How can IT startups attract investment in the mass market?
With the growth of the key rate, it has become much more difficult for Russian businesses to attract financing, and due to sanctions, Russian investors have access to significantly fewer instruments than before. In these conditions, the pre-IPO market is actively developing. What opportunities does it open up for investors and entrepreneurs?
The essence of a pre-IPO, like an IPO, is the issue of shares. Both procedures are aimed at raising capital. However, the initial public offering (IPO) is available only to large companies that are in the final stages of evolution into a corporation traded on the stock exchange.
At the same time, many issuers are looking for capital at earlier stages of development. This primarily concerns startups – young, fast-growing companies that may need money to launch a business, expand or scale up.
Pre-IPO is a step before an IPO. The company issues additional shares, and the investment platform offers them to its users. The difference here is that the securities are purchased before the business goes public. The entire procedure is faster: on average, it takes 3-4 months.
By financing such projects, investors, as in the case of venture investments, receive up to 100% of the order fulfillment. The discount (discount on the share price at an early stage) can be tens of percent compared to the IPO price. It is the opportunity to buy shares of a company in anticipation of a price increase when the papers go to IPO that is the main investment idea of participating in pre-IPO.
For your information, globally in private markets is attracted approximately twice as much capital as public ones, but the trading volume is 330 times lower, which demonstrates the huge gap in liquidity between the private and public markets. However, new technologies and legislative innovations (in particular, Federal Law 259 of 08/02/2019) are designed to reduce this gap.
With the advent of a legal framework that regulates the issuance and circulation of digital financial assets in Russia, platforms for pre-IPOs began to appear. One of them is MOEX START. On it, non-public companies will be able to attract capital for their development by placing shares through a closed subscription based on the infrastructure of the Moscow Exchange Group.
An issuer on MOEX START can be an enterprise with a period of existence of more than one year and revenue volume of 50 million rubles for the last reporting year. The company must also have an assessment from an accredited appraiser and a formed investment case for investors, including plans for public placement.
Learn more about the risks of participating in a pre-IPO
Conducting a pre-IPO is associated with high risks, but due to the ambitious goals of the business that is preparing to enter the stock exchange, it also implies high profitability.
It is also important to understand that, unlike shares of publicly traded companies, pre-IPO investments are illiquid, meaning that such investments may be frozen for several months or years until the company conducts an IPO.
The company may postpone the placement for a long time or cancel it altogether. The reason for the postponement may be poor stock market conditions at the time of the planned public placement. The average time range for pre-IPO investments is approximately 1.5-2 years.
The Moscow Exchange has developed a special trading regime for shares that have not gone through an IPO — OTC (indicative quotations). Within the framework of this separate board, holders of shares from a successful pre-IPO round can put their shares up for sale — that is, organize the circulation of shares before the IPO, which reduces the liquidity risk of such securities.
It should also be understood that a significant risk when participating in a pre-IPO, as with any other investment in the stock market, is the unreasonably high expectations embedded in the share price. The investor bears the risk of negative dynamics of the shares both before the IPO and after their placement.
The need to independently study the issuer's financial statements has not been cancelled. Therefore, only qualified investors can participate in the placement of shares of non-public companies.
Examples of Russian pre-IPOs
In July 2023, a pre-IPO of a vaccine developer, a biotech company, took place on the domestic market “Development of Biotechnology” (RBT, a subsidiary of ISKCH), which was able to attract 155 million rubles during a closed placement of shares on the Rounds investment platform.
It was followed by a pre-IPO Hyper. A startup building a network of charging stations for electric vehicles has placed shares on the Zorko platform, an official partner of the Moscow Exchange. The total funding volume for this round was 350 million rubles, of which 127 million was raised from more than 750 individuals. The remaining funds were provided by the company's founders and strategic investors.
In May 2024, a power bank rental service “Take the charge!” closed the order book in the pre-IPO round on the Rounds platform and attracted 750 million rubles in three days. Alfa Bank acted as the placement agent for the deal. Initially, the participants were targeting a range of 500-700 million rubles and a period of one month for collecting orders. According to Rounds, Zaryad! JSC broke two records at once: in terms of volume and speed of placement.
True, the volume record was soon broken by another service – “Airplane Plus”. A subsidiary of the developer Samolet raised 825 million rubles at a valuation of 21.2 billion rubles, setting a new high on the Russian pre-IPO market. About 2,000 private investors participated in the deal, accounting for about half of the placement volume, and the rest was institutional investors.
Opportunities for investors
Restricting access to Western capital should, in theory, reduce competition among investors. Less competition among investors means better conditions for those who continue to invest. But in reality, we are seeing a rush to invest in fast-growing companies.
For example, in October 2023, the first public offering of the Russian software developer Astra took place on the Moscow Exchange. The company issued shares worth 3.5 billion rubles, and demand exceeded supply by 24 times. Currently, Astra shares are trading at about 40% above the IPO price.
A pre-IPO allows a retail investor to buy a stake in a company that is otherwise unavailable to them, and also allows them to accumulate significant checks without burdening the company with the rights of a single large investor.
In this scheme, everyone wins:
The investor gets to participate in a previously unavailable asset.
The asset receives a pool of minority shareholders with long-term goals.
And the bank-broker only takes a commission for organizing this connection and does not at all appear to be the main interested party in such a transaction.
The Moscow Exchange is waiting for companies that would be valued at least at 10-20 billion rubles, which means that they would earn about 1-2 billion rubles EBITDA per year. Today, there are hundreds of companies in Russia that can scale up to such sizes, and their current valuation rarely exceeds 3-4 billion rubles. This is an opportunity for investors to increase their capital several times in a couple of years.
Government support measures for debutants
The active development of the market is facilitated by support programs from the state and funds. Thus, the Skolkovo Foundation launched back in 2022 program investment reimbursement for university start-ups.
The compensation amount is up to 50% of the total investment, but not more than 100% of the personal income tax paid by the investor for the three preceding years. At the same time, the maximum investment for one investor in each startup is 20 million rubles.
One of the most prominent participants in the program today is the marketplace for oil products and raw materials OPEN OIL MARKETwhich in three years of existence has reached a total turnover volume (GMV) of 5.9 billion rubles, and in another three years plans to provide up to 22% of sales in the country's small wholesale market.
The marketplace cuts out unnecessary intermediaries and creates a competitive space for direct interaction between all market participants: manufacturers, suppliers, carriers, buyers and financial partners. This allows any company to purchase up to 50 tons of products in two clicks at fair prices with convenient credit and delivery services.
Estimated company value from Finam makes up 10 billion rubles (post-money). The minimum lot for investment is 90 thousand rubles. By 2026, when the company plans to go public, even with partial fulfillment of growth plans, the value of shares may increase several times.
The placement of OPEN OIL MARKET is carried out by closed subscription to a limited number of people on the investment platform of JSC VTB Registrar. And in the fall, the placement on MOEX START is planned with all the ensuing consequences – shares can be sold and earned even before the IPO.
It also recently became known that pre-IPO are getting ready dumpling chain “Let's sculpt and cook”supplier of meat products Mяsoet Meat Company and a chain of restaurants Meat_CoinEach of the companies plans to attract from 200 to 450 million rubles through the Rounds platform.
Apotheosis
Pre-IPO investing is a relatively new solution for qualified retail investors in Russia, allowing them to participate in the venture business rally without taking on the huge risks typical of early stage investments.
The potential of pre-IPO is evident both in how actively companies are entering it today and in how new platforms are emerging. However, before entering this market, it is important to study its nuances, the target company and its industry.
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