One of the best ways to make asymmetric gains in the market is investing in companies before they go public. These are called pre-initial public offering (or pre-IPO) companies.
Being a successful pre-IPO investor isn’t just about how many small bets you win or lose.
Instead, it’s all about the average returns of your winning and losing investments.
You see, your win rate isn’t as important as the size of your average winner versus the size of your average loser.
And that’s why venture capital (VC) firms look for private companies with 10x potential upside or more. If they bag just one huge winner, it more than makes up for a string of losers.
The table below explains how the math works…
| Hypothetical VC Portfolio | Investment | Return | Balance |
| Private Investment 1 | $100 | -100% | $0 |
| Private Investment 2 | $100 | -100% | $0 |
| Private Investment 3 | $100 | -100% | $0 |
| Private Investment 4 | $100 | -50% | $50 |
| Private Investment 5 | $100 | -50% | $50 |
| Private Investment 6 | $100 | -50% | $50 |
| Private Investment 7 | $100 | -25% | $75 |
| Private Investment 8 | $100 | -25% | $75 |
| Private Investment 9 | $100 | -25% | $75 |
| Private Investment 10 | $100 | 1,000% | $1,100 |
| Total | $1,000 | 48% | $1,475 |
The key to making this strategy work is finding private companies with high upside and letting them run. These home runs will more than make up for the strikeouts.
If you wait until they go public, it’s much more difficult to do. That’s why VCs focus on companies before they have an IPO.
Consider this… When Airbnb, Snowflake, Uber, and Facebook went public, they had already accumulated $20 billion in pre-IPO value.
So not only did pre-IPO investors watch their share prices rise substantially… IPO-day investors paid significantly more for those same shares.
Studies by research firms like Blackstone and KKR show that private companies outperform the S&P 500.
So VC investing is the perfect way for investors craving outsized returns to swing for the fences.
Palm Beach Research Group