Author: John Gladston

No matter how much you have in the bank… no matter your connections… no matter if you’re an accredited investor or not. You now have more options than ever to invest in early-stage tech companies before IPO day.

That means you can invest like a venture capitalist and get in on the ground floor of high-growth companies. But it doesn’t mean every pre-IPO deal will be a success.

So today, I’m sharing with you an insight from the tech investing expert, Jeff Brown. He’s been investing in private deals for more than two decades. And he’s distilled his experience into three “keys” for success. They’ll help you reduce your risk and maximize your gains on your journey as a pre-IPO investor.

3 Keys to Pre-IPO Success

By Jeff Brown, Editor, The Bleeding Edge

So you want to be an early stage tech investor?

I don’t blame you.

Early stage investors – aka venture capitalists (VCs) – buy shares in companies before they reach the public markets such as the Nasdaq.

Investing in private companies is one of the most lucrative investment strategies in the world.

I say this from personal experience. I’ve invested in dozens of private early stage tech deals over the years.

I’ve invested in four “unicorns” – private companies valued at $1 billion or more. I’ve also invested in two “decacorns” – private companies valued at $10 billion or more.

By my count, I’m sitting on returns of 936%, 14,000%, and even 25,000%.

I’m not the only one making these kinds of returns in private markets. There are famous examples of private investors and VC firms making a fortune with early stage companies, too.

VCs who bought shares in Uber (UBER) before its IPO (initial public offering) turned $30,000 into $149 million… $50,000 into $248 million… or even $510,000 into $2.5 billion.

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Dark Art

Make no mistake: Investing in private firms is a dark art. It involves high-risk decisions. And it’s nowhere near as transparent as investing in public stock markets.

As a VC, I’m always dealing with imperfect and incomplete information. There are no Securities and Exchange Commission (SEC) account filings. Often, the product of the company I’m investing in doesn’t exist yet. Sometimes I won’t even have proof that the market exists for the product or service.

Not only can I not be risk-averse… I have to embrace risk.

Few people are comfortable with this kind of investing. But if you are, it can be wildly profitable. And if you’re interested… I’ve learned some important principles over my two decades as a private investor.

When you boil it down, there are really just three principles – or “keys” – to successful pre-IPO investing. These will help you identify winners and maximize your gains.

I’ll share them with you today. Feel free to print these out and pin them beside your computer for reference.

I use these three keys every time I invest in private deals. Now, you can use them, too…

Pre-IPO Success Key No. 1: Know the Fundamentals

The first key to successful pre-IPO investing may seem obvious. But you’d be surprised how many early stage tech investors get stuck right away because they can’t assess the fundamentals of what they’re investing in.

Does the technology make sense? Is there a clear “vertical” – or narrow market where the tech can flourish? Is the company doing something unique? Or is it just moderately better than what exists in the market today?

I’m a private investor in Ripple Labs. It’s a blockchain-based payment services company. Without getting into the specifics, it’s transformed how central banks, private banks, and multinational corporations transact across borders. It’s a brand-new technology, not a small upgrade to an existing system.

Grasping the core technology… and the market opportunity… is essential before making any investment as a VC.

Investors who can’t answer the questions I mentioned earlier end up making poor investment decisions over and over. They’re gambling rather than making informed investment decisions. And they’re losing money.

Pre-IPO Success Key No. 2: Be Patient

Investing in private deals is different from investing in public companies.

Investors can buy shares in public companies one day and then turn around and sell the next.

That’s because public stocks are widely traded – or “liquid” in Wall Street-speak. They’re listed on a public market such as the Nasdaq or the New York Stock Exchange. And they’re available to buy and sell, at the click of a mouse, on brokerage platforms around the world.

Pre-IPO shares are much harder to buy and sell.

VCs must wait for an “exit” to take gains off the table. Typically, an exit means the private company either is bought out or goes public. This allows private investors to sell their shares to the public markets.

As a VC, you may be sitting on gains as high as 250,000%. But if the company you’re invested in never exits, those gains are just on paper. You can’t realize them. You have no way of selling those shares for cash.

So if you want to be an early stage investor, you’re going to have to be patient. Very patient…

Your first major exit will likely happen in seven to eight years. But VCs have been known to sit on deals for 10, 15, or even 20 years without being able to realize profits.

The longest time I had to wait for an exit was 15 years. I profited on the investment, but not enough to justify the 15-year wait. Some early stage investments are like that. They’re best avoided.

But some early stage investments are worth that wait. So ask yourself: Do you have the mental fortitude to wait that long for a return?

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Pre-IPO Success Key No. 3: Diversify

This is something I encourage all investors to do… even folks who choose to invest in only publicly traded stocks.

You need to build a basket of early stage companies that all have great investment return potential.

As many as three in four VC-backed companies never return money to early investors. That’s the hard truth.

Many of your investments will fail completely. Some may return your money with only modest profits. But a small percentage can go on to deliver life-changing returns. It’s these “jackpot” investments that make up for all your losses and then some.

So you want to have a large basket of private deals and let the statistics work for you. Simply put, you want to be diversified.

Although I may have strong beliefs about which companies are going to deliver the most extraordinary returns, there’s no sure way to tell which ones will.

As I said, I reckon I’m sitting on a return of 25,000% – more than 250x – on one private deal. When this company has an exit, my return will more than make up for the small number of losses I’ve taken on other deals.

Your pre-IPO portfolio will ideally have a minimum of 30 companies. If you can build a portfolio of 100 companies, even better. The more quality private investments you make, the better your chances at life-changing gains.

And investing over the long haul will always work to your advantage. Don’t make all your early stage investments at once… and wait for them to mature over the 5 to 10 years that follow.

As I’ve been hammering on for years now, technology is advancing at an exponential pace. So it’s vital you get exposure to new companies that are working with the most advanced technology every year.

One of the best ways to do this is investing in a sector that’s going through a digital leap. That’s when an entire sector goes from analog to digital.

Amazon.com (AMZN) did this to the retail space, making it simple to order whatever we want with the click of a button.

Even the worst of past digital leaps returned 11x investors’ money.

Now, there’s one $11.9 trillion industry that hasn’t made this transition yet… And when it does, the move could be the very last digital leap.

I want to help you profit from it. But I’m running out of room here. So I’m inviting you to a free special event I’m holding next week to share all the details.

Go right here to sign up for the event, America’s Last Digital Leap, happening this Wednesday, April 7, at 8 p.m. ET. During the event, I’ll even share details about the early stage company I believe is the best way to profit from this last digital leap.