How pre-IPO risk compares with venture capital risk
How can investors hedge unicorn stock risk before an IPO? Mostly, they cannot hedge it the way they would a listed stock. There are no listed options or futures on private shares, and nobody lends them out for short selling. Risk gets managed in other ways: by choosing later-stage companies, which on PitchBook data as of 5 August 2021 fail less often than early-stage ones, and through entry price, share class, position size and spreading money across several companies.
Key takeaways
- Venture capital and late-stage pre-IPO investing sit at the two ends of the same asset class. Venture backs companies that mostly fail; late-stage investing buys companies that have already survived.
- PitchBook found company failure rates falling from 23.6% at Series A to 10.8% at Series E, on data as of 5 August 2021.
- Buying only established companies already valued above one billion dollars gives a different risk profile from early-stage venture. Not a risk-free one.
- Fewer companies failing does not mean fewer investors losing money. A secondary buyer pays a market price and carries entry-price risk that a primary investor does not.
Late-stage private companies fail less often than early-stage start-ups. That gap is the entire basis for telling venture capital and late-stage pre-IPO investing apart. A venture fund backs young companies on purpose, expecting most to return nothing and a few to return everything. A late-stage investor buys into companies that already have revenue, institutional governance and a valuation above one billion dollars, and so faces a much narrower range of outcomes, on the way down and on the way up.
What the failure data shows
The clearest published numbers on failure by financing stage come from PitchBook, which found company failure rates dropping at every round. Below are company failure rates by financing round, on data as of 5 August 2021.
| Financing round | Failure rate, company count | Failure rate, dollar basis |
|---|---|---|
| Series A | 23.6% | 16.1% |
| Series B | 16.7% | 12.5% |
| Series C | 13.5% | 9.8% |
| Series D | 12.1% | 9.6% |
| Series E | 10.8% | 7.7% |
Industry Ventures got to the same place from the opposite side in February 2017, putting the early-stage loss rate at about 65% against less than 30% for later-stage companies. Correlation Ventures, writing on 13 July 2023, found that nearly half of all venture financings in the previous decade lost investors money and that under 4% of invested capital came back ten times or more. That is the early-stage venture model, not the late-stage one.
What the comparison leaves out
The failure figures are real. Read them with three caveats, though, and each one argues against treating them as a promise of safety.
- The PitchBook data is an analyst note from December 2022, measured as of August 2021, before the down rounds and write-downs that came next. Nobody has published a refreshed version.
- A company that reaches Series E has, by definition, survived four earlier rounds. Part of the falling failure rate is selection, not strength.
- Later-stage cohorts are younger and have had less time to fail, which flatters the late-stage numbers almost automatically.
What still goes wrong in a late-stage investment
A company that will almost certainly still be around in five years can still be a bad investment. In late-stage pre-IPO deals the risks that remain are mostly about price, structure and time, not about the business going under.
- Entry price. A secondary buyer pays a negotiated market price, not the primary round price, and negotiated prices for the same company vary a lot. Prices are often set at a discount to the last round, and the spread between trades is wide. Where a buyer lands depends on sourcing and negotiation, not on the company.
- Liquidity. Nothing guarantees an exit, and the company has no obligation to provide one. FINRA lists the lack of a readily available secondary market as a principal risk.
- Structure. Preferred shares carry liquidation preferences that can leave common stock worth far less than the headline valuation suggests.
- Dilution and time. Another round at a lower valuation cuts the value of an existing stake, and holding for several years is normal.
- Transfer restrictions. The company can refuse to approve a transfer, which can kill a deal after it has been agreed.
How this shapes the way Unicorn Private invests
Unicorn Private buys secondary stakes only in established, highly valued private technology companies, the ones usually called unicorns, and does not invest in early-stage start-ups. That is a deliberate choice of where to sit on the risk curve. It gives up the chance of a hundredfold return on a seed position. In exchange it gets a far lower rate of outright business failure, companies with audited accounts and institutional investors already on the register, and a visible route to an exit. None of the risks above go away, and nothing on this site is a promise of return.
In short
Late-stage pre-IPO and venture capital carry different risks. On the published data, companies fail less often at each successive financing round, and by the late stage the failure rate is roughly half the Series A rate. What a late-stage investor takes on instead is price risk and time. Those are handled through due diligence, discipline on entry, holding period and portfolio construction, not by owning a portfolio built around expected write-offs.
Frequently asked questions
- Not with exchange-traded instruments, because there are none for a private company. Private forward contracts on future shares are sometimes offered, but they add counterparty risk and depend on the company recognising the transfer, which it can refuse. For most holders the tools that actually work are diversification and position sizing.
- Usually not. Lock-up agreements typically ban not only sales but also short sales, options and other hedges on the locked-up shares until the restriction ends. Read the exact terms in your own agreement and in the prospectus.
Does investing in several unicorns reduce risk?
- It lowers the risk that one company failing, or one down round, decides the outcome. It does nothing about what all private holdings share: no public market, no fixed exit date. Investing involves the risk of losing capital. The Unicorn Academy pre-IPO course covers private markets and their risks step by step.
Related guides
- Pre-IPO investing vs private equity vs venture capital
- Pre-IPO due diligence checklist
- What is pre-IPO investing?
- Unicorn Club
Read next
About the publisher
This guide is published by Unicorn Private Research, the research arm of Unicorn Private LLC, a Delaware private equity firm that acquires secondary stakes in late-stage private technology companies before their IPO. The firm invests only in established companies already valued above one billion dollars, not in early-stage start-ups, and its founders have been active in private equity and startup investing since 2005.
Unicorn Private is the first firm in the pre-IPO secondary market to create an open research centre in sixteen languages: guides, a tracker of the largest private technology companies, a glossary, and a frequently asked questions section, open to every reader, with every figure carrying a date and a link to a public source.
Sources
- Introducing Venture Growth, PitchBook Analyst Note, 1 December 2022
- The Venture Capital Risk and Return Matrix, Industry Ventures, 7 February 2017
- Venture Capital, We're Still Not Normal, Correlation Ventures, 13 July 2023
- Know the Risks of Pre-IPO Funds and Potential Fraud, FINRA, 18 August 2026
This page in other languages
- Il rischio pre-IPO a confronto con il rischio del venture capital (Italiano)
- Le risque pré-IPO comparé au risque du venture capital (Français)
- Wie sich das Pre-IPO-Risiko vom Venture-Capital-Risiko unterscheidet (Deutsch)
- Cómo se compara el riesgo pre-IPO con el riesgo del venture capital (Español)
- Como o risco pré-IPO se compara ao do venture capital (Português)
- Риск pre-IPO в сравнении с риском венчурного капитала (Русский)
- 上市前投资风险与风险投资风险的比较 (中文)
- プレIPO投資のリスクとベンチャーキャピタルのリスクの比較 (日本語)
- प्री-आईपीओ जोखिम की तुलना वेंचर कैपिटल जोखिम से (हिन्दी)
- 상장 전 투자의 위험과 벤처캐피털의 위험 비교 (한국어)
- Halka arz öncesi risk ile girişim sermayesi riski karşılaştırması (Türkçe)
- Perbandingan risiko pra-IPO dengan risiko modal ventura (Bahasa Indonesia)
- كيف تقارن مخاطر ما قبل الطرح العام بمخاطر رأس المال المغامر (العربية)
- So sánh rủi ro tiền IPO với rủi ro venture capital (Tiếng Việt)
- Ryzyko pre-IPO a ryzyko venture capital (Polski)