What is the difference between Pre-IPO and IPO: key differences and opportunities for investors

Financial markets offer investors a wide range of instruments, among which Pre-IPO and IPO attract special attention. Companies seeking to raise capital go through several stages, and choosing the right moment for investment becomes strategically important. One format of participation allows acquiring shares before going public, while the other provides access to trading on the stock exchange. It is important to understand the differences between Pre-IPO and IPO in order to effectively utilize investment opportunities and minimize risks. Let’s talk about this in the article.

What are Pre-IPO, IPO, and how do they differ?

Pre-IPO is a closed stage of fundraising that occurs before a company goes public. During this period, shares are acquired only by a narrow circle of financial players, among which large investment funds, specialized organizations, and wealthy investors with a high degree of trust in the issuer dominate. This stage allows companies to obtain additional resources to prepare for listing on the exchange, and early investors a chance to acquire assets before the mass demand, when the securities’ value is not yet subject to the volatility of open trading.

The goal is to strengthen the financial stability of the enterprise before its trading debut. The raised funds are directed towards scaling the business, optimizing internal operations, and increasing investment value.

Initial Public Offering is the process through which a company’s shares become available to a wide range of individuals. After the IPO, the securities begin to freely participate in trading on the exchange, and their value is determined based on supply and demand.

Key concepts: how Pre-IPO differs from IPO

Companies preparing for a public offering go through several stages of financing. Each of them is accompanied by its own terms, risks, and opportunities. The question of how Pre-IPO differs from IPO requires a detailed analysis of several parameters.

Accessibility

A limited circle of individuals participates in Pre-IPO. Companies offer shares to private funds, institutional investors, and large businessmen. Typically, they do not have access to such offers unless they work through special platforms (Forge, EquityZen, Linqto).

IPO opens access to assets for all market participants. Any investor can purchase securities through a broker on the stock exchange, such as NYSE, NASDAQ, LSE. This makes the format more democratic but reduces the chances of buying shares at the minimum price.

Value of securities and potential profitability

Companies offering shares in Pre-IPO set the price below the expected listing price on the exchange. This is explained by investors taking on higher risks, as the enterprise may not meet expectations before entering the platform.

After the IPO, the share price usually rises as the demand for public securities increases. For example, Snowflake’s (NYSE: SNOW) shares were priced at $120 during the Initial Public Offering in 2020 and rose to $245 on the first day of trading, giving investors a 104% profit.

Investment risks

Analyzing how Pre-IPO differs from IPO cannot be done without considering risks. For example:

1. Pre-IPO is accompanied by high uncertainty. The company has not yet passed the exchange check, financial reporting may be limited, and growth prospects may depend on market conditions. IPO cancellation or a decrease in the expected share price is possible.
2. IPO offers more transparency, as companies are required to disclose financial reports, undergo audits, and comply with regulatory requirements. However, even after a successful listing, the share price may decrease due to macroeconomic factors and market instability.

Liquidity and exit from investments

In Pre-IPO, shares usually have low liquidity. Investors who buy stakes before the public offering often face restrictions on selling (lock-up period), which can last from 3 to 12 months.

After the IPO, liquidity increases. Shares freely circulate on the exchange, and participants can sell them at any time, reacting to market changes. For example, Airbnb’s (NASDAQ: ABNB) assets grew from $68 to $144 after the IPO, allowing early investors to realize a profit.

Investment opportunities: when is the best time to enter?

The choice of timing for investment plays a key role in profitability. By analyzing how Pre-IPO differs from IPO, you can understand which strategies are best to use to maximize profits and reduce risks.

Investing in Pre-IPO: pros and cons

Investments at the Pre-IPO stage provide an opportunity to acquire a stake in a company before it goes public. At this stage, the value of assets is determined without the influence of speculative market factors, allowing you to buy securities at a more favorable price. If the enterprise demonstrates confident growth after the public offering, its capitalization rapidly increases.

However, Pre-IPO is accompanied by a number of significant risks. The main problem is the uncertainty of the company’s listing timing. In some cases, an IPO may be postponed indefinitely or canceled altogether, reducing the liquidity of the acquired shares and complicating the exit from investments. Additionally, at this stage, there is often incomplete information about the financial condition of the enterprise, as it is not required to undergo strict audits and disclose data in public sources.

Additional restrictions are imposed on the possibility of selling shares. In most cases, investors who buy shares before an IPO face a so-called lock-up period, which can range from three months to a year.

Investing in IPO: pros and cons

Purchasing shares at the IPO stage opens up investment opportunities for a wide audience. Companies going public undergo rigorous audits, publish financial reports, and comply with regulatory requirements. This increases the transparency of information and reduces risks associated with choosing an unreliable issuer. Investors have the opportunity to purchase shares through brokers and instantly sell them on the exchange, ensuring a high level of liquidity.

However, the format does not guarantee a stable increase in the value of securities. In the first days of trading, there is often a sharp rise in quotes due to high demand, but a correction often follows. A vivid example was the listing of Robinhood (NASDAQ: HOOD), when after the IPO, the share price plummeted by more than 60%. This effect is due to investors who received shares at the Pre-IPO stage starting to sell them immediately after the lock-up period ends.

Conclusion

Understanding how Pre-IPO differs from IPO plays a key role in choosing an investment strategy. The first format offers the opportunity to acquire securities of promising brands at an attractive price but is accompanied by increased risks and limited liquidity. Initial Public Offering opens access to the public platform, reducing potential losses but may limit profitability.