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How To Invest In Pre-IPO Startups

Wayne Duggan

This year has brought a flurry of high-profile IPOs, but the new stocks have hit the market with mixed returns for early investors. Beyond Meat Inc (NASDAQ: BYND) is up more than 500% from its IPO price and MMTec Inc (NASDAQ: MTC) is up more than 300%.

Uber Technologies Inc (NYSE: UBER) and LYFT Inc (NASDAQ: LYFT) are still trading below their respective IPO prices.

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Early public investors in companies like Uber and Lyft can find themselves frustrated with their returns. Even if investors recognize an early opportunity in a business like Uber, the stocks are often fully valued by the time they go public.

“Essentially, a handful of institutions are now providing capital to these tech companies, rather than the public markets,” EquityZen co-founder Phil Haslett recently said. “And that’s impacting the portfolios of retail investors that no longer can participate in this upside.”

Haslett pointed out that Amazon.com, Inc. (NASDAQ: AMZN) went public back in 1997 at a valuation of just $438 million. Today, there are more than 160 private “unicorn” startups with valuations of greater than $1 billion.

Indirect Plays

No easy ways exist for investors to take stakes in private companies, but there are a couple of options.

First, investors can sometimes gain indirect exposure to private companies if a public company participates in private fundraising. For example, publicly traded Yahoo! acquired a 40% stake in Alibaba Group Holding Ltd (NYSE: BABA) way back in 2005, nearly a decade prior to its highly publicized 2014 IPO.

Yahoo shareholders benefited from Alibaba’s rapid private growth phase for nearly 10 years prior to the company going public.

GSV Capital (NASDAQ: GSVC) is a publicly traded company listed on the Nasdaq that invests in private companies that are at least two years away from an IPO. GSV is invested in privately held unicorns Palantir and Coursera and was an early investor in companies like Lyft, Spotify Technology SA (NYSE: SPOT) and Dropbox Inc (NASDAQ: DBX) prior to their IPOs.

Retail investors got a piece of all these private unicorns simply by buying shares of GSV on the public market like any other stock.

Equity Crowdfunding

In addition, retail investors rarely get opportunities to invest in private companies via the secondary market.

For example, Elite Crowdfunder offered shares of privately held Uber for $38 per share back in February 2016. These shares were offered via equity crowdfunding, a new opportunity for retail investors that was part of the Jumpstart Our Business Startups Act (JOBS Act).

The JOBS Act permits retail investors who are not accredited to invest a minimum of $2,200 per year in private, early stage companies via approved broker-dealers or funding portals. Some retail investors may be permitted to invest much more than $2,200 per year based on FINRA rules incorporating factors such as net worth and annual income.

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