Alternatives to an IPO: How your business can navigate the growth ladder
If your company has reached a certain point in your life cycle, an obvious next step is to make the leap and go public.
To the outside, the decision to float is seen as a vote of confidence in your company’s growth projections and promise of return to investors.
But there are other funding options for your business, particularly if you’re looking to raise capital, and it’s important to consider all of these before starting on your IPO journey.
Private equity (PE) funding can be a good alternative to an IPO for your growth company at a variety of different stages of your business.
Some more developed businesses may look to a PE firm to provide funding before making a public offering.
PE firms bring with them a number of benefits. More often than not, the PE firm will put a non-executive on your company’s board who will provide impartial strategic business advice, which can be more attractive if your company is not be ready to go it alone.
The hands-on, practical business advice and experience that PE houses bring is helpful to your existing board when establishing a growth strategy and also means your company itself is in capable hands going forward.
PE houses tend to look to invest for a minimum of three to five years, so are a good option if you’re a company looking for a longer-term investment relationship. Ultimately it is in the PE firms’ best interest for your company to do well, as their end goal is to generate a healthy return on their investment.
Venture Capital Trusts
Like PE funding, Venture Capital Trusts (VCTs) provide a source of private capital to smaller, upcoming companies with good growth projections.
However, unlike PE firms, VCTs only tend to purchase less than 50% of your company’s equity, whereas PE houses will more often than not purchase 100% of the shares.
This is because VCTs focus primarily on start-ups and so look to spread their risk with a diverse portfolio of investments.
Private placement is often seen as a pre-IPO step for those businesses dead set on going public.
As a young company, taking the leap on an IPO may not be the best option for you if your business’ financial track record or reputation is not established enough to attract general investment.
A private placement only offers the opportunity to invest to a select number of private investors, with the view to raise capital. The process tends to be quicker than a regular IPO and doesn’t require as much resource and financial backing.
In essence, a private placement is similar to an IPO, as your company is selling shares to external stakeholders but involves far fewer individuals and is not subject to the same regulation as a traditional public offering.
By taking this route, your business will also face less public scrutiny than a listed company, making it a good alternative for you to consider going public in the future. If you’re a younger company, private placement can be a quick and low-cost source of capital.
As a company looking to go public, you need to ensure you are properly funded in order to attract investors.
Debt levels may need to be reduced or refinanced, which can prove trickier if you’re a younger company not yet making substantial profits. Refinancing debt releases funds which in turn can enable existing stakeholders to exit, thus achieving more liquidity.
Refinancing involves restructuring your company’s debts through adjusting interest rates or extending loan repayments. The debt is often replaced with cash from a company that specialises 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 whilst it does provide capital, in the long run it could prove costly.
Through joint ventures (JVs), your business can create partnerships to share profits, markets, assets, intellectual property and resources, as well as costs and liabilities.
Unlike an acquisition, JVs and strategic alliances are not perceived as an exit opportunity for founders, as stakeholders of both companies remain in place as separate legal entities.
Strategic alliances are similar to JVs, as two entities are still working together towards a common goal and share assets and resources, yet the collaboration isn’t as formal or structured.
JVs or strategic alliances are a great way for your business to acquire additional capital as well as expand your own networks, capabilities and brands through utilising your partners’ assets and reputation, particularly if they are a more established firm.
If you’re two to three years away from a public offering, then a good way for your business to raise capital is through crowdfunding.
This is where your company asks a larger number of people for smaller amounts of money through clever fundraising initiatives.
A crowdfunding campaign gives your business the opportunity to rally friends, family, and fans around your business idea, who then buy into your business by investing.
Offering compelling rewards such as the opportunity to be one of the first to own a new product or invention is one of the ways your business can spark interest amongst the public.
Peer-to-peer (P2P) lending works in a similar way to crowdfunding, with P2P marketplace-style websites and platforms that bring together people or businesses that want to lend money with those that want a loan.
It’s a way for your business to get funding whilst eliminating traditional financial institutions, such as banks or building societies, from the process.
These sources of capital are great if you’re looking to grow your brand and secure cash for your business.
Ultimately, not every company that pursues an IPO ends up going public, at least initially.
An IPO will be one of the most important and transformational decisions your business can make, so it pays to understand all the options and to have straight talking and pragmatic advisers on board from the outset, to guide your management through the process.
This article was contributed by chartered accountants and tax advisers haysmacintyre.