While no two companies are alike, there are four common issues that lead to good and bad Pre-IPO investments.
Those issues include the following:
Industry Market Sizing– There are many publicly traded stocks today that, even when capturing a significant market share, do not provide the future growth potential of the mega stocks like a Facebook, Twitter or Google. When reviewing an investment opportunity, the size of the “market potential” needs to be significant enough that when obtaining a small percentage (under 5%) of the market, it will still represent sales growth over a hundred million in revenues. Assuming the stock will eventually trade on NASDAQ or NYSE, the price per share, and the daily volume will depend significantly on the company’s future revenue potential. This is crucial if the Company is going to meet a minimum corporate size to attract institutional investors where investments are typically a million dollars or more.
Institutional Trading Potential– Pre-IPO’s have been, in the past, typically consumed by institutions such as pension funds, private bankers, commercial bankers, insurance companies, etc. and seldom execute an investment purchase for under a million dollars in both equity and/or fixed income investments. When considering a purchase in a Pre-IPO, institutional investors perform much of the same due-diligence as indicated here. Upon completing its due-diligence, and meeting and determining minimum qualifications for purchasing the company’s Pre-IPO shares, the company is now in the position to realize significant trading support of its shares in a post IPO phase. This is greatly beneficial for all Pre-IPO shareholders, large and small.
Intellectual Property– Another significant due-diligence consideration sought by institutional investors in a Pre-IPO opportunity is a company’s differentiation supported by patented intellectual property. This allows a company to further differentiate its intellectual property, improve its market position, and have adequate time to perfect its “proof of concept”, prior to a well-developed commercialization plan. Many intriguing and fascinating technologies often lack well-thought-out commercialization plans and thus end up on a patent shelf collecting dust. A good Pre-IPO company should have a thorough commercialization plan that supports its intellectual property and further confirms independent market research.
Industry Standard Valuation– Institutional investors depend significantly on independent, qualified valuations, completed by credible industry experts, prior to investing in Pre-IPO’s. Typically, they will purchase the stock at a discount of anywhere from 15 to 25% of the value per share, determined by a Discounted Cash Flow (DCF) calculation. Institutional investors utilize this valuation method and depend strongly on a separate review of the company’s product/IP interest, established from actual customer reviews as an additional due-diligence consideration.
This Due Diligence Review was drafted by William Gray, the current President/CEO of Wytec International, Inc. and is based solely on his opinion derived from twenty years of experience as an SEC Series 7 institutional registered representative. He has advised on both debt and equity investments to institutional and private portfolios exceeding $1 Billion Dollars.