IPOs come with many advantages and disadvantages. Depending on your company’s needs, objectives, and situation, it may or may not be in your best interest to pursue a public offering. There are many alternatives for companies that are looking for some of the benefits of an IPO, but feel an IPO is not their best move at present. A few of these alternatives are listed below.
If founders do not want to give up equity but are in need of capital, taking out debt may be a good alternative. While taking out debt can lead to financial distress, debt overhang1, or bankruptcy, if a company is thoughtful and deliberate in its decision to go into debt it can be the best possible alternative. There are many types of loans available to younger companies including traditional company loans like corporate loans and revolving lines of credit, or loans aimed at start-up companies like venture debt and bridge2 financing.
Refinancing is an alternative to an IPO when founders or investors are seeking exit3 opportunities. Refinancing involves restructuring a company’s debts through adjusting interest rates and/or extending loan terms. The debt is often replaced with cash from a company that specializes in corporate refinancing. This cash can then be used as an exit for investors, but is often only used to partially satisfy investor obligations. Refinancing is often viewed as a last resort, and while it does provide capital, it does not provide any of the other benefits of an IPO.
Joint venture/strategic alliance
While a joint venture or strategic alliance is not a lucrative exit opportunity for founders, it is a great alternative to an IPO for companies that are looking to IPO to raise capital for business objectives rather than founder exit opportunities. A joint venture (JV) is formed when two companies agree to share resources with the goal of accomplishing a certain task. The joint venture is a separate entity from the participants’ other businesses and, as part of the JV, both parties agree to share all profits, losses, assets, liabilities, costs, etc. A strategic alliance is similar to a JV in that it is two entities working toward a common goal, but in a strategic alliance there is no separate entity formed and the collaboration between the two companies may be less structured or less permanent. While there are differences between a joint venture and a strategic alliance, both offer many opportunities and provide viable alternatives to an IPO. A younger company may use a JV or strategic alliance to receive additional capital, expand through its new partner’s network and brand, or access new technology. A JV or strategic alliance may also provide a lesser known company with publicity and credibility, similar to an IPO. It is important to remember, however, that as part of a JV or strategic alliance you will need to work closely with a partner who may expect you to operate in ways you may not agree with. A JV or strategic alliances will also not normally provide you with nearly as much money as an IPO.
The most common alternative to an IPO is to sell the company to a larger company. Being acquired, however, is only a good alternative when seeking a liquidity event. When a company is acquired, the acquiring company normally pays the founders and investors of the acquired company cash or shares of stock in exchange for complete control of the company. While selling a company is a great exit opportunity for stakeholders, it is usually just that—an exit. While founders are often asked to continue working for the company after being acquired, it is important to note that generally getting acquired comes with founders losing control of their companies. Acquisitions do not provide any of the other advantages that a public offering provides.
Looking to a private equity (PE) firm is another method for young successful companies to be acquired. Private equity firms are often looking to invest in or buy younger companies in hopes that they can improve profitability and sell the company five to seven years later. PE firms have substantial funds and can offer large amounts of capital to companies they believe have great potential. Not only are deals with PE firms great exit opportunities, but there are also chances for founders and early investors to continue to be involved with the business. However, deals with PE firms often involve giving up substantial decision-making power, or at least not being able to make significant decisions without the PE firm’s approval.
Seek additional capital
Companies who are seeking additional capital may also consider making deals with private equity firms, venture capital firms, or other larger corporations. There are many firms that make strategic investments in up-and-coming companies but do not want to own a controlling share in their investments. Firms looking for less than controlling shares are great opportunities for founders to raise additional capital by selling equity without giving up complete control of their companies.
Private placement is the sale of equity or debt to a small number of private investors in order to raise funding. Private placement is similar to an IPO in that it is selling shares to individuals outside of the company; however, it involves far fewer people, is not subject to the same SEC regulation as a public offering, and can be structured as equity or debt. A private placement has the potential to require less effort, cost significantly less money, and be quicker than a public offering, because it may not be subject to SEC regulation and may not involve the same large fees (underwriter, legal, audit, etc.). Private placements can raise large amounts of capital and can be great exit opportunities for founders and early investors. Privately placed securities do, however, usually include a deep discount relative to public stocks because the ownership risk is only being spread to a few investors. Also, because of the added risk of a private placement, it is often difficult to find interested investors. Unlike public offerings, private placements do not have the disadvantages of regulatory requirements and large transactions costs. However, it is important to realize that while private placements do not lead to the same short-term market pressures that accompany going public, private placements usually do include commitments to an IPO or liquidity event in the future. Please see our article Private Placements: Reg D Offerings
Reverse merger takeover/reverse IPO
A reverse merger is when a private company acquires a public company, or is acquired by a public-shell company and as a result the private company becomes a public company without the hassle of a traditional IPO. Through a reverse merger a private company in need of capital can gain access to the stock market and raise capital funds through selling public shares. While this is not the typical path to fundraising and becoming public, it is an option for larger private companies that have the capabilities of operating as a public company and do not want to go through the typical IPO process. See our article Reverse Mergers to learn more about reverse mergers.
Crowdfunding has become a more popular option in recent years. Crowdfunding is when a company raises capital online through a large number of smaller investments. See our Types Of Startup Investors article for more information on crowdfunding.
Selling assets/operating segments/restructure
If founders or early investors are not ready for a complete exit but need liquidity, they may consider selling parts of their company. This allows founders to continue to control the core aspects of their company while still receiving cash. For example, a founder may sell a company building or product segment to another company in exchange for cash while still retaining the rest of the business.
There is nothing wrong with waiting until a better time for an IPO or any of these alternatives (see more about timing your IPO in our article Timing Your IPO – Market Windows). It may be in your best interest to wait for a higher valuation, a better deal, or a better partner rather than rushing into something that will not provide the greatest value. Waiting can even help companies that need additional capital to accomplish their objectives. Companies can adjust their outlooks to provide capital through their own reinvested earnings in order to achieve their objectives, if founders and employees are willing to forgo earnings temporarily. It is also important to note that many companies have gone public or entered into a deal and later regretted their rush to a liquidity event because, in reality, they were doing more harm than good to their long-term success.
Whether or not to move forward with an IPO will be one of the most important decisions you can make for your company. Therefore, when you are contemplating an IPO be careful to consider your alternatives, be patient, and weigh the advantages and disadvantages to ensure that you make the best decision for you and your company. For more information on these advantages and disadvantages, read our article titled IPO Advantages and Disadvantages.
- EY: “Guide to Going Public.” 2018.
- Inc.com: Private Placement of Securities
- Investopedia: Corporate Refinancing
- When a company has so much debt that it cannot raise additional capital because investors are worried they will not get paid back regardless of how safe the investment is.
- A type of short-term convertible debt meant to provide needed funds until more permanent financing can be secured.
- A significant financing event that allows a startup’s early-stage investors to liquidate their holdings and receive a return on their investment. Common exits for startup companies include an acquisition or an initial public offering.