What is PIPE funding?
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Let us start with the definition of "PIPE funds" and its differences from venture capital, private equity and other investment vehicles. PIPE stands for "Public Equity Private Investment". It is essentially the process of registering a listed company with a hedge fund, venture capital and/or private capital investment in exchange for equity, usually at a discounted price.
What is the relevant history of PIPE funds?
In the fourth quarter of 2007, the amount of funds provided to listed companies increased dramatically due to the special pressure inherent in the credit market in the secondary market. According to Robert F. Kyle, executive vice president of Sagient Research, the PIPE market reached its highest level in 2007, raising more than $45 billion in the fourth quarter alone. In the past 12 years, the total for this quarter has exceeded any annual total.
Why is PIPE funding growing so fast?
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Mark Twain once said, "I am more interested in return on investment than on return on investment." The statement echoes the main advantages of investors in the PIPE funds regarding exit strategies. When investors invest in a company, the main concern is the exit strategy. Through PIPE funds, the company is public, so investors can control their ownership and can buy or sell at any time. Private companies often fail to provide investor liquidity until an exit strategy is identified and enforced, which often poses significant risks and for a long time. This is why PIPE funds have increased over the past 12 years. Another benefit of investing in public and private entities is disclosure. Listed companies need to disclose financial information and are regulated by the US Securities and Exchange Commission. Investors around the world, including hedge and venture fund managers, institutional bankers and individual investors, view this information. Another major advantage of listed companies is the ability of management to maintain control. Venture capital and angel investors usually require board seats and majority voting rights. In our experience, companies that have listed companies and obtained PIPE funds have retained a majority stake, allowing them to implement or modify their strategies to achieve the company's growth goals.
Is your company eligible to go public?
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Not every company is positioned as a public company, we recommend that companies always seek advice from industry experts specializing in PIPE financing and DPO processes.
- Will your friends and family invest in your company? If not, no one else has a chance. This may sound simple, but in our experience, this is probably the most powerful touchstone for everyone.
- Is your company likely to enter the national and global markets? For example, a local flower shop with 10 locations cannot be listed. However, due to its national marketing plan and growth strategy, flower shops with national growth aspirations such as nationalflowers.com may be a viable candidate.
- Does your company have a strong and experienced management team? A strong management team is the backbone of any company. Over the years, we have seen a dramatic increase in the amount of funds raised by startups and early companies. However, in order to attract investors, these companies must demonstrate sustained revenue growth and/or success history in relevant industries. We often use the example of a local banker who wants to commercialize and patent his golf ball for distribution nationwide. Since there is no history in the field, his chances of success in the public offering process have diminished. However, if the same inventor has a successful history in a similar development project, even if there is no existing income, his chances of listing and obtaining funds will be greatly improved.
- Do you know how much money the company needs? If your company is looking for less than $1 million, the listing process will be costly. Typical financing opportunities for newly listed companies range from $1 million to $10 million. However, mature companies that earn more than $3 million will usually receive a higher amount once they are disclosed.
- Can the company generate cash or create value? All listed companies must fulfill their trend of continuing to move in the right direction. If a company can't prove that it can generate cash or create value in the minds of private company investors, then it is likely that it will not become a public company. For public entities, half of the battle is to create an interest in the company's potential or product or service, "squeaky." This is important not only for the initial attraction of investors, but also for helping to maintain the health and development of the company. If a company has a good story and a product or service that meets regional, national or global needs, then the PIPE financing process is an excellent financing solution worth considering.
What is the cost of a public process?
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IPO processes involving underwriters such as Goldman Sacks or Merrill Lynch could cost the company up to $10 million. For direct public offerings [DPOs] for small and medium-sized companies, because we use stock exchanges and sources, we do not need an underwriter, and the cost is about $100,000. Another major difference from the DPO process is the exchange. Most direct public offerings are held on the OTC Bulletin Board, often referred to as the Pink Sheet.
in conclusion
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PIPE funds have grown steadily over the past 12 years due to the increasing capital allocated to hedge funds and private equity groups that primarily invest in public entities. The opportunities for emerging companies and investors are huge.
The advantages of private companies listing through DPO include:
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- Low cost compared to IPO
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- Access to a wider variety of investors
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- Gain a bigger business growth investment fund
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- Maintain operational control of company management
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- Higher market valuation
The advantages of investors in public entities include:
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- Reduce company risk by accessing company data and finance
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- Comprehensive exit strategy
While public entity investors may not have board seats or maintain voting rights, leverage ownership is persuasive to company leaders and can be a powerful driving force to continue to drive the company in the right direction. Therefore, the "exit strategy" is definitely more beneficial than the opportunity to obtain liquidation investment.
Orignal From: PIPE financing through direct public offering is a "new" venture capital investment
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