Pre-IPOs

Perhaps the most common of alternative investments is pre-ipos. IPO is initial public offering. This is when investors provide capital to a private venture or company prior to the company going public. They use this capital to grow the company in one way or another. It could be to do further development on a new product, launch a new marketing campaign, or doing prerequisites prior to taking the company public, etc.

The company does not have to pay the capital back to the investor, but instead grants the new shareholders a right to future profits distributed by the company. That is only the first reason why they can be risky. However, if the plans come to fruition as the management plans, the returns can be huge - 10 times the amount invested, 30X, 50X, and sometimes 100X or more. This is why due diligence on the company, the management, the business plan, the marketing, etc. are so important. Would you have been one of the original investors in Microsoft, Starbucks, Google, PayPal, Yahoo, Fed Ex, et al? If you had, you would be a multimillionaire. Would you have had the stomach for the risk? Would you have had the insight? Would you be able to wait years for the return? However, keep in mind, for every one of these huge successes, there are probably hundreds or thousands that fail and never return anything.

Many of these plans also take anywhere from one to 10 years or so for the investor to see the returns. Some investors do not want to tie up their capital for that length of time. Some will look for pre-ipos that are very near going public so the wait for the return is not as long. If the company does go public, there may be wild swings in the market price on the initial days of trading. It sometimes is advisable to take profits on shares right away, sometimes it's better to hold for years. These are just some of the reasons why these investments can be risky.

As stated in the due diligence posts, it begins and ends with the management of the company. Management can make or break these investments, regardless of the industry, product, or timing. Do your homework. Get insights from others who are educated on the company and industry. Choose wisely. Be patient.

But the noble man makes noble plans, and by noble deeds he stands. Isaiah 32:8

There will be more on alternative investments this week. Stay tuned ...