Investing in pre-IPO stocks can send your portfolio higher than stocks trading on the exchange. It can result in generational wealth.
This wasn't open to everybody before. But now, anyone can do it with just $50.
And we're going to show you how.
When you're pre-IPO investing, you are placing an equity investment in small companies that are privately held - at the startup stage or slightly later.
At one time, the first point at which retail investors got a crack at small, innovative companies was the post-IPO stage. That would mean buying a stock once it begins trading on the major exchanges. But now, savvy investors can focus on investing in pre-IPO stocks to maximize their portfolio gains.
The Jumpstart Our Business Startups (JOBS) Act of 2012 eased securities regulations to make angel investing more accessible. You no longer have to be a millionaire like before.
Let's take a closer look at what makes pre-IPO investing more profitable than post-IPO. Then we'll show you how to begin right away.
Why IPOs Are Risky
IPOs are preceded by long periods in which large institutional investors hear about the stocks. If the stocks look enticing to them, they are allowed to purchase them before retail investors get a chance.
Usually, an IPO is accompanied by a buying frenzy. That drives up the share price for any stock. The result of frenzied buying boosts the stock price, and it can go deceptively high above fair value.
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When stocks are bid up beyond what their fundamentals can support, they are often subject to downturn.
This is what happened to Facebook. Retail investors who bought at the IPO price had a long period in which the stock sold below their purchase price.
Now, stocks like Facebook eventually catch up with IPO-induced share price inflation and go on to reward investors. However, in the short term, retail investors not only need a very strong risk tolerance, but they also need to be able to face potential losses.
The fact is IPO investing can be challenging for retail investors because of the environment surrounding IPOs. Those problems don't exist with pre-IPO stocks...
The Advantage of a Pre-IPO Stock
Pre-IPO investing is a much more profitable alternative to IPO investing.
It's not on the public exchange yet, so the stock isn't getting bought up like crazy. You're getting equity in early-stage companies. And as an early-stage investor, you're providing seed capital for a company that needs funding to support its great idea.
There are two stages to this. The first is angel investing, which is also known as first-stage funding.
Angel investors are folks who invest in a company valued at $5 million or less.
At one point, most angel investors were family members or friends of the company's founder. Amazon, for instance, was funded in its early stage by 22 angels, who were mostly family members and friends of Jeff Bezos. Their stake is now valued at over $8.5 million - a 17,000,000% jump from the initial investment.
After angel investors, venture capitalists take over capital needs once companies are valued at more than $5 million. They often are specifically interested in companies that could initiate a successful IPO in the future.
Angel investors do not tend to be concerned with IPOs. Rather, they're interested in the sector or product. They also tend to be individuals, while venture capitalists usually work in venture capital firms.
At one point, retail investors couldn't think about being angel investors. But once Congress passed the JOBS Act, 240 million people in the United States became potential pre-IPO investors.
And now, that means you can be an angel investor, too.
By joining the Angels and Entrepreneurs Network, you can get the benefits of investing in pre-IPO stocks for as little as $50.
By becoming an angel investor, you are positioned to benefit from the growth of a startup. Not only that, but once a company is valued highly enough to begin an IPO, you're also positioned to profit from the pre-IPO excitement.
Angel investing is ownership of private stock, which is frequently structured as preferred stock or debt convertible to stock.
The Strategy You Need to Start Angel Investing
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It's important to have a strategy whenever you invest. It's especially important when you're investing in pre-IPO stocks.
That's because pre-IPO stock investing carries more risk than investing after an IPO.
Stocks trading on a public exchange are usually capitalized well enough that any downturns are eventually counterbalanced by upturns. Investors in Microsoft Corp. (NASDAQ: MSFT), for example, may see dips in their stock through normal fluctuations. However, MSFT has been in business for decades. It offers a dividend yield that cushions any downturns, and it's likely to return steadily on fundamentals.
But because investing in pre-IPO stocks takes place with startups, it is riskier than regular stock investing.
Prudent pre-IPO investors will have a strategy to limit their risk.
We suggest capping the money you dedicate to pre-IPO investing to a maximum of 10% of your portfolio.
The other 90% of your portfolio should be in growth and dividend stocks.
The 10% cap is only one side of the strategy we recommend.
The other side is to put that 10% into a number of companies. Statistically, angel investing has a lot of losses and one or two skyrocketing winners. You need to have money in many different companies to get the rewards of the one or two clear winners.
You also need the risk tolerance to ride out the eight or nine losers. You want enough companies to give you a higher probability of winners.
The Angels and Entrepreneurs Network can provide you with information on pre-IPO stocks each month.
Members are invited to networking events with founders, educational meetups, and meetups with famous early-stage investors, in addition to other members of the Angels and Entrepreneurs Network in the "Virtual Boardroom."
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