Why Private Equity Is A Better Option Than Investing In IPOs In 2019

With food delivery company DoorDash gearing up for an IPO soon, it’s going to join a long line of startups going public. IPOs seem to be the new norm these days and Wall Street is starting to take notice.

According to an analyst report by Swiss investment bank UBS, more than 100 unicorns are expected to go public in 2019; which begs the question - “Should you invest in one?”

The simple answer: Yes, but only if you can get an allocation.

However, that is easier said than done for retail investors.

As a retail investor, a better way to participate in the growth of private companies is to get in prior to the IPO. Invest in promising young startups through early-stage equity funding or crowdfunding platforms.

In this article, we’ll explain why investing in private equity is the smart option.

Here’s what we’ll cover:

  • Why Investing In IPOs Isn’t A Good Idea
  • Why You Should Invest In Private Equity
  • A Detailed Look At Successful Startups That Went Public

Why Investing In IPOs Isn’t A Good Idea

There are a few reasons why you might want to hold back on jumping onto the IPO craze at the moment:

1. It’s Hard to Predict Success of an IPO

Sure, you have IPOs that have been wildly successful like Beyond Meat (ticker:BYND) where an initial stock price of $45 grew to $225. 

However, for every success story, you have tons of failures by the wayside. Uber’s recent IPO (ticker: UBER) was one of the most anticipated IPOs in recent history. However, just a few months in and they’re reporting large losses with their stocks falling by 10%. Investing in unicorn IPOs clearly isn’t the safe bet that everyone thinks they are.

2. Average Investors Can’t Buy At The Initial Price

An IPO’s distributions are usually only available to big-time investors and institutions who were able to get in the door beforehand. IPO distributions rarely trickle down to the general public and even if they manage to get an IPO allocation, they won’t receive enough shares to make any significant gains. 

3. Fewer IPO Opportunities These Days

While IPOs are still grabbing headlines, it’s usually the same bunch of companies in the news. The hard truth is that fewer companies are looking to go public these days.

A combination of slow market growth and failed IPO openings are deterring companies from publicly listing today. Moreover, going public is expensive and when you have access to private cash why go public? 

Fewer IPOs means fewer investment opportunities - making it harder for average investors to make any significant financial gains.

Need proof?

Only 23 new companies listed on Australia’s stock exchange (ASX) during the first half of 2019, raising $823 million. Last year's total raise was over $8 billion

Why Private Equity Is A Smarter Choice

Early-stage investing in private companies is not a new concept. Venture capital has been around for a long time and has helped tons of smart investors make loads of money over time.

Moreover, unlike the stock market, it’s still an attractive option.

Startups will always continue to innovate and find new, untapped fields to explore. All investors have to do is find the right startups. Once you do that, you could be looking at an investment that has exponentially gone up in value after a few years.

There’s more growth potential investing in a small, upcoming company than spending thousands of dollars on a startup’s IPO where the stock only increases marginally over time.

Here are a few examples of companies that got early-stage private funding or were crowdfunded before they went public:

Startups That Took Private Funding Before Going Public

1. BeyondMeat

BeyondMeat is a plant-based meat alternative company that’s had great success with its IPO launch.

Private Funding: $122M over 7 rounds

Investors: 15 investors among which 5 were lead investors.

Time of IPO: May 2, 2019.

Valuation at IPO: $1.5B

Amount Raised at IPO: $241M

Initial Stock Price: $45

Ticker: NASDAQ: BYND

2. Lyft

While taxi company Lyft’s IPO was initially panned, the company reported fewer losses than expected in Q2 this year which has resulted in its stock prices going up.

Private Funding: $4.9B over 18 rounds

Investors: 68 investors among which 13 were lead investors.

Time of IPO: March 29, 2019.

Valuation at IPO: $24B

Amount Raised at IPO: $2.3B

Initial Stock Price: $72

Ticker: NASDAQ: LYFT

3. Chewy

Pet e-commerce giant Chewy IPO’d in June 2019 and has been steadily increasing in value ever since.

Private Funding: $451M over 7 rounds

Investors: 9 investors among which 7 was a lead investor.

Time of IPO: June 13, 2019.

Valuation at IPO: $8.8B

Amount Raised at IPO: $1B

Initial Stock Price: $22

Ticker: NASDAQ: CHWY

4. Zoom

Video-conferencing app Zoom had a fairly quiet IPO opening but seems to be doing very well since then with massive stock price increases.

Private Funding: $161M over 7 rounds

Investors: 17 investors among which 3 were lead investors.

Time of IPO: April 18, 2019.

Valuation at IPO: $9.2B

Amount Raised at IPO: $751M

Initial Stock Price: $36

Ticker: NASDAQ: ZM

5. Fiverr

Online freelancing platform Fiverr enjoyed a successful IPO launch in June that saw its shares jump by 90% in value over the first day.

Private Funding: $111M over 7 rounds

Investors: 9 investors among which 3 were lead investors.

Time of IPO: June 13, 2019.

Valuation at IPO: $800M

Amount Raised at IPO: $111M

Initial Stock Price: $21

Ticker: NYSE: FVRR

While these companies had varying success with their IPOs, one thing remained constant. Their valuation exponentially increased between their private funding rounds and their IPO launch. 

Early-stage investing in any of these companies would’ve got you a massive return on your investment that far exceeds the gains you’d make from their share prices on the market today.

Conclusion

While there’s no doubt that you can make some substantial gains investing in IPOs, there’s more money to be made if you invest in private equity directly with startups or through venture funding or crowdfunding platforms

With fewer companies going public and an increasingly volatile stock market, early-stage investing is easily the best option for savvy investors in 2019.

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