The text is not an investment recommendation.
The first investment I made was in an unlisted company. I got a chance to invest in an early startup, from which I had just knocked out an internship in addition to my studies.
I was enchanted because I was now in the finale of angel investors! Even though I didn’t sit with them for business lunches at the white tablecloths, my name was still found in the same PDF file as theirs. Boom!
I imagined that you can become a startup investor through two different ways; being A) a millionaire using expensive pearl necklaces, or B) the first employees of a company to poke a dune in a sweat hat for a small or non-existent salary.
Today, I know that the road to becoming an investor in an unlisted company can be much easier. Namely, we can invest in unlisted companies even from this seat. Let’s go through how today.
What was an unlisted company?
Great question! Let’s first review what is a listed company. The listed company is a public limited company (Corporation). It is a larger company that has listed its shares on the stock exchange, allowing anyone to buy, own and sell its shares. However, all of these large, public corporations have started somewhere. Before listing, they were unlisted companies.
Unlisted companies are all non-listed companies (Oy). In this text, however, I focus on unlisted growth companies, that is, smaller corporations that aspire to rapid growth and need money for it (read: investors). By investing in a growth company, investors thus have the opportunity to get involved in the next success story at an early stage.
But because an unlisted company cannot be found on a stock exchange, its shares cannot be traded on a book-entry account like shares of listed companies. So how does investing in such a company work?
Mass funding as a gateway to districts
Traditionally, angel investors and employees have been able to invest in growth companies at an early stage, and there have been no publicly traded shares.
This, however, has changed and has been established in suburbs and other styles through unlisted companies that we’re able to sell shares to private investors: that is, ordinary walkers like you and me. This was called crowdfunding.
With crowdfunding, a company can replace large, individual investors with several smaller investors.
Example: An unlisted company needs € 1,000,000 for internationalization. Instead of seeking € 1 million in funding from two angel investors, both putting € 500,000 into the pot, the company is selling its shares through crowdfunding to a thousand investors, each investing an average of € 1,000.
The company gets the money together and we – we non-millionaires too get involved in investing in early-stage companies!
How can you invest in private/unlisted companies? Here are five ways you can get involved.
- Intermediaries and start-ups –
- Some start-ups can help you in owning private assets that offer stocks in Demat account with a minimum investment amount of Rs.50,000 per company.
- These companies help in looking for a buyer but they don’t guarantee that the sale will take place. Companies ask you to pay money upfront and the delivery is done on a T+3 basis.
- Counterparty risk – which means you may transfer the funds, but there is no guarantee that you may get the shares. Seek your investment advisor’s advice before investing in these stocks.
2. Buy from existing employees with ESOPs
- Companies give stock ownership plans to employees by allowing employees to buy a certain number of shares in the company at a predefined price after a predetermined period.
- You can check with your broker for such transactions.
3. Buy from Promoters Directly
- These are called Private Placements and many investment banks and wealth managers facilitate the purchase of these private assets.
- Network drives this kind of purchase and you should be looking at a significant amount of stake.
4. Buy PMS or AIFs which pick up unlisted shares
- Apart from retail investors, financial institutions running portfolio management services (PMS) and alternative investment funds (AIF) pick up unlisted shares.
- Many of these funds invest to “capture pre-IPO valuations” to take advantage of a rise in valuations following an initial public offering. do make them understand that there is a risk of the prices falling after listing. Ride-hailing giant Uber, which was listed recently is a prime example of a company losing money post listing.
5. Equity crowdfunding platforms, Angel Funds
- Individuals invest in a new business venture in exchange for common or preferred equity
Risks to the counter
As a reminder, the risk and return of an investment always go hand in hand. Growth companies have a high return potential: if you happen to invest in a large company of the future at an early stage, you will make a plush return. Naturally, this means that growth companies have a correspondingly high risk.
Once listed companies have already established their position and customer base, growth companies are only covering them. However, future goals can be paid for at the time of purchase: the value of growth companies is based on future expectations.
The first investment of my life was miserable in terms of decentralization: 100% of my investment assets were caught up in the startup where I was working. O-ou.
A good rule of thumb is to keep about 10% of your invested assets in growth companies. It would be good to have at least 10 unlisted companies in the portfolio (in the long run, of course, this will not happen immediately). Why? According to the probabilities of growth companies for success look something like this:
50% of growth companies do not return money to investors
30-40% of growth companies investors get their own money back
10-20% of growth companies return money in multiples
As always with investing: don’t invest money you can’t afford to lose!
Unlike listed companies, whose shares can be bought whenever the stock exchange is open, unlisted companies organize financing rounds, share issues. A time window always opens when an interesting unlisted company puts its shares up for sale. An example of such a company at the moment is the responsible clothing brand Papu Design, which has attracted international interest and makes clothes for children and women from organic cotton.
Here’s how it works: when an unlisted company, in this example Papu Design, arranges a share issue through a crowdfunding platform, the company determines the funding range for the money to be raised: € 150,000-800,000. If the minimum fork target (€ 150,000) is not met, the investors’ money is returned to the account and the issue is canceled (well, for Papu, this minimum target was reached in less than a unit of time). If the maximum fork target (€ 800,000) is met, the issue will close prematurely.
Papu has previously raised a large number of investors with crowdfunding: it currently has 770 owners, 65% of whom are women!
Selling, realizing, exiting, a beloved child has many names
Unlike a stock market where you can press the sell button when you’re having fun, unlisted stocks are harder to get rid of. Roughly, there are two different ways to monetize unlisted stocks, and neither is in your hands. (WARNING: now follows the startup spin)
1. EXIT (investor exit)
Another company buys the company. Such large companies grow even more; they buy potential competitors out of the market and at the same time grow their operations. A successful exit means a plump wallet for investors who sell their shares to a buyer at a good price.
2. IPO (Initial Public Offering)
An unlisted company grows so large that it decides to list itself on the stock exchange. A Nordic unlisted company will probably be listed first on the First North list, which is a stock exchange for slightly smaller companies. Papu’s goal is to be listed on the First North list over the next five years. When an unlisted company is listed on a stock exchange, you are free to sell your shares on a public trading venue.
By investing money in unlisted companies, you can indirectly influence what kind of companies can be found on the stock exchange of the future – in this example, the responsible clothing industry.