The Wall Street Journal reported some big news last week:
Slack, the popular messaging app, is about to go public.
In case you’ve never heard of Slack, here’s what you need to know:
Its IPO will be one of the most valuable public offerings of the last decade.
And given some of the other big offerings on deck — including Uber, Airbnb, and Lyft — it’s easy to see why research company Pitchbook says 2019 will be a "historic year for IPOs."
But before you run out and try to grab your share of these IPO riches, take a minute to read today’s article…
Not only could it prevent you from making a big mistake…
But it could also help you bank some big gains.
Enough To Turn $10,000 into $16 Million
To back up for a minute, let me explain what an IPO is.
An IPO is an Initial Public Offering. It’s the first time that a company makes shares of its stock publicly available for trading on an exchange like the Nasdaq or NYSE.
Before a company goes public in an IPO, it’s a private startup — in other words, all of its shares are owned by its founders, its employees, and a small handful of early investors.
Historically, IPOs were a big deal…
You see, when a company went public, investors would expect its shares to skyrocket on IPO day, and then continue to rise in the months and years afterward.
For example, when Microsoft (Nasdaq: MSFT) went public in 1986, its shares were priced at a split-adjusted $0.072… that’s 7.2 cents. Today, with shares trading at about $115, IPO investors would be sitting on profits of about 160,000%...
That’s 1600x times their money, enough to turn $10,000 into $16 million.
IPOs used to be a way to earn virtually guaranteed returns…
Unfortunately, times have changed…
Losing Money on IPOs
To show you what I mean, let’s look at the performance of some recent IPOs:
Snap – This messaging app (NYSE: SNAP) recently IPO’d at a valuation of about $20 billion. Today, its market cap is about $10 billion — down 50%.
Groupon — This daily-deals startup (Nasdaq: GPRN) went public at a valuation of about $12 billion. But now it’s worth just $2 billion — an 85% loss.
Zynga — This popular gaming company (Nasdaq: ZNGA) went public at a valuation of $7 billion. Now it’s worth just half that — another 50% loss.
Blue Apron — This meals kit company (NYSE: APRN) recently IPO’d at $10 per share. But investors who bought at the IPO are down 80%.
To be clear, not all recent IPOs have been losers…
But even the “winners” — like file hosting company DropBox (Nasdaq: DBX) and streaming music company Spotify (NYSE: SPOT) — are only up by a tiny amount.
Gone are the days of quick, triple-digit IPO profits.
But why is this? What’s going on here?
The Two Trends Killing IPO Profits
Simple: two major trends today are changing the game.
The first is that startups are staying private longer than ever — and the longer a company stays private, the more time it has to build its business and increase its value.
For example, privately-held Uber is 10 years old, and is worth $70 billion. Given how richly valued it is already, IPO investors will be lucky to make any money at all when it goes public.
The second trend is that companies today can raise as much money as they need in the private markets — meaning, there’s less need for them to go public to get access to capital.
Bottom line: with so much of a company’s value being created before it IPOs, there’s less room for its shares to rise after it goes public.
The Trick to Capturing IPO Profits
To be clear, however, there’s still plenty of money to be made with IPOs.
In fact, while one group of IPO investors has been suffering losses, a different group has quietly been pocketing millions. What’s their secret?
Well, instead of investing during the IPO, these savvy investors get in before the IPO.
In other words, they invest when the company is still a privately-held startup, when all its shares are owned by the company’s founders and employees.
And because they get in so early, they can make a fortune — no matter what happens after the IPO.
A Gain of 80x Their Money
For example, I told you earlier how Zynga’s IPO investors have lost about 50% of their money…
But a different group of Zynga investors made a fortune from its IPO. You see, when Zynga was still private, these investors bought its shares for just $0.05 per share… that’s 5 pennies.
So even through Zynga’s stock trades at $4 right now, down more than 50% from its IPO, its private investors are up 8,000%. They’ve made 80x their money.
As another example, we recently introduced Crowdability readers to a car company called Elio Motors, back when it was still a private startup…
Since its IPO (OTCMKTS: ELIO), Elio’s stock is down about 90% — but Crowdability investors who got in before the IPO have done very well...
For example, Marie M. from Glendora, California wrote us to say that she made quick “325% profits when Elio went public...”
Now It’s Your Turn
Once you get the hang of it, getting into companies before they go public is easy. You just need to make sure that you pick the right ones.
Here are three ways to get started:
First, check out our Monday “Deals” email. We send it out at every Monday at 11am EST, and it contains a handful of new startup deals for you to explore.
Second, check out our free white papers like “Tips from the Pros.” These easy-to-read reports will teach you how to separate the good deals from the bad.
And third, if you want to accelerate your startup investing, consider signing up for one of our premium courses like The Early-Stage Playbook, or one of our premium research services like Private Market Profits.