Introduction to Pre-IPO Investments

Investing in companies before they go public, or pre-IPO, has always been a risky and potentially lucrative endeavor. Successful investments can yield massive returns, making them a favorite among seasoned venture capitalists and early-stage investors. Yet, achieving significant returns is no small feat. In my experience, the journey has been filled with challenges and learning opportunities that are crucial for any investor aiming to succeed in this realm.

Lessons Learned from Pre-IPO Investments

Since 2013–2015, my investments have seen around 1x return on investment (ROI), while 2016–2018 investments sit just under 2x. These results, while not unprecedented, underscore the importance of a strategic approach to pre-IPO investing.

Understanding Power Laws

The concept of "power laws" is often bandied about within the investing community, but its relevance should not be underestimated. In essence, a small number of your investments will typically return the majority of your profits. This means that the quality and potential of your top bets is crucial.

The Importance of a High Hit Rate

A high hit rate can significantly enhance your success in early-stage investments. While it's inevitable that many of your investments won't pan out, a few successful deals can more than offset the losses. Moreover, a high hit rate encourages a bolder approach, empowering you to pour more resources into each opportunity. As the saying goes, “The way you often make more is … to invest more.”

Strategic Rule Evolution

Creating rigid rules can sometimes backfire, preventing you from capitalizing on great deals. Instead, I learned to evolve by investing the maximum possible in the first round and pushing the stage and check size boundaries as long as they weren't too late. This approach allowed me to effectively stretch my comfort zone while still ensuring the investments were viable.

Price Isn’t Everything

The entry price may seem critical, but it's not as important as you might think. The key is to focus on a discreet range of valuations. My first 20 investments spanned valuations from a pre-money of 4M to 29M. Despite the wide range, returns so far have not varied significantly. This is largely due to higher valuations being accompanied by more traction, such as 1 million in annual recurring revenue (ARR) growing swiftly, which more than offset the higher price tag.

Don’t Stretch Risks Unnecessarily

Investing too early, in founders I was unsure of, businesses I didn't fully understand, or those with churn and NPS issues were the top risks that didn't pan out for me. These were experiments that taught me the importance of sticking to what I know works based on my experience. Now, I prioritize investments I can confidently trust, thus minimizing risks.

Identifying High-Quality Opportunities

Understanding the team and sector of your potential investment is paramount. A flawed idea can still fail, but a capable team can often overcome initial setbacks. It's crucial to have a keen eye for when something truly stands out and has strong potential.

The Secret Weapon: Insiders' Insight

Investing pre-IPO also provides a unique advantage: the ability to legally trade on insider information that others may not have. This information can give you a significant edge in making informed investment decisions.

Conclusion

While pre-IPO investments are inherently risky, the potential for high returns is undeniable. By understanding the power laws, maintaining a high hit rate, and strategically stretching your investments, you can increase your chances of success. Always prioritize the team and sector, and embrace the insider information available to you to navigate the challenges of pre-IPO investing.