Apr 24, 2017 - 11:59 AM
You also need enough revenue for investment banks to take you public. That may need to be $40m bare minimum but you probably want it to be more like $80m or much higher. The goal of companies IPOing is to get a great price for their initial offering.You also need to be revenue or have a reason for the public markets to trust you.Some companies will buy a penny stock that is public, then go from there.
You still need to deal with the Sarbanes-Oxley accounting, regulation and compliance costs. You also need to worry that a penny stock won’t get a great P/E ratio in order to be able to raise more money. You also wouldn’t get the benefit of index mutual funds investing in you. You would also need to worry about being able to grow out of a penny stock later.
Apr 24, 2017 - 12:04 PM
Looking at some of the overview reports from other groups, we can see that in the last 10 years, the amount of Angel money in Seattle has gone up by a factor of 3. So there are more opportunities than there have been in the past. It may also be interesting to note the amount of money per capita, instead of just total dollars.
In addition, it looks like an IPO vs Angel money question ignores the stages of a startup development.In general, we look at things like Pre-seed, Seed , Series A, Series B.... And we expect IPO to be somewhere way way past Series A. However, there are many options for funding companies.
The key is to look at the different exemptions along the way and the associated costs. Bryan got it right when he says that there are substantial accounting costs associated with some of the choices. An that going "Public" usually involks the need to follow addition accounting and reporting rules.
We use Reg D 506(b) for the exemption for more than 90% of Angel Investing. However, there are many others:
- Reg D 506(c) - General Solititation
- Reg CF - Crowd Funding
- Reg A+ - New simpler path to a "mini-ipo"
- Reg 504 - Intrastate investing
- SCOR - Small Company Offer Registration
But it also comes with reporting and accounting consequences. Be aware of the costs and the consequences of each of the possible paths. Some of them will not be helpful to you if they add substantial overhead before you are able to cover the costs.
The best place to get funding for your startup is from customers.
Apr 24, 2017 - 12:10 PM
"The arithmetic proved challenging. Banks were reluctant to lend to MusclePharm, and, in the aftermath of the 2008 financial crisis, private investors were scarce. “Nobody wanted to give [money to] a company with a former bankrupt CEO and another musclehead,” Pyatt says.
His experience with DC Brands, however, had taught him a third way—he could turn MusclePharm into a penny stock, issuing shares to raise cash.Rather than go through the onerous IPO process, MusclePharm paid $25,000 for a dormant public company, “isometric training technique” marketer Tone in Twenty, and changed its ticker symbol to MSLP.
Once public, MusclePharm began making deals with outfits that buy stock from companies at a huge discount then flip it to individuals. “Brad needed to raise a sensational amount of money,” says William Bossung, who was part of the investor group that helped MusclePharm get listed. One financier paid off $375,000 of the World Extreme Cagefighting debt in exchange for 7.8 million shares.
Another, who’d turned to penny stocks after being barred from the hedge fund business, acquired about 200 million shares for as little as three-tenths of a penny each. “We took any money we could,” Pyatt says. In his mind, it was either that or miss payments and fail to fill orders. “Anyone in that penny stock world that’s toxic, we dealt with.”
In 2011, anonymously authored promotional e-mails started arriving in the in-boxes of penny stock investors. “We have noticed that MSLP is already becoming a major player in the nutritional market,” said one such e-mail, from someone identified as the Stock Brainiac. “You can clearly recognize that this is not some small generic company.” That year, MusclePharm issued 487 million shares."
Apr 24, 2017 - 12:13 PM
Public markets are less about venture investing than investing based on a track record of growth or profit margin.So what would investors purchase? If we think like an investor, we need to purchase stock based on intrinsic value.Say a company wanted to do this to raise $20m in capital from investors, and give away 20% of the company. Here is how sound math would look:
1) They purchase a value-less shell company for $25k
2) The valuation of the company would need to be $100m, for them to raise $20m when giving away 20% (after the round closes).
3) Let’s say that they can get a 15 P/E ratio. They would need to have $6.6m in yearly revenue. On the public markets, the expect companies to be profitable, so it would need to be profitable.
4) Many penny stocks may only get a 5 or 10 P/E ratio. So they would need $10m/yr at a 10 P/E ratio, and $20m/year for a 5 P/E ratio.
The above makes sense for investors. They would be paying for shares in a company based on revenue, growth rate and earnings.To make it safe to raise money, they should be growing at 10% to 30% per year. They should be making 10% or more in net earnings.
I think as entrepreneurs, we need to think about building fundamentals. Everything good comes from that.
Apr 24, 2017 - 12:15 PM
- The 'greater fool theory' mentality of large penny stock investors. They negotiate directly with the company to buy large blocks at a discount, to then quickly flip. Coupled with this, is another belief among penny stock investors that from the bottom you can only go up and that from a really low base it isn't hard to get exponential gains (of course one can go bankrupt too but many are fine losing all of their money on a particular stock hoping that the few winners will more than make up for this)
- Not every investor engages in the sound fundamental analysis you just laid out. There are also technical analysts who care nothing about what the company does or its fundamentals. They just study patterns and price movements. Both Steve Cohen and Paul Tudor Jones employed these techniques to build multi-billion dollar fortunes.
May 27, 2017 - 01:00 PM
https://www.wsj.com/articles/how-a-bitcoin-clone-h... (Google the headline to get past the paywall)
Dec 04, 2018 - 04:24 AM
Startups looking for finance often rely on venture capital (VC) firms or an IPO. VC firms can offer resources; planned support; beginning to possible customers, partners etc. I think in PRE IPO investment, mature companies gives the possible returns as compare to VC funds without much risk and a less time to liquidity.