billion. Hardly an emerging company. (UBER hit 434.4 on Sep. 25.)

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It may just be that these pre-IPO investment platforms are on to something – that is:  Earlier is better as companies stay private for longer.

Still, investing in private companies carries a higher level of potential risk than investing in established blue-chip companies, though the rewards can be great.

You will need to assess your risk tolerance and determine if any of the pre-IPO companies available on various platforms fit your diversification needs. Early stage investing is not for everyone. Resist the siren song of easy money expectations.

  • Make sure you are putting a modest amount of your investable assets into a pre-IPO investment. Dip your toe in, don’t dive. Start with the minimum and do your research.
  • Understand you are in this investment for the long-term. 
  • Don’t gamble. Remember, a reasonable investing time horizon is three-to five-years. For pre-IPO companies it may be even longer.

2020 is shaping up to be a hot IPO market. It may be that a pre-IPO investment will give your portfolio some juice. But do your research. That will serve you better than a Casper mattress to sleep soundly.

Nancy Tengler is chief investment officer at Laffer Tengler Investments and the author of “The Women’s Guide to Successful Investing.” 

The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.

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