Investing in Pre-IPO Companies: A Women's Perspective

Women frequently miss out on opportunities within the private markets. Investing in pre-IPO companies can be a game-changer. Recently, ARM, Instacart, and Klayvio made headlines as they prepared to go public this fall following a lull in IPOs.

By the time these companies reach the public market, usually after 10 to 15 years, the growth available for public investors can be limited. With technology firms remaining private longer, how can you tap into pre-IPO investments and pursue growth equity? The answer lies in understanding the pre-IPO landscape, which is often overlooked by women.

In the global private market, only 33% of entry-level investment roles are occupied by women, dwindling to just 9% at the senior investment committee level. This lack of representation extends to individual investments, where women generally allocate a smaller portion of their wealth to riskier assets like corporate shares. However, these shares in private companies are crucial for a well-rounded investment portfolio.

Due to the high costs associated with going public and the short-term focus of public markets, tech companies are delaying IPOs longer than a decade ago. In 1999, the average time to IPO was around 4 years; now, the median age for IPOs is nearly 12 years. Consequently, many unicorn tech firms achieve valuations of $1B or even $50B pre-IPO, creating substantial value before going public and limiting potential upside for public investors. With approximately $3.8 trillion locked in private unicorns, the secondary market is becoming accessible to a wider array of investors, particularly women. Thus, the query: How do you invest in pre-IPO companies? is gaining traction.

Understanding the Private Secondary Market

The private secondary market allows existing shareholders to sell their stakes while companies remain private. These sales typically target accredited investors and differ from primary transactions, where proceeds go directly to the company.

Private secondary marketplaces facilitate connections between shareholders seeking liquidity and investors aiming to invest in late-stage tech firms before they go public or are acquired. Once investments occur, shares are usually held through a fund until an exit event, which can take 2 to 7 years. If a company goes public, investors can sell their shares after the IPO lockup period, or receive cash if acquired.

Investments in late-stage firms often exceed $500M in valuation, generate considerable revenue, and are supported by leading venture capitalists. These companies demonstrate proven business models, often achieving hundreds of millions in revenue and employing thousands. Two decades ago, many of these firms would already be public.

Late-stage companies differ from early-stage ones, which carry higher risks. While early investments can yield significant rewards, they also pose greater risks. Therefore, late-stage investments are viewed as a more stable growth-equity approach.

Many investors now include late-stage private company investments in their growth equity allocations. Recent data indicates that investments at the Series E, F, or G stages yield mean annualized returns of over 75% within six months of an IPO. In contrast, post-IPO investments based on first-day trading prices have yielded a mean return of -1.4%. For long-term investors, pre-IPO investments can be significantly more lucrative than those made at the IPO.

Assessing Pre-IPO Investment Opportunities

Private firms have fewer disclosure obligations than public companies, increasing risk. Evaluating a pre-IPO investment requires careful consideration of several factors.

Business Overview: What is the startup's purpose, and how does it generate revenue? What sets this company apart?

Market: What market size is the target company aiming for? What is its go-to-market approach? Who are its competitors, and how does it stand out?

Team: What advantages do the company's leaders possess?

Investment Terms & Pricing: What are the share costs and terms? In private markets, pricing is influenced by recent primary funding rounds, as well as supply, demand, and share class. Additional details affecting pricing can be found here.

Risks: What potential issues exist, and how is the company addressing them? Risks can vary and may include economic, competitive, financial, and operational challenges.

Outcomes: What returns might this investment yield? Use your research to establish base, bullish, and bearish scenarios.

Highlights: What makes this investment enticing? Each opportunity has distinct features, such as:

• Has the company achieved product-market fit?
• Is the business profitable and does it maintain a solid balance sheet?
• Have renowned venture capitalists invested?
• Can you acquire shares at an attractive valuation?
• Is the company rapidly gaining market share in a growing sector?

Investment Decision: If you've made it this far, you're prepared to decide on investing in pre-IPO companies. Great job!

So, where can you invest in late-stage firms before their public debut? Given the relatively new nature of private markets, choosing the right partner to facilitate pre-IPO investments is crucial. EquityZen is a leading platform that has facilitated over 47,000 investments in 450+ companies, offering in-depth analysis on private firms based on a decade of experience in the private secondary market.

There's a wealth of knowledge to gain about the innovations within private companies, along with immense potential for women to engage in this expanding market. As firms remain private longer and the private market grows, pre-IPO secondary investments are set to play an increasingly vital role in achieving meaningful returns and maintaining a balanced portfolio for all investors.