The Case for Pre-IPO Investing

On September 11, 2024, Bloomberg reported that OpenAI aimed to raise $6.5 billion at a $150 billion valuation.

Here’s a brief history of OpenAI’s known valuations:

• July 2019 — $1 billion
• January 2023 — $29 billion
• October 2023 — $86 billion
• February 2024 — $80 billion (tender)
• September 2024 — ~$150 billion

OpenAI wasn’t public in July 2019 and isn’t interested in going public any time soon.

Too often, the most innovative and fastest-growing companies of our time are private. If and when they finally IPO, the wealth has already been created.

One way to participate is to own tech companies that have venture arms.

Microsoft, for example, invested in OpenAI in 2019 and early 2023. So, Microsoft shareholders benefit when OpenAI’s profit and valuation rise. But upside is limited.

Direct private ownership has become more accessible to retail investors in recent years. Linqto, Hiive, EquityZen, ForgeGlobal, and EquityBee all offer accredited investors access to pre-IPO shares.

But direct investing excludes non-accredited investors, and acquiring shares of the hottest companies can be challenging due to a lack of supply.

Like the stock market, it’s hard to pick individual winners, even if you can access them. Buying shares in OpenAI was like buying Nvidia in July 2019 — not so obvious at the time, but a no-brainer in hindsight.

Today, we have options to address some of these issues.

Non-accredited investors can now own pre-IPO startups via venture capital funds like the Fundrise Innovation Fund (review) and the ARK Venture Fund.

These give us access to multiple innovative startups instead of trying to pick winners.

Pooling investor investment dollars provides fund managers leverage to access the higher-demand deals.

Fundrise and the ARK Venture Fund both participated in an earlier OpenAI investment round (presumably, the February 2024 tender offer, based on timing), giving non-accredited retail investors an ownership stake.

Most of us could not have accessed OpenAI otherwise.

Though we’ll unlikely see the kinds of returns we’d get from a seed investment, we still participate in pre-IPO returns while maintaining a reduced risk profile through diversification.

With private companies delaying their public debuts, these funds let us enjoy gains while everyone else has to wait for the IPOs.

By then, valuations inflate (e.g., Airbnb, Rivian, Uber).

The trend of staying private longer isn’t going away.

IPOs aren’t going away either.

Over the past decade, we’ve watched the IPO window open when valuations soar and investor appetite is insatiable.

VC investors cash out near the peak, while retail investors buy overvalued stocks subject to substantial declines at the whiff of the next recession.

Let’s join the VCs with our investment options today and urge new fintechs and existing pre-IPO marketplaces to give retail more access, liquidity, better valuations, and lower fees.

Featured photo via DepositPhotos is used under license.