The Hot Market for Pre-IPO Tech

Prior to Google’s IPO a decade ago, there were few avenues for ordinary investors to own shares of pre-IPO entities. Substantially all of the equity in early stage tech companies was held by the management team, company employees and participating venture capital firms. My, how times have changed.

Today there are a number of ways to get involved in tech companies before they go public:

• For select consenting companies, SharesPost and SecondMarket provide a platform to match buyers and sellers of private equity stakes, including most of the tech heavyweights.
• In early 2011, Goldman Sachs raised over a billion dollars of high net worth client money to invest in private technology companies. While they ultimately restricted the fund to European investors, the move sparked a trend among its Wall Street peers.
• GSV Capital (GSVC) is a public company that serves as an investment vehicle for a number of hot names in the space, including Twitter, Facebook, Groupon, and Zynga.

So what’s behind the growing variety of options for investing in pre-IPO companies?

One major factor is that companies are waiting longer before pulling the trigger on their IPO. According to GSV’s Michael Moe, the average age of a company when it goes public has tripled in the past ten years to over 9 years (for reference, Facebook is about 7 years old). This means there are initial investors itching to get out, and with more time to generate a buzz around the company, there’s more casual investors itching to get in. The combination leads to many more shares trading hands while the company is still private.

More nefariously, the shift could signify diminishing disclosure standards on the part of investors. When valuations are rising and expectations are high, prospective shareholders are more likely to accept a murky picture of the company’s financials before making an investment.

That’s fine if valuations keep rising. But it also means those investors could be susceptible to steep losses if the hype dies down and they discover the business model isn’t really viable. It’s a scary thought considering how badly investors got burned in 2000 even with full information on the companies they were buying. Suffice it to say this author will not be buying any shares of GSVC for that very reason.

But regardless of what you or I think, the SEC’s general approval of these and other efforts to bring early stage tech to the common man signals that the trend is here to stay. Following in the footsteps of ETFs and ADRs, which in the last ten years have made commodities and foreign stocks accessible to a much wider swath of investors, early stage tech seems to be an asset class undergoing rapid democratization. Only time will tell how the participants in this process make out, but there’s no question that we’ll continue to see innovation in the space to make the Twitters and Facebooks of the world more accessible.