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The Privilege of Early Access

Because not every investor gets to board the train before it leaves the station.

What if you could turn back time and invest in Zomato, Nykaa, or Policybazaar before they became household names*? That’s the power of pre-IPO investing; an opportunity to enter just before the spotlight hits.

In recent years, this early-access window has widened for HNIs, family offices, and institutional investors. From capturing listing-day pops to entering strong businesses at leaner valuations, pre-IPO investing is where aspiration meets alpha.

As India’s startup ecosystem matures, pre-IPO investing is becoming more structured and transparent; no longer reserved for VC insiders.

What is pre-IPO investing, really? And why should you care?

It’s buying into companies that are private but nearing IPO. These firms are usually late-stage, backed by institutional investors, and well past the idea stage. It’s less about speculation, more about timing.

Think of it as entering a high-stakes game just before the final handnwith visibility on most of the cards.

The two parts of the pre-IPO universe

Private placement: Fresh shares are issued to select investors at a negotiated valuation.

Secondary sale: Early investors or employees sell their shares via intermediaries, with pricing driven by demand and supply.

Still wondering what it looks like in real life?

Now, before a company rings the bell at the stock exchange, there's a long corridor it must walk. Each stage serves a specific purpose: from validating the product to scaling the business, and finally, preparing for the public markets.

• Bootstrapping / Self-Funding
  Founders rely on personal funds or support from friends and family to get the business off the ground.

• Pre-Seed Funding
  Small-scale funding from angel investors or incubators to validate the idea and build a basic product.

• Seed Funding
  First institutional capital to refine the product, understand market fit, and build the core team.

• Series A
  Aimed at scaling the business optimising the product, acquiring customers, and building revenue traction.

• Series B,C and D
  Late-stage rounds to expand into new markets, strengthen operations, and drive growth aggressively.

• Pre-IPO
  The final private round before a company goes public.

• IPO (Initial Public Offering)
  The company lists on a stock exchange, raising capital from public investors and offering liquidity to early stakeholders.

So why is Pre-IPO such an attractive opportunity?

• Early entry, bigger upside: Get in before valuations inflate.

• Participation in growth stories: This is your chance to own a slice of tomorrow’s market leaders, before they’re widely recognised.

• Portfolio diversification: Unlisted equity often moves independently of public market cycles, offering a strategic diversification tool.

• Real business visibility: Pre-IPO businesses aren’t hypothetical; they’re operational, profitable (or near profitable), and backed by credible investors.

But be mindful of the risks:

Pre-IPO investing comes with its own set of challenges. Information is limited, as financials of unlisted companies aren’t publicly available, making due diligence a critical part of the process. Liquidity is also a concern selling shares may take time due to the absence of a ready market. Additionally, IPO timelines are not set in stone and can shift due to market conditions or internal factors. These shares also fall outside SEBI’s stricter regulatory frameworks, offering fewer safeguards for investors.

In short, pre-IPO investing is a game of foresight and patience. The rewards can be compelling but so are the realities.

How can you access pre-IPO shares?

1. Via platforms and marketplaces

• Platforms like Grip Invest, Precize, Unlistedkart, Shareskart and EquityZen offer curated access to high-quality pre-IPO shares, often with detailed analysis and structured frameworks.

2. Through PMS or AIFs

• PMS (Non-discretionary): Minimum INR 50 lakh, with up to 25% allowed in unlisted securities.
• AIFs (Category II): Minimum INR 1 crore. These funds pool investor capital and access vetted, diversified pre-IPO deals.

3. Secondary sales via employee ESOPs or founder holdings

• These are negotiated deals through networks or intermediaries. Pricing depends on demand, listing expectations, and internal company dynamics.

And what about your exit?

The most common exit is via IPO listing, after which shares can be sold on stock exchanges though shares held by AIFs, VCFs, or FVCIs come with a 6-month lock-in under SEBI’s ICDR norms. Alternatively, investors can exit through secondary sales to private buyers or via unlisted share platforms, depending on market sentiment and regulatory compliance.

All about the taxes

Profits from selling IPO shares are taxed based on how long you hold them. Sell within 12 months, and it is a short-term capital gain; hold longer, and it is treated as long-term.

From 23 July 2024, short-term gains are taxed at 20%, while long-term gains are taxed at 12.5%, with the first INR 1.25 lakh exempt.

Do note: indexation doesn’t apply to equity IPOs.

In conclusion

Pre-IPO investing is not about chasing hype, it’s about getting in early with eyes wide open. The companies are real. The upside is real. So are the risks. But for those who do their homework, the potential rewards can be exponential.

*The sector(s)/stock(s)/issuer(s) mentioned in this document do not constitute any recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s).