How to Take a Company Public

Assessing the “going public” decision is certainly one of magnitude. Most large IPOs make headlines with their massive valuations (and often over-valuations) and flashy stories of humble beginnings. There are both upsides and downsides to taking a private company public. There are also huge cost disparities in the ways companies can get to the public markets, the most expensive being the Initial Public Offering (IPO). We’re often approached about raising capital for business growth, but the struggle is that a business without a solid exit strategy will likely not have the ability court investors like it should. My number one argument for going public is that it offers a great tool for liquidity. In other words, it allows investors to get their investment + growth out of the company. And, if the plan to go public is part of an overarching goal for the business, investors are much more likely. The biggest key for going public with small and microcap companies is to ensure you go public without going broke. In other words, that the process is cost-effective enough that nearly any private company with the right threshold of revenue can gain quickly gain the benefits of becoming public. Affordability lowers the threshold, meaning more companies–with or without outside investors–can gain the liquidity they need. Below is the basic process we take in taking private companies public.

  1. Pre-Incorporation Agreement
  2. Incorporation
  3. Initial Documentation
  4. Private Offering
  5. Legal Opinion
  6. Financial Statements
  7. 15c211 and CUSP
  8. Trading Symbol
  9. Transfer Agency and Certificates
  10. Trading Approval Process

Here’s more detail on the going public process outlined above.  The process is less cut and dry than initially meets the eye. Each scenario requires its own individual assessment. In doing so, here are some considerations:

  • Do you have the accounting resources to comply with FINRA and the SEC? It’s cheaper than you think, but you’ll likely need a couple thousand dollars extra per month for accounting fees relative to staying copacetic in your reporting duties with the SEC.
  • Do you need the money for a one-time even or for on-going capital-raising needs like a wave of acquisitions or other organic growth needs. If you’re looking for a simple one-time cash-out, going public may not be the best option.
  • Do you have the PR engine in place to ensure you’re communicating with investors in a timely and proper manner?
  • Will your company be able to deal with the transparency of being public?
  • How big is your firm? Will it be able to gain traction as a publicly-traded company?
  • Do you have an effective Market Maker/Rainmaker/iBanker to market your shares?
  • Have you weighed all your other options? Going public is not the right option for many firms. Weigh the pros and cons.

What about the cost of going public?

Nothing is free, despite what’s written on the web. Some firms will tout their ability to take a company public for free, but the catch is that you often pay dearly for it by sacrificing more equity shares in the business which, if you expect your company’s value to be boosted by a going public–will mean you forfeit more than the initial cash cost.

Often the cost to go public depends on the type of offering. There is more than one way to take a private company public. There are pre-qualification costs, up-front costs to get up and trading and then the on-going regulatory burden of staying current on your reporting. You’ll also be under more scrutiny from investors and analysts like never before. There is no cookie-cutter approach to the process. Just as each business we represent is different, so is the process and relative cost for each opportunity.

How Long Does it Take? 

This question can also be answered with the annoying “it depends.” It can take anywhere from a few weeks to years, depending on whether your going public via a traditional IPO or by some type of reverse merger. One of the fastest and cheapest methods is through a SEC Rule 419 SPAC. And, depending on how dirty or tainted a public shell might be, the process of reverse merging may actually take a similar length as a traditional IPO, if not considered properly.

Conclusion

Public companies represent a graduation to the big leagues. Doing so is certainly not for everyone. Without an expert knowledge of the process and pitfalls, companies can–at best–waste a great deal of time and money or–at worst–get into fights with creditors, lenders or the SEC or FINRA, which no one wants.

How to Start a Venture Capital Fund

*Or why I would suggest getting into something else.

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Getting into Venture Capital is about as difficult as getting into the NBA. Don’t count on making waves.

We’re not venture capitalists. We don’t claim to be. We don’t have a dedicated fund. We could raise large amounts of money and we have in the past on specific deals. And we know many of the places to go to tap institutional money, but we choose not to. Raising money money is a double-edged sword. That’t at least one of the reasons it’s not where we want to play.

Before I get into some of the ins and outs of starting a fund, I’m going to play Chicken Little and give my negative reasons why starting a venture capital fund may not be such a good idea. My personal take is that many of today’s dedicated family and institutional funds are poorly managed for a number of key reasons.

  1. Dedicated, contributed capital subverts discipline. We like to raise money on a case-by-case and deal-by-deal basis. In other words, the deal will need to stand on its own two feet. This forces discipline in assessing which opportunities to pursue and which to leave behind.
  2. Too much capital, too few deals. It’s a seller’s market right now in private equity and venture capital and I believe it will be for sometime. When Bain Capital and others started in private equity in the 1980s it was a new phenomenon. Between this and other sites we own, we’re contacted by no less than five or six private equity groups weekly. Simple supply/demand economics puts pressure on the equity buyers to increase their offers. It’s funny, but this model is radically different in the VC world where NO revenue and NO profit makes determining value much more difficult and will cause a knowledgeable VC to have almost all of the power in the relationship.
  3. Failure rate of VCs is already chronicled. Some VCs do very well. Most are mediocre at best and many do not do well at all.

Find a Profitable Niche 

A learned a great lesson long ago that has always stuck with me: a specialist beats a generalist every day of the week. We have a close partner in a different geographic region, for instance, whose sold VC investment focus is on the Latin American market. Their reason. First, they had done extensive research on the region and found that it was under-served for providing venture money. So, finding better deals with good upside potential was much easier because the competition behind each deal was much lower. Second, this particular firm had contacts, experience and language expertise for the regions they decided to target–which would be an absolute must. It was a perfect win-win for the firm.

What’s your company niche? How will you determine to differentiate from others in the VC fray? –because you’ll have to if you want to be successful long-term.

Have Experience

This should probably be number one. You can’t get money without experience and you typically can’t claim experience as a twenty-something. Institutional money doesn’t flow that direction. In addition, experience can also come in many forms. The fallacy that the Ivy League adds an extra decade onto experience is still prevalent, but in some cases a good filter. More important to most venture capital funds is the school of hard knocks.  To be a true venture capitalist most have worked as entrepreneurs. Let me rephrase, most have worked as very, very successful entrepreneurs. In short, one of the best ways to showcase experience is to start a successful technology company, grow the business into millions in revenue and subscribers and sell it off to a very large publicly-traded company for a large sum. Granted, it’s much easier said than done, but for procure truly institutional money, this type of experience (even in a small way) is most assuredly a pre-requisite.

Furthermore, the institutional money folks will also want to see a track record for investment analysis and assessing deals and opportunities. Having someone like that on your team will be another necessity. Perhaps your specific business experience does not translate into other tech companies and making investments across a broad swath of smaller companies to which you’ll be investing.

Procuring the Capital 

Raising capital will either be the easiest thing you do or the hardest part of the process, depending on the your experience mentioned above. Engage, Filter, Rinse, Repeat Engaging with firms is easy. The only problem is that you have to kiss a lot of frogs. We get opportunities pitched to us fairly regularly whose business plans are either terrible or worse, the operators of the businesses are atrocious. Most would agree that they would fund the A-team with a C-idea. A-ideas are prevalent, but if the IP is owned by a complete idiot with no business or social acumen then it’ll be best to leave it be. The assessment by capital-holders will be similar to your business analysis of potential companies to which you’ll be investing.

In most cases, procuring the capital is not going to be as simple as getting on the phone and calling up university endowments. Do you have an existing relationship or connection with such people? If not, going forward may ultimately be very difficult. And, as with anything, if you can convince them to invest in Fund I and you are successful, then Fund II will come knocking without too much effort. So, how to raise money for a venture capital fund, unless you know someone, I would suggest just doing a private placement on a deal-by-deal basis to accredited investors. It’s quite simply the easiest method to raise money in a very disciplined way. Would welcome any comments below. For information on what we’re building for the VC world, please visit http://venturecapitalist.org/

Starting a MicroFund: Why Mini-Funds Will Be the Way of the Future

We get a decent amount of calls from folks looking to start a private equity fund or build their business by raising private capital. But unlike the world of the 1980’s when large PE groups first starting cropping up (Bain, KKR, Blackstone et. al) today’s businesses require less capital than ever before and can often reach significant scale with a smaller input. This creates a win/win for both founders and investors alike. Founders don’t need to give up quite so much equity to make a run at a really good idea. Investors are not in a deal for a massive sum of money and thus they can bear less risk across a much more broad portfolio of private businesses. Here’s where some of today’s capital democratization folks really win.

  • Crowdfunding. With sites like Kickstarter and the like you’re able to get PAID before you even have to buy raw materials to make whatever it is you plan to sell. On the software or services side, you can now get “paid forward” to perform a meaningful service without incurring the risk of loss because you lack capital. The whole idea is a mind-blowing game changer when you really look at it.
  • Technology has been democratized as well. When Jeff Bezos started Amazon in his Seattle-based home in the mid 1990’s, the company needed to invest heavily in servers to ensure customers and potential customers could have access to the site on a 24×7 basis. Today, we use Amazon’s AWS pay-as-you-go model to do the same thing, only thousands cheaper. Whether you’re creating an application to service clients or running an ecommerce site on co-located servers, it’s now cheaper, faster and more efficient than ever.
  • Reach the masses with a mouse. When Bain started Staples they probably didn’t envision a day when mouse clicks would gobble up bricks and mortar. To

In today’s world, it will most likely be a combination of the business idea, the business model and the business team that wins. But with how small things need to be in today’s world, the business model is almost the most important thing to understand from a finance angle. The models have completely changed. We operate in a world where someone with an internet connection can make as much revenue and income as someone with a massive start-up fund.

Great ideas and great execution require much less. We’ve put very little–in comparable historical terms–into many of the projects we’ve personally worked on and funded in the last couple of years and we’ve seen great dividends come back from such projects. As we move forward, job creation will need to come from big ideas, small capital and heady entrepreneurs.

Talk to us about microfunding on projects.