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 Capital”. It is essentially the process that results in hedge funds, venture capital and / or private investment in a registered public company in exchange for ownership of shares, usually 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 funds provided to public companies due to the credit crisis, the extraordinary stresses now inherent in the subprime mortgage 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-quarter total exceeded any annual total for the past twelve years.

Why is PIPE funding growing so fast?

Mark Twain once said, “I’m more interested in the return on my investment than the return on my investment.” This statement echoes the main advantage for an investor who is in PIPE financing with respect to the 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 his property and can buy more or sell at any time. Private companies are typically unable to provide liquidity to investors until an exit strategy that typically carries high risk is identified and executed and over a prolonged period of time. This is the reason why PIPE funding has increased in 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 and hedge fund managers, institutional bankers, and individual investors, view this information. Another main advantage of a public company is the ability of management to maintain control. Venture capital and angel investors typically demand majority voting rights and board seats. In our experience, companies that go public and obtain PIPE financing retain majority ownership, allowing them to execute or modify their strategy to achieve the company’s growth objectives as they see fit.

Does your company qualify to go public?

Not all companies are positioned to be a public company and we recommend 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 florist 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 their 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 increase in the number of startups and early stage companies that go public for 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 track record in that field, his chances of succeeding in the public offering process diminished. However, if that same inventory had a proven track record with similar development projects, your chances of going public and obtaining financing, even without existing income, would be vastly 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 in excess of $ 3 million typically earn larger sums once they go public.

– Can the company generate cash or create value? All public companies must act so that their share price continues to trend in the right direction. If a company cannot demonstrate the ability to generate cash or create value in the minds of investors as a private company, it is likely not to do so as a public company. Half the battle for a public entity is to generate interest, a “buzz”, about the potential of the company or its product or service. This is critical not only to attract investors initially, but also to help maintain the health and growth of the ongoing business. If a company has a good story to tell and a product or service that meets 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, which involves an insurer like Goldman Sacks or Merrill Lynch, can cost a company up to $ 10 million. Direct Public Offerings (DPOs) for small and medium businesses where a subscriber is not required due to stock exchanges and sources we use cost around $ 100,000. The other big difference to the DPO process is the exchanges. Most direct public offering stocks are kept on the OTC bulletin board, often referred to as Pink Sheets.

In conclusion

PIPE funding has increased 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 startups, as well as investors, are enormous.

The advantages for private companies of going public through DPO include:

– Low cost compared to IPO

– Access to a wider variety of investors

– Access to greater investment funds for business growth

– Maintain operational control by the management of the company.

– Higher market valuation

Advantages for the investor in public entities include:

– Access to company data and finances that result in a reduction of risks.

– Integrated exit strategy

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