Get ‘Em While They’re Warm
To our Valued Investors:
Historically, tensions in the Middle East might pose the threat of disruption in the supply of crude oil, and that may cause the cost for each gallon of gasoline in your tank to jump. Conversely, the demand for gas might wane in America after Labor Day when vacations end and motorists retreat to their non-gas-powered cubicles. The share prices of pharmaceutical companies and those of remote-conferencing facilitators like Zoom Video Communications tend to skyrocket because of the same global pandemic that punishes airline and hotel chain stocks. At the first sign of rain, the peddler on the corner of Wall & Broad is likely to triple the price of umbrellas.
You already knew this, though. We don’t mean to insult your intelligence by thrusting forth this fundamental principle of economics as though we had recently discovered it. After all, if you didn’t have a firm grasp of the basic law of supply and demand, it’s unlikely that you would be inclined to receive and immensely enjoy the weekly newsletters produced by your favorite pre-IPO investment company.
Still, the evidence we see time and time again at Iron Edge VC suggests that things still need to be pointed out in this department.
For as long as our investment fund has existed, we proclaimed great confidence in the upside potential of Palantir Technologies, Inc. (NYSE: PLTR). With an extensive roster of early investors and many company employees and former employees who were willing to part with small percentages of their accumulated equity at a discount in order to satisfy a need for immediate liquidity, supply of private Palantir shares was relatively abundant. Demand, on the other hand, was underwhelming. Most individuals outside of Silicon Valley had never heard of the company, and those who had some familiarity with the name often had only the most superficial understanding of what Palantir does. As you might imagine, this made it very challenging to persuade investors to write checks to buy a stake in Palantir. Still, we persisted, because we believed that the returns for our clients would be big. We had plenty of Palantir for sale, and as late as last June, we were conducting transactions at $6 per share and lower.
In the first week of July, news broke heralding Palantir’s filing of a confidential Form S-1 with the Securities and Exchange Commission. The notion of Palantir going public went from a speculative concept to a near certainty looming in the immediate future. The secondary market’s customary summer slowdown was effectively cancelled. The fortunate group of insider shareholders largely recognized that the coveted liquidity event would soon enough be upon them without the aid of outside investor cash. While those insider sellers began their retreat, indecisive would-be buyers suddenly discovered an urgent need to get in the game. Within weeks, private shares of Palantir were changing hands higher than $10. We fielded more than a few calls that went something like, “Hey, remember that company you were offering me a couple of months ago? That Pala-whatsis? I’ve been thinking it over. Can I still get some at $6?”
In the comparatively volatile arena of the public marketplace, a move from $6 to $10 over the span of a little more than a month is not terribly uncommon. In the secondary market, though, things move at a slower pace. With far fewer players in the game, and because private companies don’t publicly announce quarterly earnings reports, a historically significant and obvious event is needed to stimulate a private company’s price movement. Valuation-boosting funding rounds and indications of public-listing plans like Palantir’s S-1 filing are the most dependable catalysts that move a pre-IPO company’s needle. As these milestones occur, demand advances on supply, and fence-sitters become boat-missers.
Palantir began trading on the New York Stock Exchange on September 30, 2020, ending a years-long exercise in patience for many pre-IPO investors. The wait paid off, though. After a few weeks of moving through a range of $9 – $10, share prices began to find their footing at the end of October. On Monday, Palantir traded at a new high of $15.90, and today it sits at about $15.30. One hundred percent of investors who bought into the company through Iron Edge VC are currently sitting on unrealized gains, and many have realized gains by selling converted portions of their positions at the public market. The vast majority of Iron Edge’s Palantir holders acquired their shares at prices lower than those at which the company has ever traded publicly, and no Iron Edge pre-IPO investor has sold a single share at a loss since the direct listing. Those who bought in at our lowest levels — many of whom did so in massive quantities — were able to sell their unlocked shares at a profit of more than 175%. We are proud to have enabled this kind of return, especially in slightly more than a quarter of a year.
There is no shortage of similar instances, and some examples are even more astounding than that of Palantir. In some cases, pre-IPO shares of Snowflake, Inc. (NYSE: SNOW) were trading below $75 last summer. That company’s September IPO was priced at $120, it opened at $245, jumped to $319 in short order, and is now holding steady around $240.
At this point, we feel it’s prudent to whip out the familiar disclaimer: “Past performance may not be indicative of future results”. That said, the emergence of a pattern that repeats itself consistently cannot be ignored. Alongside Palantir, Iron Edge VC has spent much time telling investors about companies like Social Finance, Impossible Foods, AirBnB, and DiDi Chuxing. Thanks to fundamentally positive developments within these companies and brightening IPO prospects, private share prices of all of them are rising. It’s as though insider shareholders have assumed the role of the most attractive prospects at the dance, gleefully shunning the eager advances of the buyers’ pursuit.
The key to the most successful pre-IPO investments is to not wait until a company is red-hot. Get ‘em while they’re warm.
Fortunately, not only are today’s opportunities plentiful, but they are multiplying. Privately held companies valued over $1 billion, known as “unicorns”, are springing up at a record pace. According to Crunchbase, 61 companies reached unicorn status between 2005 and 2013. Since then, 789 new unicorns have been born. After many of those have gone public, shedding their “private” status, it is estimated that 630 unicorns are currently out there. Note that for every Robinhood and SpaceX that has already garnered widespread attention, there are a dozen names like Procore, Gitlab, Drizly, Plastiq, and Checkr.
Those unicorns that have taken the leap to the public exchanges in 2020, according to Crunchbase, enjoyed an average of a 117% increase from their last-known private valuations. Such success has not been seen in the IPO markets in more than five years, and it happened despite the burdens of the Covid-19 pandemic. We at Iron Edge VC are proud to have access to a wide variety of private companies’ shares before they go public. If you would like to learn more, or if you know of anybody else who would, please do not hesitate to contact us by clicking “Get in Touch” below.
If you enjoyed this article, visit the Iron Edge Blog for past updates on other pre-IPO investment opportunities.
As always, shares are available on a first come, first served basis.
All Our Best,
Paul Maguire, Managing Partner and The Iron Edge Team