Investing in late-stage private companies often carries less risk than putting money into startups or smaller enterprises. The companies are usually better-established businesses with steady revenue streams and a strong market presence. They'll likely already have a good idea of what products and services work.
Late-stage investments may be less prone to failure than early-stage investments, but they are still risky. Plus, more mature companies may be close to making an initial public offering (IPO). That can mean there's less time to wait for an exit event. Investing in companies before they go public can offer the potential for higher returns, although these outcomes are not guaranteed and depend on multiple market factors.
If you're new to late-stage pre-IPO investing, it's important to understand how to capitalize on these opportunities, as well as what risks are involved. Below, we’ll break down everything you should consider before signing on the dotted line.
Before you invest in a late-stage private company, it is typically best practice to research the fundamentals, consider the growth potential, and look at how it stacks up against the competition. Be clear about what your investment will be spent on and how it might stimulate growth. For example, funding at this stage might be used to expand operations, improve products, hire more staff, or boost marketing efforts.
As you analyse the company information, be sure to keep your exit strategy and investment goals in mind as well. Here are several factors to help weed out deals that might not be the right fit for your portfolio.
Investors at this stage want to see top pre-IPO companies with consistent, multi-million-dollar annual revenues. This indicates the business can both bring in money and scale its operations. Do a detailed financial analysis to lay bare profit margins, cash flow statements, and the company’s overall sustainability.
Assess the market landscape surrounding the business: Who are the main competitors? What trends might affect the company? And how could new capital be used to the company’s advantage? Find out if the company plans to use the cash to boost its marketing efforts and attract more customers to further its foothold in its industry.
Even mature private companies have room for growth. Consider expansion opportunities like bringing on more staff to support a scaled operation. Look for signals that the company is gearing up toward an exit event, such as an IPO, merger or acquisition. Exiting late-stage investments can yield big returns.
The key to successful late-stage pre-IPO investing is to examine the potential deal from every angle.
Dig into key metrics like the company’s financial statements, debt levels, and revenue streams. This will help you uncover potential risks and suss out the business’s true value before handing over your money.
Operational due diligence can give you confidence that the company can scale effectively. For example, look at the supply chain and production efficiency so you can pinpoint any risks. Identify new corners of the market for potential expansion. Assess the track record and adaptability of the management team, as quality leadership is critical.
Minimize the chance of any post-investment surprises. Verify contracts, familiarize yourself with any intellectual property owned by the company, and check to see if the business is involved in any litigation.
It's also important to ensure that the company abides by laws and regulations — especially if its leaders plan to go public one day. That will come with a host of new reporting requirements imposed by the Securities and Exchange Commission, which oversees all publicly held corporations in the U.S.
Pre-IPO investing carries different risks from buying shares in listed companies. As with any investment, economic headwinds, policy changes, and trends within the company’s industry could each affect valuation.
There's often a hefty dose of uncertainty because pre-IPO companies don't have to follow the same reporting requirements as public ones. One way to mitigate that is to use reputable platforms with clear information. Innovators like Augment* aim to make the private secondary market more visible and accessible. Its pre-IPO investment platform simplifies the process of investing in late-stage private companies.
Augment includes vetted late-stage opportunities on its streamlined platform. Qualified buyers and sellers can negotiate directly, and prices are clearly displayed on its private stock marketplace. Think the Bloomberg Terminal, but for private markets.
How a company manages its cash can say a lot about its long-term viability. A lack of liquidity to meet both short- and long-term goals is a potential red flag. So is a business that has racked up tons of debt.
Pay attention to possible threats from the competition. An oversaturated market could make it more difficult to attract new customers, while a company with a unique proposition may be better able to stand out.
There’s much to consider before investing in a late-stage private company. Investors may be wise to perform a thorough, multidimensional evaluation before buying in.
While private secondary investments have the potential to generate substantial returns, success depends largely on an investor’s due diligence, risk management, and the company’s alignment with their long-term goals.
*Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.