Be Ready For Direct Listings

I’m starting to think IPOs — initial public offerings — are overrated. That’s a really weird thing for an early investor to say. Because for early investors, the IPO is the holy grail. It’s why you invest in startups. An IPO is one of the few moments in time when you can turn paper gains of 10X, 50X or 100X into cold, hard cash. 

IPOs also come with a lot of pomp and grandeur. Founders are invited to ring the bell to open trading on the Nasdaq or New York Stock Exchange. Jim Cramer spends five minutes talking about how great the company is on CNBC. The Wall Street Journal writes a series of stories about the startup’s journey and what the opening price might be. So does Bloomberg and the rest of the business press.

It’s a heady time for any startup investor. After years of waiting, they’re finally being rewarded for being smart, bold, and visionary. It’s time to cash out.

Or at least it used to be that way. Now, holding on to those shares should be the (almost) automatic play in one specific case.

The Changing IPO Landscape

Twenty-five years ago, companies went public while they were still small — worth $500 million or less and still growing. And they were mostly profitable. That was good for everyday investors like you and me. We had a chance at 10X returns (or even 5X) if we invested in the stock markets wisely.

But now, companies going public are routinely valued in the billions before they go public. Most of the startups that go public now have exited their growth phase. And many are still figuring out how to become profitable. High valuations, slowed growth and lack of profitability make it hard for the everyday investor to make gains in today’s stock market. So the only way for investors to make at least 10X is to invest early, while companies are still private startups.

Startup investors have a choice when one of the companies in their portfolio goes public. They can sell their shares and lock in their profits. Or they can continue to hold their shares in the hopes that share prices continue to rise and chase even bigger gains.

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