What Is Pre-IPO Funding
Do you know what pre-IPO funding is? It’s something that businesses or companies might seek for financing before they formally do an IPO. It’s commonly done in preparation of an actual IPO. One frequent arrangement is that of pre-IPO placement.
Keep reading to learn more about this as the following paragraphs go into detail about it to some degree.
What exactly is a pre-IPO placement? It’s something that happens when a portion of an IPO gets placed with various private investors. This happens in advance of the IPO hitting the open market. An IPO is an initial public offering, or when shares of a previously privately held company go on sale to anyone and everyone on related stock market exchanges.
Private investors who are in pre-IPO placements are usually big hedge or private equity funds that are interested in buying up substantial stakes within the company. The investment size means that any price they pay for their shares will usually not be as much as the prospective price of the IPO. Individual investors have to wait until the business starts trading shares on the public or secondary market before they can buy a share.
Pre-IPO placements can be risky. Even if the amount per each share is discounted from the anticipated IPO price, there are no assurances that the business will get that share price or more when the IP does happen. In some cases, IPOs even wind up not happening at all, regardless of the plans. The discounted share prices are compensation for the risk involved. Having said that, if the IPO is successful and post-IPO prices go higher than the initial offering, those who got discounted shares with pre-IPO placement can obviously immediately sell their shares on the open market for a nifty profit.
A good example from a few years ago was the company known as Alibaba. This business opened up their own pre-IPO placement for big funds, as well as wealthy private investors. The company had been valued at roughly $150 billion, and demand was growing for the eventual IPO. Ozi Amana was both an investor and the manager of a portfolio who bought $35 million worth of pre-IPO shares. These shares were purchased under $60 per share. When the IPO happened, shares sold for more than $60, so those with pre-IPO placements enjoyed minimum returns of 48 percent.
There are other ways of getting pre-IPO funding other than pre-IPO placements. Venture capital investment is one of them and a very common one. A venture capital fund might be given substantial percentages of ownership in a developing or growing business, who in exchange gets access to the capital they need to grow and develop. However, they get to avoid losing ownership or control of their own business. The investment partners are banking on reaping serious rewards and percentages of the profits over time should the business take off as anticipated.
Another way of getting pre-IPO funding is through crowdfunding, where many different parties can pool together their resources online. Each investor would get back profits, rewards, or interest proportionately based on their investment shares.
Now that you’ve read this article, you know a bit more about pre-IPO funding, specifically in terms of pre-IPO placements, than you did before. Hopefully this knowledge will prove useful to you.