With the public markets rising, all that investors can think of is where does this all stop! But Public markets globally average out their returns in a particular range, over a decently long investment horizon, that is where the IPO gains come in and with the latest fad around SPACs, it is all the more important to get access to quality stocks in the IPO allotment for some listing gains to get that slight alpha for your portfolio!
But not everyone gets lucky with an IPO allotment, especially not in a high steam company with lot of cult following, of the likes of Uber, AirBnB etc. Thus the average Joe almost everytime has to content with purchasing the stock on the day of listing which almost guarantees lost listing day gains.
Large Institutional investors typically have access to IPO allotments due to the size of their investment where they gain an advantage over the average retail Joe - this gap is as of now not being met by any Tech solution, but a traditional investment mode of mutual funds, that plugs this gap to some extent (although indirectly), by pooling together money from retail investors and applying to IPOs as an institutional investor and ensures that the average retail investor gets access to IPO gains (similar to Moonfare PE model).
Another investment avenue wrt public markets is that, there was no small minimums way to access pre-IPO companies. Until the likes of EquityZen, ForgeGlobal etc. took the pre-IPO market by storm by building a Tech solution around this.
Pre-IPO Stock Trading Business Model
One thing to understand about the Pre-IPO market is that the type and quantity of stock that is available. Since this is more of an on-supply (something that is available only when supplier is ready to supply) commodity it typically is illiquid and has random minimums.
This mostly depends on the seller of the stock. These sellers can be any one from a Family Office, VC Fund, Angels, Employees looking to cash out their vested and exercised stock options and so on. Since these would typically be available in the form of bundles, the purchase price can be more than the affordability of the current buyer at hand. Plus the asking price can be quite arbitrary depending on how much value it holds in the eyes of (be)holder! To top it all, the paper work involved in transfer of equity can be quite overwhelming.
Thus the below 3 pain points need to be addressed:
- Discovery of Trustworthy buyer/seller
- Liquidity (& lower minimums)
- After sale service (settlements, transfers etc.)