Have you invested in a company before companies pre-IPO? How much ROI did you get?

So far, my ‘13–’15 investments are at about 10x. My ‘16-’18 investments are much earlier, and are sitting just under 2x.

A few lessons for me:

  • “Power laws” is an annoying phrase, but they do matter. Your top investments will likely return the bulk of your returns.
  • A high hit rate can help. It is OK for a lot of your investments to not pan out if a few do well. But a high hit rate has one big benefit — it helps you “lean in” and invest more in each opportunity. The way you often make more is … to invest more. A high hit rates helps here.
  • Stretching stage and check sizes worked for me. Of course, you want to own more. But if you create too rigid of rules, you end up not doing some great deals So I evolved this to just investing the maximum I can in the first round. Investing a little later in stage than my initial comfort zone — as long as not too late — also in the end worked out fine.
  • Entry price wasn’t that important — within a discreet range. These first 20 investments ranged in pre-money valuations from $4m to $29m. While that sounds like a wide range, the returns so far haven’t varied too much based on the pre-money. The simple reason is the somewhat higher valuations were accompanied with more traction ($1m+ ARR, growing fast), which more than balanced out the higher price.
  • Stretching risks did not work out. Investing too early for me, investing in founders I wasn’t sure about, and investing in businesses I did not fully understand, and investing in businesses with churn + NPS issues, were the top risks I took that didn’t pan out. This were experiments. Now I know to stick to what my experience tells me sort of always works out.
  • You know. You know when it’s a really good one.

Investing pre-IPO is very, very difficult.

But if you can do it well, you get one secret weapon. You can legally trade on “insider information”. Others won’t know about, and/or have access, to these companies.

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Published on December 27, 2018

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