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09 Jun Is My Company Big Enough to Go Public?

We’re often asked the question, “is my company big enough to go public?” While the SEC provides no specific threshold on size for going public, many of the exchanges limit the company’s market capitalization with thresholds the preclude many private companies in taking the next leap into the public market arena. The NASDAQ listing requirements, for instance, provide much more stringent thresholds for entry than does the Over the Counter exchange. In fact, for reverse merger candidates, heading to NASDAQ requires a year’s gestation on the OTC in order to qualify for the big leagues. But that doesn’t answer the question for smaller firms that are possibly in startup mode with promising technology but little to no revenue.

The SEC has no problem with startup companies entering the public markets. In fact, one of the purposes of going public in the first place is to raise capital. What they do care about is the legitimacy of the offering and startups, particularly those rolled into shells, have higher instances of illegitimacy and fraud than do their larger public counterparts. Hence, regulators are much more leery of allowing such firms in if they suspect the players, operators or deal makers are simply using a public vehicle to defraud investors of their hard-earned cash. No real barrier-to-entry may be somewhat true, but your story should be good enough to convince the SEC that you should be public and good enough to convince investors to open up their wallets.

We typically like to work with profitable companies with at least $2M in EBITDA. If you’re not profitable or below that threshold, that is fine, but the opportunity for a good capital raise lies best in those companies that already have at least some existing track record for success. We’ve seen companies listed on the OTC that have less than $100,000 in annual revenue and even startups with no revenue. There is just greater risk to investors and entrepreneurs alike when a company doesn’t yet have the traction to stand on its own two feet.

In short, if a company with little to no revenue has a good enough story, some formidable contracts or partnerships, protectable intellectual property or an officer that can drive the business forward in a real way, then the company may yet be a good candidate for going public. Unless you’re going public on NASDAQ, the Over the Counter exchange is the place to go public for smaller deals. The best public deals are those that build a great company before taking the leap to go public.  If the company isn’t prepared and its plan and actual performance seems uncertain then it may be wholly exposed to manipulators, unscrupulous investors and even shorters and naked shorters.

While there is no real threshold for becoming public, the risks to companies with no revenue are higher than for their private counterparts. Legal exposure, increased regulatory cost and investor relations can all add to the increased pressure that already exists on startups that may have a hard enough time trying to succeed in the first place. While the failure rate for public companies on the smallest end of the microcap is high, my guess is that the failure rate isn’t different than some of the most well-funded venture deals. So, the next time a small company asks me if they’re big enough to head into the public markets, the answer is like most other questions in life: “it depends.”

  • solarmanjd

    Your topic is spot on…especially in the Renewable Energy arena…as I watched many of my colleagues mortgage so much of their own property in the 1990’s to sustain their business…only to see 6 months down the road the ” Oh No not enough capital” and then bankrupt…many very good people with just very bad advice….

    • Nate Nead

      Yes, yes and yes. The problem is that the “dealmakers” can still profit on the smallest of deals, regardless of whether or not the company is sustainable long term. Going public is certainly one alternative to things like venture capital, but without an in-depth knowledge of the lay of the land OR a trustworthy guide to navigate the waters, the probability of drowning is much higher. Sure, no threshold exists, but we–just like every other VC, startup and PEG in the world–are looking for the veritable unicorn deals and opportunities where:

      1. The dealmakers make money
      2. The shareholders and founders hugely benefit
      3. The business remains successful more than 18 months after the deal

      Rare, but possible. Sometimes even we get it wrong, unfortunately.

      Thank you for commenting.

  • Yes, we’ve seen a few list in financial tech. Let me know if you’ve got a RM partner interested in financial tech startups and apps. thx!

    • Nate Nead

      Sure. There are options. Feel free to reach out via our “contact” page.

  • As you so aptly stated, build a great company first, for intuitively speaking ‘size’ should have nothing to do with raising capital through the equity market if you’ve a great story. Equity has a price, of course, and so issues of capability and sustainability come into play. Look inside yourself first for if all your success is attributed to an awesome and inspirational leader how comfortable are you if that individual moves on. Your greatest asset may be people. Identify what has directly contributed to your success and plan ahead under different scenarios and mitigate risks by determining the most likely sustainability strategies. Then your equity route should prove to have long run success.

    • Nate Nead

      Thanks Peter. I think the focus should always be on sustainability. For some it’s toxic finance via death spiral for others it’s pump-and-dump schemes. I would echo the idea that the truly responsible leader and manager in any organization may “know when to hold ’em and know when to fold ’em,” but in many cases the startup-types never had a chance with the team and the plan out of the gate–sustainability was never possible anyway. You’re right, building a great company + a great team are step one and two. All too often, owners think that going public comes before those. In some cases it does, but most often not. Thanks again Peter, cogent as always.