If you are managing a private company, at some point, you are bound to have thought about taking it public to raise money. Indeed, issuing publicly listed shares to a myriad of hands-off minority investors seems like a nice way to raise equity without losing the operating control of the company. But before you jump on the boat, let's review the pros and cons of launching an Initial Public Offering (IPO).
Advantages of being listed
- It is an exit route to pre-IPO investors.
- The possibility of sub-dividing and consolidating securities doles out liquidity and flexibility to investors.
- Being regulated on public exchanges grants additional marketing reach and prestige.
- Timely disclosure adds visibility, improves reputation, impacts market value and provides more transparency.
- Ready marketability of securities on a continuous basis makes further fundraising easier.
- Shareholding can be diversified with retail, institutional and foreign investors.
- The market value can arguably reflect the fair value of the company and help during M&A, business and financing negotiations.
Disadvantages of being listed
- There is an additional administrative cost to manage a listed company.
- It is an open door on speculation and potentially, on aggressive takeovers.
- There is a higher dependence on market trends.
- There is additional room for inside trading, stock tampering and scams.
- The exchange makes the information available to the competitors.
- Pre-IPO shareholders are diluted.
- The company still needs to find investors.
The worse case scenario for a private company going public is to bear the listing cost and then fail to sell its shares on the market at a reasonable price.
Value Creation - Alternative can implement 2 strategies to get private equity listed on a stock exchange, while at the same time minimize the risk of not finding a market to sell the shares.
Strategy 1: SPONSORED IPO
For companies in specific industries and displaying specific criteria, VC-A has gathered a pool of private investors willing to sponsor the IPO.
The advantage of having a sponsored IPO is to ensure market traction and at the same time, reduce the IPO cost.
Having a reputable first investor triggers a Pygmalion effect amongst other investors that can translate into herd behaviour:
Strategy 1, could be applied to companies with the following characteristics (last update: 14th day of September 2021):
Current criteria for acceptable candidates
- Biotechs willing to go public on a major exchange.
- Must have patents and a blue-chip management team.
- Early-stage companies are acceptable.
- Need to have a unique selling proposition (USP).
- Willing to accept dilution that can go up to 40%.
- No lab testing deals.
- Gold mines willing to go public on a major exchange.
- Must have technical reports and a blue-chip management team.
- Must have proven gold reserves.
- Willing to accept dilution that can go up to 40%.
There is no up-front retainer required but the company needs to prepare the support documents.
Companies who hire VC-A's services can expect to receive:
- Pre-IPO funding from GBP700.000 to GBP1.300.000 to cover the cost of the IPO.
- A commitment from IPO investors to invest at least GBP2 million to GBP3 million.
Strategy 2: REVERSE IPO SPIN-OFF
For companies too early stage to consider an IPO, we have designed the following strategy:
- We identify a listed company interested in VC-A client’s value proposition.
- The VC-A client company is valued at $X today and $Y in 2-3 years' time post-funding based on the VC-A client's business case.
- The listed company swaps its shares for the VC-A client’s shares valued at X$.
- The VC-A client’s shareholders execute a share buy-back agreement at $Y based on the fulfilment of some milestones defined in the business case.
- The listed company advertises the VC-A client’s solutions as part of its portfolio and provides working capital. The VC-A client company still operates as a stand-alone entity, but now benefits from the advantages of being listed.
- After 2-3 years, if the VC-A client’s company meets the objectives of his business case, the VC-A client's shareholders can buy their shares back and implement Strategy nº1.
Strategy nº 2 shall apply to fast growing companies only and is dependent on VC-A’s finding a listed acquirer first.
Terms and Conditions
Terms and conditions need to be defined on a case by case basis, but generally speaking, the cost of going public is the following:
Listing cost [€150k - €200k], eventually funded by the investors.
- Annual cost for being listed [€25.000 - €100.000].
- % of equity to be listed [20-40%].
- Expected ROI [10 – 20%].
• Strategy 1: [6 – 12 months].
• Strategy 2: [1 – 3 months].
- Retainer [€10.000 - €20.000 per month], eventually funded by the investors.
- Pre-IPO shares [5% - 10%], based on $X valuation.
- Warrants on post-IPO shares [10% - 20%], based on $Y valuation.
Warning: the above is not a quote. Figures are indicative and approximate.
In order to move forward with Value Creation - Alternative, please be prepared to submit the following documents:
- A Non-Circumvention, Non-Disclosure Agreement (NCNDA).
- A Letter of Intent (LOI).
- A Business plan and financial projections: cash-flow statement.
- Up to 3 years of historical financials: balance sheet and profit & loss account.