Pre-IPO Investing for the Planet: Is there an opportunity?
Climate positive start-ups have recently been on the rise, and they’ve seen a surge in both popularity and visibility. Competitions, such as Elon Musk’s XPRIZE for Carbon Removal and BloombergNEF Pioneers, are incentivizing early-stage companies that pursue low-carbon opportunities and solutions. Contest winners could offer great options for investors who want to get in early on the ground level of such promising companies. But by waiting until they go public, prospective investors could see these “up-and-comer” companies become lost opportunities.
Early investment in the stocks of private companies is no easy endeavor. However, if done properly, it can bring the greatest advantages for investors. By acquiring the know-how for buying pre-IPO stock, you could get your hands on high-potential companies’ shares – not to mention make a positive climate impact – at bargain prices.
That said, it’s important to be aware that pre-IPO investing comes with significant risks, as well as several potential restrictions. It requires strong investor conviction and a willingness to dive deep into studying prospective companies. In the U.S., there may also be investor criteria for accreditation from the Securities and Exchange Commission (SEC) to even qualify. Moreover, pre-IPO stocks may not even be on the table for many early-stage companies.
In this blog, we provide you with a brief guide on pre-IPO investing, along with its potential risks and rewards, and discuss winners of climate tech competitions to follow as future prospective investments.
What is IPO investing?
Pre-IPO investing means buying shares in a company before its Initial Public Offering (IPO). Essentially, you buy stock in companies before they are publicly traded, i.e. listed on a stock exchange like the New York Stock Exchange or Nasdaq.
Why invest?
Over the years, the number of publicly listed companies has steadily declined. More businesses have chosen to stay private, in order to avoid public market scrutiny and the pressure to generate consistent earnings every quarter. Two decades ago, it was quite normal for companies to undertake an IPO after two years. Now, the average timeframe is over ten years. Yet often, the biggest gains accrue to the early bird investors. For example, in 2019, the electric vehicle (EV) producer and Pure Climate Stock Rivian was valued at $5 – 7 billion. When it went public two years later, its IPO valuation stood at a phenomenal $66.5 billion, roughly 10 times its 2019 valuation.
What are the risks of pre-IPO investing ?
-Information asymmetry
One problem with investing in private companies is that sellers – namely, employees with options and early investors – know more than buyers (you). For example, sellers might have some negative insights into the company that are hard to see from the outside.
– Adverse selection
The pre-IPO market is dominated by established players, particularly VCs. They have no interest in sharing the best deals with us or the general public, because such generosity would only diminish their returns. Pre-IPO investments that are available to private investors are therefore usually the investments that the VCs chose not to finance, because they didn’t believe in the investment case.
-Limited disclosure requirements
According to SEC rules, companies listed on U.S. stock exchanges must disclose a lot of information to investors. All these filings, which include highly detailed annual and quarterly earnings reports, are publically available on the SEC website. However, the same requirements don’t apply to private companies. So by buying shares in private companies, you are necessarily buying from people who know more than you do. In general, it’s also much harder to get good information on the business.
-Not all pre-IPO companies go public
In some cases, you can invest in a pre-IPO company that doesn’t end up going public or getting acquired. It’s not unusual for private companies to generate losses before and even after the IPO. If the business doesn’t do well, and it can’t hold an IPO or raise more money, the company could fold. In such a situation, you could lose your entire investment.
Climate positive alternatives to watch
If you are interested in some investment opportunities in possible Pre-IPO companies – which could become Pure Climate Stocks in the future, if there’s an IPO – there are some competitions that track early stage low-carbon projects.
In April, BloombergNEF announced twelve winners (and three wildcard winners) of its 2022 BNEF Pioneers, a competition that recognizes early-stage companies that pursue significant low-carbon opportunities. Each winner’s innovation fills an important gap that addresses a key challenge between (i) generating 24/7 clean power, (ii) achieving net-negative carbon capture, and (iii) decarbonizing aviation. Some examples include:
-Energy Dome, a company that has invented a CO2 battery to make long-duration energy storage an economically viable proposition.
-Climate Robotics, a company that develops agricultural implements to produce biochar, or a soil amendment that improves soil health while sequestering carbon; and
-ZeroAvia, a company that designs and develops zero-emission, hydrogen-electric aviation powertrains, setting its sights on a 500-mile range for a 10–20 seat aircraft.
Here you can read the full list of winners.
Since last year, Elon Musk, together with XPRIZE, has also been running a competition for the best carbon removal solutions. The $100 million grand prize will only be awarded by 2025, but last month, the contest doled out $15 million from the prize purse, in order to reward the 15 most promising contestants so far. Some relevant winners include:
-Heirloom, a company working on capturing CO2 directly from the air, which recently made headlines after raising $53 million in venture capital. For the XPRIZE, Heirloom teamed up with a company called Carbfix, which specializes in converting CO2 into stone. Carbfix is already demonstrating its technology at a working carbon removal facility in Iceland.
-Global Algae Innovations has pitched an idea to grow algae farms, which capture atmospheric carbon via photosynthesis, and then turn the algae into a non-biodegradable form of plastic.
-For a final example, Planetary turns mine waste into a “mild, nontoxic antacid” that helps restore natural ocean pH. The full list of milestone winners can be found here.
Most pre-IPO stocks are sold in one of three ways:
- To angel investors or Venture Capital Firms that provide initial financing with the option of acquiring shares.
- Through pre-IPO placements that occur when, right before the public offering, IPO financiers make stocks available at a discount to select investors.
- Stock options are sometimes given to employees, who may then resell their shares, subject to restrictions.
Therefore, acquiring shares in any of the companies listed above is unfortunately quite difficult unless you’re already a major player.
So, speaking generally, how can a private investor actually buy pre-IPO stock? Two main alternatives exist:
- Adopt the role of angel investor or venture capitalist yourself, which, it should be said, requires accreditation and certain minimum income levels. If you provide a start-up with early-stage financing, you can then acquire stocks. If the company eventually holds an IPO, you could stand to reap stellar rewards. If you choose to go this route, you have to constantly be following the news and start-up pitch events and competitions, register with crowdfunding platforms like AngelList, OurCrowd, and FundersClub, or register with stock tokenization platforms like tZero, which converts pre-IPO stocks into blockchain-based tokens.With these methods, you can connect with companies at an early point along their growth curve. They probably won’t be actively planning IPOs at this stage. Therefore, in this scenario, you would have to tie up your capital for some time, in order to reach the IPO phase. Many companies never get there. If you do choose a winner, your earnings could be spectacular, but you’ll have to be both selective and lucky.
- Brokers and financial advisors often take part in pre-IPO trades. They may have acquired stocks that they’re willing to sell, or they may represent sellers (like company employees) who seek buyers. Some brokers that are worth a look include:
a. Forge Global links sellers of pre-IPO stocks with prospective buyers. The minimum investment is $100,000 while some sales may be more expensive or restricted to qualified buyers.
b. EquityZen offers pre-IPO stocks in specific companies. They also provide managed pre-IPO funds that allow diversified exposure to a group of pre-IPO companies. EquityZen used to have listed pre-IPO shares in companies such as pure climate player Rivian. The minimum investment is only $10,000, though some investments may require higher minimums.
c. Nasdaq Private Market maintains a network of accredited buyers that invest in pre-IPO stocks through a flexible auction process. Investors must meet the SEC’s revised accredited investor criteria.
d. Pre-IPO is a European broker operated by French firm Invest Securities. They offer placements in selected pre-IPO companies for as little as 2,500 euros.
e. SecFi specializes in helping private company employees sell their stock options. Many companies allow employees to liquidate stock options to help them achieve their financial goals. SecFi links these sellers to buyers who meet the SEC’s accredited investor criteria.
f. HudsonPoint Capital offers pre-IPO stocks in selected companies, sourcing stocks from employees and early investors who seek liquidity.
Based on our current assessment, pre-IPO investment in the Pioneers and XPIZE competition winners isn’t yet possible. But with these tools, you can stay up to date when the opportunity does arise.
Summing it all up
Buying pre-IPO stock carries significant risks. On top of that, it can be a challenge to find available stocks in companies in which you believe. And while significant restrictions and requirements do exist, buying pre-IPO stocks is still not impossible.
So far, we haven’t found any interesting pre-IPO opportunities for Pure Climate Stocks. Those mentioned above would still present very risky investments since they’re not yet properly established in the market. But if you’re passionate about climate tech solutions in the carbon removal space, there are two early-stage Pure Climate Stocks that you can check out: Aker Carbon Capture and Horisonti Energy, both of which currently get 100% of their revenues from technologies that capture CO2.
If you liked this article and would like to read more like it, you can subscribe to our newsletter to get the latest updates.
Do you have questions about how to buy pre-IPO stock? Or want more hints on climate-tech start-ups? Let us know in the comments below!
