2022’s Pre-IPO Lessons Of the Year
War, inflation, high profile bankruptcies, and a general market decline have made buyers more cautious and sellers more willing to sell their shares. Here are the five lessons I’ve learned this year and which may be helpful for those interested in investing in the private secondary market:
1. Private companies are blocking direct transactions more than ever.
This has two implications. First, many buyers will find that SpaceX, Carta and dozens of others can only be acquired via SPVs. My advice is to find funds that do not charge annual fees or carry. Second, in many cases companies can selectively block transfers, so it’s important to choose your counter-party wisely. An ex-employee who left on bad terms is more likely to get blocked than a high-performing current employee doing the transaction for “household purposes.” Finding a seller with the best chance of closing a deal is an essential part of my job as a broker.
2. Common shareholders (generally employees and ex-employees) are in many cases offering shares at between 25% – 75% less than institutional holders of preferred shares.
For investors who have confidence in a company’s future and can tolerate this “preference risk,” acquiring smaller lots of common shares to reach a target allocation can lead to a significantly lower average cost basis.
3. As I write every year, buying a security in the months before an IPO is very often an unwise strategy.
Since most of the upside is priced in (and then some). We at Rainmaker have consistently focused on companies where an IPO could be expected in 18 to 24 months. However, slightly longer now considering market conditions. As we believe this provides the optimum entry point on the “J Curve”. Keep this in mind if and when the IPO market heats back up.
4. Transparency, integrity, and professionalism are priceless.
Our market is a relatively small and close-knit community of brokers, buyers, sellers, boards, law firms and CFOs. Price fishing, misrepresenting relationships or ownership, falling down on trades, or having a hostile attitude will eventually make it harder for you to transact at all.
But of course, the converse is also true:
Clients who are respectful and sincere about their goals are those that generally get a “first look” at trades. And as a result, inspire brokers like me to put in the extra effort to help them achieve their goals.
5. The private secondary market, like the world at large, is a risky place.
Never invest more than you could comfortably loose and remember to treasure and cultivate the people in your life as much as your portfolio. In that way, we can all look forward to a rewarding 2023, no matter what happens in the market.
We continue to actively cover over 100 late-stage private secondary companies. And I’m happy to share information on the market, pricing, or research.
2022’s Pre-IPO Lessons Of the Year
Written by Chad Gracia
I’ve worked with PE & VC managers raising capital for more than 20 years. And decades as an advisor to governments, family offices and institutions in the Middle East and around the world. Since 2013 I’ve led the annual US Commerce Department’s Private Equity and Venture Capital trade mission to Saudi Arabia, the UAE, Kuwait and Oman. I’ve also done capital raising on behalf of some of the largest private equity, real estate, and venture capital funds globally, and have raised more than $1.5 billion for my clients.
My focus now is helping investors trade late stage pre-IPO secondaries. If you have any questions about any of the above securities, or more than 100 other companies we cover, just let me know. I work with employees (and ex-employees) seeking liquidity, funds looking to rebalance their portfolios, and others wishing to acquire stakes in unicorns before they go public.
If you’d like a brief chat about our firm (Rainmaker Securities) and how we’ve helped our clients transact more several billion dollars worth of secondaries in the past few years, just hit reply and I’ll set up a brief call.
