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Risks of investing in pre-IPO

Low liquidity, lack of information and other pitfalls

We single out the main investment risks typical for the majority of private companies.

Temporal uncertainty

As a rule, investors don’t know the expected date of entry into the stock exchange.

We select companies that, judging by the indications, should hold an IPO in 1-3 years, but these indicators are indirect. For example, news about hiring of a new CFO or specific public statements by company’s management may indicate the preparation for the IPO, but the exact date remains unknown. Moreover, the company's plans may change depending on market conditions.

Information asymmetry

The seller of shares (employees and early investors) has more information at their disposal than a new buyer. An investor cannot always give an accurate assessment of the company's actual financial performance.

Private companies are not required to publish their financial statements, in contrast to companies traded on the stock exchange. Revenue, number of customers, growth rates – this information is provided by the management. On its way from earlier rounds to later rounds, it becomes easier to evaluate the company, but it is still impossible to verify the data.

Low liquidity

Investing in private companies at the pre-IPO stage is an opportunity to make profit within several years. In case of an early exit, the price may differ significantly from the purchase price or the sales process may take longer than 1 month.

Share dilution

As new investments are attracted and additional capital is released, the share in the company owned by the existing investors decreases proportionally.

This happens if, as new shares are issued, their price increases disproportionately to the company's capitalization. However, dilution is not always a bad thing: new shares can be issued at a higher price. In this case, you own a smaller stake in a bigger company, and the total value of your investment increases.

Bankruptcy

The company's shares may depreciate.

As early investors invest money in companies, they realize that only a few of these investments will pay off – the rest of the companies will go bankrupt. At the early stages, the risk of bankruptcy is higher, whereas at the pre-IPO stage it is lower, though it still exists. Sometimes the company has assets that an investor can claim, but most likely investors will not get anything. For our part, we guarantee that in case of negative news and an opportunity to sell shares we will do it for all investors.

Unfavorable terms of M&A deal

In case of absorption of a sagging business, investors at different stages will receive different returns on invested capital.

A company that is listed on UTEX as an investment idea can be bought out by a larger company (merger or acquisition, M&A). In this case, the exit conditions depend on the terms of a deal and the terms of the round in which the investor entered.

The terms of a deal is the price at which the company is bought out. A “good” acquisition is the purchase of a company with a premium, which means the investor profits from the price difference. A “bad” acquisition is the acquisition of a declining business, a situation, which is close to bankruptcy.

The terms of the round depend on the stage at which the investor enters the transaction. As a rule, investors have more rights in later rounds, so we try to work with shares of large private companies at late stages.

Market impact

If a company's value increases after a public offering, it’s a successful example. But things may be different. For example, the value of securities at the time of expiration may decrease due to the onset of a general economic recession or the company's business may show lower financial results than expected in the market.

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