PIPE financing through direct public offering is the “new” venture capital

What is PIPE financing?
Let’s start with the definition of “PIPE financing” and how it differs from venture capital, private equity, and other investment vehicles. PIPE stands for “Private Investment in Public Stocks”. It is essentially the process that results in a hedge fund, venture fund, and/or private equity investment in a listed public company in exchange for share ownership, typically at a discounted price.

What is the relevant history of PIPE funding?

In the fourth quarter of 2007 there was a dramatic increase in the amount of financing provided to public companies due to the extraordinary stresses of the credit crunch now inherent in the subprime market. According to Robert F. Kyle, executive vice president of Sagient Research, the PIPE market reached historic levels in 2007 with more than $45 billion raised in the fourth quarter alone. That one-fourth total exceeded any annual total for the past twelve years.

Why is PIPE funding growing so rapidly?
Mark Twain once said, “I am more interested in the return on my investment than I am in the return on my investment.” This statement echoes the main advantage for an investor found in PIPE financing with respect to exit strategy. When an investor makes an investment in a company, one of the main concerns is the exit strategy. With PIPE financing, the company is public, so the investor has control over ownership of it and can buy more or sell at any time. Private companies are typically unable to provide investors with liquidity until an exit strategy is identified and executed, which typically carries high risk and over an extended period of time. This is why PIPE funding has increased over the last 12 years. Another benefit of investing in public vs. private entities is disclosure. A public company is required to disclose financial information and is regulated by the SEC. Investors around the world, including hedge fund and hedge fund managers, institutional bankers and individual investors, consult this information. Another main advantage for a public company is the ability of management to retain control. Angel and venture capital investors typically require board seats and majority voting rights. In our experience, companies that take their company public and obtain PIPE funding retain majority ownership, allowing them to execute or modify their strategy to achieve company growth goals as they see fit.

Does your company qualify to go public?
Not all companies are positioned to be a public company and we advise that companies always seek the advice of an industry expert who specializes in PIPE financing and the DPO process.

– Would your friends and family invest in your company? If not, there is little chance that someone else will. This may sound simplistic, however in our experience this is perhaps the most powerful litmus test of all.

– Does your company have the potential to reach a national or even global market? For example, a local flower shop with 10 locations would not be in a good position to go public. However, a florist with national growth aspirations like nationalflowers.com may well be a viable candidate due to its national market plans and growth strategy.

– Does your company have a strong and experienced management team? A strong management team is the backbone of any company. Over the years, we have seen a sharp rise in the number of start-ups and early-stage companies going public to raise capital. However, to attract investors, these companies must demonstrate consistent revenue growth and/or a track record of success within a related industry. We often use the example of a local banker who wanted to market a golf ball that he developed and patented for national distribution. With no background in that field, his chances of succeeding in the public offering process were diminished. However, if that same inventor had a proven track record with similar development projects, their chances of going public and obtaining financing, even with no existing income, would be greatly improved.

– Do you know how much capital your company needs? If your company is looking for less than $1 million, then the public listing process would be too expensive. The typical funding opportunity for a new public company is between $1 million and $10 million. However, established companies with revenues of more than $3 million typically command larger sums once they go public.

– Can the company generate cash or create value? All public companies must perform so that their share price continues to trend in the right direction. If a company can’t demonstrate the ability to generate cash or create value in the minds of investors as a private company, it probably won’t do so as a public company. Half the battle for a public entity is creating interest, a “buzz,” about the potential of the company or its product or service. This is critical not only to initially attract investors, but also to help maintain the continued health and growth of the business. If a company has a good story to tell and a product or service that fills a need on a regional, national or global scale, then the PIPE financing process is an excellent financing solution to consider.

How much does the IPO process cost?
The IPO process, involving an underwriter such as Goldman Sacks or Merrill Lynch, can cost a company up to $10 million. Direct Public Offerings (DPOs) for small and medium sized businesses where an underwriter is not required due to the stock exchanges and sources we use cost around $100,000. The other big difference from the DPO process is the trades. Most direct public offering stocks are held on the OTC bulletin board, often referred to as the Pink Sheets.

In conclusion
PIPE funding has been increasing steadily over the past 12 years due to increasing amounts of capital allocated to hedge funds and private equity groups that invest primarily in public entities. The opportunities for start-ups, as well as for investors, are enormous.

Advantages for private companies of going public through DPO include:
– Low cost compared to IPO
– Access to a wider variety of investors
– Access to larger business growth investment funds
– Maintain operational control by the company’s management.
– Higher market valuation

The advantages for the investor in public entities include:
– Access to company data and finances, resulting in reduced risk.
– Integrated exit strategy

Although investors in public entities may not hold board seats or hold voting rights, leveraged ownership speaks volumes to company leaders and can be a very powerful motivator to continue moving the company in the right direction. . So the “exit strategy” certainly implies greater benefits than just the opportunity to liquidate an investment.