Pre-IPO Market: Characteristics, Stages, Risks, and Strategy

Pre-IPO (Pre-Initial Public Offering) is a stage of financing for a private company preceding its planned IPO, or public offering of shares on the stock exchange. At this stage, investors have the opportunity to acquire a stake in the company before it goes public, typically at a lower price. Pre-IPO placements attract experienced investors, as companies are already in advanced stages of growth: they have a functioning business model, a significant market share, and a solid financial history.

In recent years, interest in pre-IPO investments has surged globally, with many tech companies and successful startups securing funding in the final stages of their development before going public. In Russia, this mechanism is relatively new but gaining significance. Against the backdrop of low activity in traditional IPOs, especially amid economic instability and high key interest rates, pre-IPO is becoming an alternative means of raising capital for growth. This article will explore the history and evolution of the pre-IPO market, the main stages and investment mechanisms, as well as the advantages, risks, and strategies for investors in this segment.

History and Development of the Pre-IPO Market

The concept of raising capital for companies just before an IPO emerged during a time of increasing numbers of startups demonstrating significant growth while still private. On an international scale, large tech companies raised hundreds of millions of dollars prior to going public. This trend correlates with the emergence of "unicorns" (private startups valued at over a billion dollars) and a decreasing number of public listings.

In Russia, the pre-IPO market began to take shape only in the late 2010s to early 2020s. Previously, such closed placements were accessible only to a narrow circle of large funds and wealthy investors. The mass involvement of private individuals required regulatory changes. In 2020, the Central Bank allowed non-qualified investors to participate in pre-IPO after passing a test (with a cap on investment amounts in the hundreds of thousands of rubles). Concurrently, several large financial companies launched specialized platforms for pre-IPO deals, and the Moscow Exchange announced plans to establish a separate over-the-counter segment for such operations.

The first pre-IPO transactions in Russia were relatively small: according to the Central Bank's estimates, their total volume in the initial years did not exceed several hundred million rubles. However, by 2023, the market had grown to several billion rubles, with the total transaction volume reaching approximately five billion rubles. This growth is attributed to several factors: the exit of traditional investors from risky markets, the challenges of raising capital through bond issuances amid high key interest rates, and the increased attractiveness of pre-IPO for promising companies under conditions of limited demand for conventional IPOs.

Thus, the Russian pre-IPO market can be characterized as a young but rapidly evolving segment, influenced by international practices and local market conditions (sanctions, devaluation, and a tight monetary policy). Technological companies, manufacturers, and others are beginning to use pre-IPO as a development tool, mirroring the experiences of their foreign counterparts.

Stages and Mechanisms of Investing in Pre-IPO

Investing in pre-IPO begins with the search for interesting companies on private platforms or through brokers dealing with closed placements. Access to such transactions is available to qualified investors and, within certain limits, to non-qualified (retail) investors. However, restrictions apply in Russian markets: without qualified status, a private investor can invest only limited amounts (typically up to several hundred thousand rubles) and only after passing a special test.

The preparation of a pre-IPO deal involves several stages:

Pre-investment analysis (due diligence). The investor evaluates the company's business, analyzes its financial indicators, development strategy, and competitive environment. The company and its management provide necessary data (financial reports, plans, contracts) in the form of a confidential information memorandum. At this stage, the main risks and potential returns are identified.
Negotiations and agreements. Interested investors discuss the terms of the round: the amount of investment, company valuation, rights of future shareholders, and other parameters. Term sheets and key documents outlining agreements between the parties are drafted and signed.
Investment and issuance of shares. The round typically occurs through the issuance of additional shares (new funds go into the company) or through the sale of stakes by existing shareholders (secondary placement). Investments are made via a closed subscription: the placement is not available to the general public and is conducted among a limited number of investors, unlike a public IPO.
Document formalization. A share purchase agreement is signed, and amendments are made to the company's charter detailing the rights of new investors. Often, restrictions (lock-up) are outlined for selling shares until the IPO, along with special corporate privileges (anti-dilution mechanisms, buyout rights, etc.).
Post-deal support. Investors monitor the use of funds, participate in strategy development, and may enter the company's board of directors or supervisory board. The company invests the received funds in growth: scaling production, marketing, product development, expanding to new markets, or acquiring competitors.

Furthermore, Russian investors often participate through collective instruments: closed-end mutual funds (PIFs) and venture funds specializing in late-stage investments. Such funds pool contributions from multiple investors and allocate them to pre-IPO transactions. For retail investors, purchasing fund shares can be a way to indirectly participate in deals, reducing individual risks via diversification. Meanwhile, fund managers handle the entire transaction end-to-end—from due diligence to exit strategy.

In international practice, hybrid formats are also found: convertible loans or equity options issued in the final stages before an IPO. However, the traditional format, primarily equity participation via share purchases, is more commonly used in the Russian market. Some companies and investors also explore the possibility of secondary trading of private stakes (share transfer) on specialized over-the-counter platforms before the IPO, providing additional liquidity ahead of the listing.

Advantages and Risks of Pre-IPO Investments

Advantages:

Favorable pricing and growth potential. Shares at the pre-IPO stage are typically sold at a significant discount to the anticipated public offering price. This means that upon a successful market debut, an investor can realize substantial profits due to the difference between private and public valuations of the company.
Lower risk than at earlier stages. Unlike initial venture rounds, pre-IPO companies already have a validated business model, visible revenues, and experienced management. Reduced uncertainty diminishes the risk of total investment loss compared to seed investments.
Faster exit. The investment horizon for pre-IPO is usually no more than 1-3 years, as companies plan for a near-term IPO. Investors do not have to wait decades—as is common in early venture capital—simply waiting for a listing or another liquidity event.
Participation in an established business. Pre-IPO offers a chance to "join" an already successful project: the company has increased its market share and may be generating profits. This aligns with the strategy of "buying income-generating assets" at a stage close to going public.
Portfolio diversification. Investments in pre-IPO typically have low correlation with public stock and bond markets, making this asset class capable of improving the overall risk-return profile of a long-term investor's portfolio.

Risks:

Low liquidity. The most significant risk is the lack of trading prior to the IPO. Shares of private companies cannot be sold quickly on the exchange, and an investor may find themselves "frozen" for an indefinite period. Often, one has to wait for the IPO to occur or seek private buyers through the secondary market.
Changes in company plans. There are risks that the IPO plans may be revised. A company might delay or entirely abandon its IPO for various reasons (economic, strategic, regulatory). This denies the investor the anticipated premium associated with public status and may force them to hold onto their stake in a private company.
Evaluation and information asymmetry. Private companies are not required to disclose the same information as public issuers. Limited transparency makes accurate business valuation difficult. Investors will have to rely on the company’s internal data and their analytical conclusions, increasing the risk of mispricing.
Macroeconomic and regulatory risks. The state of the economy and the overall condition of the stock market influence the attractiveness of IPOs. In Russia, specific factors apply: currency fluctuations, sanctions, changes in investment legislation. Changes in key interest rates or new regulations can sharply adjust return expectations.
Restrictions for non-qualified investors. Without qualified status, an individual can invest only a limited amount (typically up to several hundred thousand rubles) and only after undergoing special testing. This complicates participation for the average investor and makes the product less flexible.
Concentration of risks. Pre-IPO investments typically imply significant investments in a specific project. Poor diversification and strong reliance of portfolio results on the success of one deal increase the risk of substantial losses if the company fails.

Thus, pre-IPO combines the potential for high returns (due to the discounted price relative to the IPO) with elevated risks (liquidity, informational opacity, IPO delays). In a favorable scenario, an investor could realize substantial gains upon the company’s public debut or through a sale to a strategic investor. However, in an unfavorable outcome, there remains a risk of prolonged capital stagnation or loss of investments.

How Investors Should Assess the Prospects of Pre-IPO Deals

Before investing, thorough analysis of both the business and the terms of the upcoming deal is essential. Key aspects for evaluation include:

Fundamental business metrics. Assess the company's financial metrics: revenue dynamics, profitability, margin, and return on investment. A steady increase in revenue and realistic financial forecasts indicate the company's viability. It's crucial to understand whether the business will generate the forecasted profits considering its costs and what the monetization strategy is.
Market position and competitive advantages. Examine the industry and the company's market share within it. Leadership or niche advantages (e.g., unique technology or patents) enhance chances for success. Evaluate barriers to entry for competitors and how well the product fits the market and demand. A strong team with industry experience is also a positive factor.
Company valuation. Compare the proposed valuation with comparable companies (public firms in the same sector). Utilize multiples (P/E, P/S) for benchmarks, tying them to current and expected company indicators. The size of the discount to the anticipated IPO price is also important: the lower the current valuation relative to potential, the higher the likelihood of profit. Overestimated valuation diminishes deal attractiveness.
Deal terms. Analyze the agreement details: the type of shares being issued (common or preferred), the presence of protective conditions (anti-dilution clauses), terms of conversion, and lock-up provisions (restrictions on selling shares before the IPO). Deal conditions impact the investor's rights, share, and exit opportunities.
Use of funds and growth strategy. Understand the intended use of raised funds: scaling production, marketing, development, debt repayment, asset acquisition. The more justified and specific the strategy for fund usage, the lower the uncertainty. Evaluate the realism of the company’s financial and operational plans post-capital raise.
Team and management. The experience of founders and top management is a key factor. Ensure the leaders have a track record of business development or successful cases. Having independent experts on the board and implementing corporate governance standards enhance the company's reliability from an investor's perspective.
IPO plan or alternative exit. It's crucial to ascertain if the company is genuinely preparing for an IPO. Check for the engagement of external auditors, listing conditions, and a realistic timeline for preparations. If the IPO is postponed, inquire about alternative exit strategies (sale to a strategic investor, merger deal, or placing a stake on the secondary market for private shares).
Macroeconomic and industry factors. Assess how the economic situation and industry trends impact the company: how it will be affected by currency fluctuations, interest rates, and demand for its products. In the current environment of high rates and instability, look for companies with stable demand (for example, in the field of import substitution or IT).
Additional methods. In the absence of complete information, investors can apply qualified assessment methods: benchmarking with public analogs, scoring (point assessment according to a set of criteria), or consultations with industry experts. It is also useful to analyze what experienced investors are participating in the round: their involvement can serve as a signal of trust in the project.

The main goal of assessment is to form a complete picture of the risk-return ratio for a specific deal. Careful analysis helps determine the reasonableness of investments, correctly estimate potential profits, and prepare for various scenarios.

Recommendations for Pre-IPO Investment Strategies

Investing in pre-IPO should be viewed as part of a diversified portfolio. Experienced investors recommend:

Defining position size in advance. One should not invest all available liquidity in a single deal. It is advisable to limit each position to a small portion of the portfolio (for example, 5-10%) to avoid excessive concentration of risk in one project.
Utilizing syndication and co-investing. If possible, participate in deals alongside large venture funds or well-known investors. Joint participation reduces the burden on any one participant and provides access to the experience of more seasoned colleagues. Moreover, larger investors often achieve better deal terms.
Investing via pre-IPO funds. If one lacks the ability to assess a company independently, investing in specialized PIFs or late-stage funds can be beneficial. This provides ready expertise and diversification across several deals. Be sure to consider fees and liquidity of the fund shares when choosing this route.
Entering at final stages of preparation. The optimal timing is when the company has developed its strategy and is in final preparations for the IPO (audits completed, investors lined up). This reduces the risk of cancellation but offers a lower discount to valuation. At early stages, potential returns are higher, but so is uncertainty.
Avoiding participation in "trendy" rounds without substance. Do not chase hype projects merely for the noise in the media. It's essential that the business is sound. If a company lacks a well-calculated growth strategy, even a well-known brand may not meet expectations.
Maintaining a long-term perspective. Readiness to wait for 2-3 years or more is essential. Pre-IPO is not short-term speculation. Decisions about exiting an investment often occur only after the IPO or sale of the company. Investors need to prepare for timeline shifts.
Monitoring regulatory changes. Financial legislation can evolve. For instance, rules regarding participation by non-qualified investors are periodically reviewed. It's crucial to keep up with new developments and assess how they affect investment opportunities and terms.
Building a professional network. It is advantageous to have contacts in the venture community, brokers, and consultants. Often, the best opportunities arise from recommendations and trusted channels. A good network can help obtain information about quality projects ahead of others.

The key idea in strategy is to blend moderate aggression (for potential profits) with caution. If the market is favorable, one can increase positions; otherwise, carefully filter deals. It's important to remain disciplined and avoid hasty decisions: a savvy approach to pre-IPO can serve as an additional driver for capital growth alongside traditional investments.

The pre-IPO market in Russia is in its formative stages but already demonstrates a significant role in the investment ecosystem. For companies, it serves as a fast way to raise capital before an IPO, while for investors, it offers a chance to enter successful projects on the cusp of their public growth. Amid changing economic environments and a limited number of IPOs, pre-IPO transactions provide an alternative financing mechanism and market entry.

However, investing in pre-IPO requires a professional approach and attention to risks: liquidity shortages, evaluation challenges, and dependence on external factors. Seasoned investors must thoroughly analyze each deal, utilize risk consolidation opportunities (such as syndications or funds), and consider the nuances of Russian regulations.

Overall, pre-IPO can be an effective strategy in the portfolio of a long-term investor seeking to diversify investments and enhance overall returns. With appropriate preparation and careful deal selection, this instrument allows for additional profits from the difference between private and public valuations of companies.

Pre-IPO Market: Features, Stages, Risks, and Strategy