July 19, 2021

Pre-IPO Checklist: What You Should Look For in a Pre-IPO Opportunity

Written by: HUDSONPOINT Team
IPO, Pre IPO, Private Equity

Unique Pre-IPO Opportunities for Investors

pre-IPO checklist

Pre-IPO investments offer a unique opportunity for investors to take part in a growing company’s journey to the public bourse, and a pre-ipo checklist is a must-have when getting started. IPOs, or initial public offerings, refer to the process of a private company going through the process to list publicly—meaning anyone can then buy and sell shares in their equity. Pre-IPOs are, therefore, an investment in the company prior to, or during, its process to go public.

Pre-IPO investors are hoping that their backing will turn into an even higher valuation once the broader market gets a chance to have their say. While there are many spectacular examples of pre-IPO investments that have made significant returns (such as Alibaba and WhatsApp), there are also just as many that have flopped or failed to go to market completely.

Since no pre-IPO opportunity is created equal, you need to have your eyes open, and your analytical mind switched on. While you cannot guarantee a successful investment, there are signs to look out for.

We created a pre-IPO checklist, detailing everything you should consider before putting your money into a pre-IPO opportunity.


The company has a clear plan to go public

Number one on the pre-ipo checklist. Pre-IPO investments hinge on the ability of the company in question to actually follow through on their plans of a public listing. One of the most significant risks when it comes to private investments is that management’s goals do not eventuate, and investors are left holding the bag.

The best way to combat this is to thoroughly research the integrity of the company’s strategy (and progress) to IPO. There are many hurdles in the way of a successful listing, including SEC approval, exchange compliance, and the quality of their documentation, such as legal and financial statements.

Without the liquidity event of an IPO, the upside of any investment is limited. While none of this can be guaranteed, assess management’s current plan. Investigate the timeline to listing as well as how far they have progressed along with the progress. If there are any red flags, it’s better to discover them now rather than later.


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The management team is experienced and has a history

One way to gauge the future success of a business is to look at the people running it. Almost no business can succeed without competent management, and a pre-IPO is no different. In fact, the success of the IPO is primarily driven by the management team. The process of listing is complicated, and the demands involved are arduous, as is growing the business itself.

To pass the necessary approvals, an IPO candidate must have a Board of Directors, a defined CEO, and the essential accountants, advisors, and legal team in place. Without these in place, it’s a sign that the company may not be prepared for a smooth IPO.

Furthermore, check the business acumen of the executives. Like a job interview, management should ideally have a history of experience and success. If they have never worked in the industry before or appear out of their depth, it may be best to avoid the opportunity until a more solid backing is apparent.


The addressable market offers a sufficient runway

Pre-IPOs are usually growth companies looking to expand rapidly and capture a particular share of their total addressable market (TAM). Take a look at what stage the company is in.

If they already have a significant customer base, how large is their scope to acquire more? If they don’t have many customers, how realistic is it that they will be able to capture a meaningful amount over the next few years? Asking these questions helps clarify whether the investment is solving a real problem that will be embraced by the market.

Furthermore, consider the macro-picture. How much interest from the public will there be for a company in this industry? An old-school physical retailer may not be as favorably received as a hot tech startup. Right or wrong—market perception matters, especially when you’re looking to capitalize on a short to medium-term liquidity catalyst.


The financials make sense

Valuation matters. No matter how hyped up a company is, if its valuation is out of touch, the public market will not reward early investors. Valuing a business is a complex topic, but simple metrics go a long way in determining whether an investment is fair or not.

How much are you paying for a company’s sales? A price to sales ratio in the hundreds is pricing in massive sales growth that may not be reflected in reality. Furthermore, less than a quarter of recent IPOs have been profitable at listing. Pre-IPOs that are already turning a profit stand out from the crowd and often deserve a premium valuation.

Consider market comparables. Are there any similar businesses that have a public valuation? If so, how does this one stack up? Precedence is crucial. If investors are willing to pay a certain amount for a similar opportunity, chances are they will be ready to do similar again (assuming the economic conditions and businesses are comparable).


The quality of existing investors

The backing of high-quality investors on the register is an excellent sign that the pre-IPO has already passed the tests of reputable people and institutions. Excluding early-stage seed funding, developing companies go through a process of Series A, B, and C (etc.) funding stages. These funding rounds can often carry the company to a pre-IPO valuation of $100m or more.

Once they reach this point, with a range of institutions and quality investors backing the business, the likelihood of a successful IPO is increased significantly. Investing after the early stages of funding allows us to avoid much of the risk associated with growing a new business. If the company has passed the scrutiny of multiple rounds of funding prior to its pre-IPO, it ticks another one of the boxes.

Accessing pre-IPOs investments is best done with the guidance of experts in the industry that know what to look for. HUDSONPOINT Capital provides retail investors with the platform they need to access a wide range of alternative investment opportunities, including pre-IPOs. By pooling investor’s funds, HUDSONPOINT can access unique investment solutions with risk-adjusted return profiles designed to meet your financial goals as a retail investor.


If you’re interested in adding Pre-IPOs to your portfolio, or want more information on our pre-ipo checklist, please schedule a call to learn more about what we have available right now.


Please note that any investment involves risk including loss of principal. Some risks of investing directly or indirectly in real estate include declining real estate values, changing economic conditions and increasing interest rates.

This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.

 Private Shares are for qualified investors and involve a high degree of risk.

Securities offered through National Securities Corporation Member FINRA/SIPC

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