Reddit Had An IPO, But You May Be Too Late For Real Profits — These Pre-IPO Startups Are Statistically A Better Option
Reddit's initial public offering (IPO) marked a significant moment in the tech landscape. With Pinterest being the last major social media company to go public five years ago, investor excitement over Reddit was through the roof, with shares soaring up to 70% on its debut.
Buying shares at IPOs has long been a widely accepted investment strategy on the stock market. However, statistical evidence suggests that the real profits might lie elsewhere — specifically, in investing in companies before they go public.
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A Better Way
It's understandable where the enthusiasm for IPOs comes from. If you invested $100 in Google, Amazon.com Inc. and Facebook at their IPOs, you would be a multimillionaire today. Despite this and Reddit's impressive debut, historical data reveals a sobering trend: Buying shares at IPO often yields lower returns compared to investing in companies during their pre-IPO stages.
That's the conclusion of research conducted by Manhattan Venture Partners. Its study followed 147 U.S.-based companies that went public between 2010 and 2021 and compared the returns at different funding rounds and the IPOs. Pre-IPO investment returns significantly outstripped gains from buying shares once the companies went public.
This trend is not merely a reflection of a few successful cases but a consistent pattern seen across various sectors within the technology, media and telecommunication industries. The same study highlights that companies have increasingly chosen to stay private longer, resulting in larger late-stage deals buoyed by significant private capital. This "flywheel effect" allows private markets to benefit from continuous capital deployment, encouraging firms to delay public offerings and offering higher returns to early investors.
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How To Invest In Pre-IPO Startups
A decade ago, startup investing was reserved only for hedge funds, venture capital firms and wealthy individuals. But today's landscape is different. The enactment of the Jumpstart Our Business Startups (JOBS) Act opened the doors of startup investing to regular investors who can acquire stakes in early-stage startups with a few hundred dollars or less.
That means you can formulate a portfolio of startups with as little as $500 for diversification purposes. Early-stage startups are a high-risk, high-reward investment, so not placing all your eggs in one basket is essential for long-term prospects. Your investment won't necessarily need to be locked away for years, given that you can sell your shares on secondary markets.
At the dawn of mass artificial intelligence (AI) adoption, investing in startups could be your most successful investment. Many startups want your backing, but the amount of shares they can offer nonaccredited investors is legally limited. Luckily, you can own shares of the startups that catch your eye by the end of the day.
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This article Reddit Had An IPO, But You May Be Too Late For Real Profits — These Pre-IPO Startups Are Statistically A Better Option originally appeared on Benzinga.com
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