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19 Aug, 2018

How to Raise Capital for Your Business: 7 Alternatives to an IPO

How to Raise Capital for Your Business: 7 Alternatives to an IPO

Demand for initial public offerings has shifted away from small caps to favour larger listings, forcing many smaller and mid-market companies to find other ways to raise capital. You need to be of a decent size to consider a listing and if you go in too early, you just get lost among all the other small caps.

So what are the alternatives? Listed below are seven possible non-IPO options for capital raising, with some ideas of the availability, advantages and disadvantages of each one.

1. Engineer a reverse takeover (RTO)

A reverse takeover (RTO), a type of merger that private companies engage in to become publicly traded without resorting to IPO, isn’t going to give you access to capital unless your story is good and there’s a particular pool of capital that would invest in you except that you’re not listed. It’s a very difficult thing to get right, not least because there’s a lot of lifestyle directors sitting on these boards who are very happy to just carry on taking five grand a month and they are not really interested in either being moved off the board or doing more work.

It is often so time consuming and expensive that you would be better of doing an IPO.

2. Sell the company

The less risky model, particularly for entrepreneurs looking for an exit, is to sell to a cashed-up buyer.

3. Debt

Usually the most expensive cost of capital is debt. But the problem with debt is that banks will usually only lend to people who don’t really need it, and if you haven’t got property security to put on the table, you’re effectively at credit card interest rates if you can actually get over the line at all.

4. Hit up high net-worth individuals

It’s very hard to get through the gatekeepers to actually get to the right person and then to be able to articulate your proposition in a way that gets it over the line. It’s very time consuming and costly way of doing it and unfortunately not much success around it, this market is tightening.

5. Get investments from private equity

Fundraising from private equity investors can be a good option if you can pull it off, but the problem is private equity can afford to be very, very choosy so if you’ve not got a very smart business plan, an excellent management team on board, and a growth story that you can articulate, then you’re just wasting your time, because the guys are seeing all the deals coming through and can cherry-pick.

The advantage of private equity though, if you can get the right deal size and the right team behind you, is that it’s not just cash, unlike an IPO, you’re getting an advisory board and network of people who can add value to the business.

6. Merger with your competitor

Some companies might get a better result from creative solutions that don’t require cash, mergers or partnerships can be a good idea.

Whether you’re looking to enter a new market, develop new products, bring in some know-how, if there’s another business out there that’s already got that, why not join forces either formally or informally?

Mergers are a lot more popular [at the moment], they’re harder to do, and take more investment time, but the chances are the people you’re merging with are sharing some of the same pain and if you get together maybe one plus one can equal three.

7. Save for a rainy day

Do you actually need to raise finance at all? Perhaps you can achieve your goals the old-fashioned way, by growing revenue from customers and conserving cash within your business. Many successful companies have boot-strapped to get where they are today.

The upside is that it’s less risky, you don’t dilute your equity or take on costly interest repayments, and you can be confident you’re building your business on solid foundations rather than quicksand. The downside is that it is slower and your competitors may grab market share and entrench their position.

Read more about M&A: DD Check List, Mandate F. A. Q.

Company Valuation: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8

Some ideas about capital-raising strategies: Bringing Your Company Public, Exploring Alternative Capital-Raising Strategies, Refinancing and Minority Equity as Partial Exit Strategies, 5 Alternatives To IPOs, How to Raise Capital For a Company in Financial Troubles, 7 Private Equity Strategies

M&A forecasts: M&As In 2018, Last Year M&A Review and New Year Outlook, How to Raise Capital For a Company in Financial Troubles

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