17 Sep Should You Take Your Startup Public?
I love start up companies. Bold entrepreneurs are a big part of the American spirit. Assisting them has always been a passion as many a consultant with enough life experience has been in similar shoes. In working with these folks we’re often asked, “is it a good move to take my start up public?” or “is my start up a good candidate for a reverse merger?” These are almost always “it depends” questions. For most, the answer is flat out “no”, for the rest the caveats, risks and opportunities are outlined below. Hopefully this provides some insight.
Types of companies where going public may be a good option–but still involves a VERY high amount of risk:
- IP-based companies. Firms with legal protection and barriers to entry revolving around Intellectual Property can often be excellent public company candidates, even in the start-up phase. Technology, including biotech and nanotech firms, have taken advantage of reverse merger opportunities in recent years. Those that have become wildly successful typically included a large addressable market and an even larger dose of luck. There are risks, but this area remains a good play for some tech incubators wishing to bypass the venture capitalists.
- Spin-outs and Split-offs. Often companies (both public and private) want to spin-off or split-off a specific core or non-core portion of their existing operating business. Doing so by performing a reverse merger into a public shell corp can be beneficial.
- Oil & mineral rights. Companies with specific oil or mineral excavation rights can be very successful in the realms of reverse mergers. It is preferred that the rights are set excavation rights and not exploration rights. There is a big difference. These too can prove very risky for investors. The SEC has issued warnings.
- Foreign firms wishing to enter the U.S. capital markets. Chinese reverse mergers have and continue to receive a bad rap. Recent studies have indicated they actually perform better than their U.S. counterparts. Part of the reason for this is there are less instances of Chinese startups going public. We prefer firms with EBITDA numbers somewhere north of the $2MM mark. Chinese (or other foreign) start ups could certainly go public, but it’s not an arena we work in and it’s extremely taboo for investors. The increase in discipline from foreign companies merging into U.S. public shells has helped to raise the value of the reverse merger over the last decade. Unfortunately, there are still instances of fraud.
- Large markets, no revenue. These are the most risky. If there is little to no revenue, no protection but wild promises from pie-in-the-sky entrepreneurs, it’s best to shy away and we always do. This is one of the many reasons we’ve been readily avoiding all marijuana reverse mergers opportunities.
Taking your company public requires the time and capital that many start ups lack. There certainly are cheaper methods through manufacturing SPACs, etc. but these take a bit more time to market than just buying a clean public shell outright. Raising capital by going public right out the gate is the absolute wrong scenario for 95% of all startup businesses. For those where there is a fit, the risks and bets are extremely high. You have now been warned and forewarned. Tread lightly. However, when I hear things like “9 out of 10 reverse mergers fail” I believe it’s painting the wrong picture that those 9 were all fraudulent companies. In most cases, many legitimate start-ups go public with promising technology, but they–like any other start-up don’t pan-out like expected. Start-ups go public all the time. The questions you need to ask are:
- Is “going public” the right move for my particular start-up? If not, what are the other alternatives?
- If going public is the right option, how should I do it? Reverse merger? Self-file? etc.
- How much money am I looking to raise in my alternative IPO?
- Do I have the money to take my company public? (It’s much cheaper than you might think. Here’s a questionnaire that will help to qualify you) If not, how can I raise the money to get me there?