Financing Growth Companies
There are few important tasks for an entrepreneur as well for a company; to start a business, to generate revenue and to provide finances for a growth. There are many options on the market but the route of Pre-IPO funding is becoming more and more globally attractive because of its unique benefits.
1. Why companies seek finances at first place
One of the most important questions on the field of entrepreneurship and corporate development is why entrepreneurs and companies seek finances. There is no unambiguous answer but if we start from the beginning, we can say that the first reason is foundation of the company, then we need to pay different services and documents. Align with that companies have costs with salaries, operational costs, fixed costs, etc. If you want to develop your company, you will need to invest huge amounts of finances to fuel the growth – that is the fact.
When the first, operational stage is formed, there becomes a need for fresh capital to improve R&D sector, to invest into the company’s growth or just to buy another company with operating and defined business model.
2. Options of financing
In particular we have 2 major options when financing a company. When we borrow the money and then pay the principal and the interest plus costs of service, we talk about debt financing. On the other hand, we know an equity financing, where we transfer a part of our company to the investor who become a shareholder with certain rights in the company and management.
When talking about the debt financing, we must consider the company will not give away any equity position and the lender has no control over the business, but it has to had a tracking of revenues to prove it can return money as expected. Probably the first option from debt financing at the beginning of the business is 4F model, where founders, family, friends and fools invest money into the company, because they trust entrepreneurs and then the company returns money and interest after agreed period of time. The most common options in that frame on the institution level are banks with a crediting option, government-backed loans, credit cards, mortgages and other options.
In the case of equity financing, the owner of the company transfers ownership to the financi-er for a certain financial amount as agreed. In this way, the investor acquires the rights to manage the company, which depend from the amount of the share. After a certain period, the investor can leave the company, but he can also withdraw his share keep for the longer term. Likewise, the value of the share can increase with the growth and development of the firm.
Angel capital is an informal investment at the beginning of a company’s business, when the company does not necessarily have a developed business model or a fully developed product or service. Angel capital can be about individuals or companies that are willing to support start-ups with capital and knowledge, especially in the local environment.
In venture capital, which is the most important financial source for new ideas and technolo-gies, are the most commonly established formal funds that invest in young companies after angel investments in several tranches. As with angel investments even in the case of venture capital, the investor becomes the owner of the agreed part for the agreed amount of money.
With the development of digitalization there is an increased volume of crowdfunding in-vestments in the last years. One option is raising finances with crowdfunding platforms, where are the biggest business models Kickstarter, Patreon, Indigogo, etc. Additionally, cryptocurrencies busted crowdfunding ecosystem and more and more companies are seeking finances with ICO (initial coin offering) with issuing their own coins potentially listed on the crypto stock exchange. Several Slovenian companies have already raised millions of funds for their development, mainly in the field of blockchain technologies and crowdfund-ing platforms.
Private companies with few owners and a promise of profit, with a fixed business model, stable management, rapid growth and successful revenue model usually conduct the Initial Public Offer of shares (IPO). An IPO is performed on a stock exchange or at an institution that can manage such transactions and that assists in marketing part around the implementa-tion of the process, market analysis and demand assessment, setting the price and date of the IPO, etc. During the IPO, investors become owners of shares and participate in the rights as required by law.
3. Why is the route with Pre-IPO funding round and an IPO the best way to go?
A pre-initial public offering (IPO) placement is a private founding round in order to finance the company until it can be listed on a public market and either make a new funding round in conjunction with the IPO or after the company were listed.
A Pre-IPO funding round allows for the investor to come in earlier in the company with a planned exit in form of the IPO. With a clear path to an exit and utilizing the liquidity arbitrage when going from private to public markets, creating an opportunity for investors to invest in a moment were only private equity investors act. Resulting in investors getting an attractive return to an attractive risk profile and the company able to fund itself cheaply and without the restraints of a private equity or venture capital investor.
Timing this with the infliction point of going from a start-up to a scale-up making it very attractive for both the company, which needs capital to grasp the commercial opportunity, and the investor can have a transparency in the specific project it is financing. Causing a win-win as the investor lowers it risk and the company can realize the opportunity. A golden moment where Risk/Reward are becoming more favorable for both the company seeking financing and the investor.
Young companies in a similar situation without the clear path to IPO would otherwise not get funding at all or to a much higher price by a VC or PE firm and relinquishing its independence. Making the Pre-IPO route very favorable as the management can be independent and will have a lot more freedom to make the right decision for the company in the long run.
4. Who can help you fund your business?
Listing Partners is a Team of capital markets professionals and business-builders who have an established international record that continue to transition private companies to public markets and list on regulated stock exchanges with global recognition. Engaging with Listing Partners early in the process, allows your Company to plan and implement objectives more effectively and allow your management to focus on the business and to maximize capital.
Listing Partners model of listing companies on the Canadian Securities Exchange ensure the companies getting the most value out of its money, a fraction of the cost to list on a big exchange and still benefits of being listed on a proper exchange and not a Multilateral Trading Facility (MTF). Base on that we can say that Pre-IPO Placement is certainly a way to improve your business performance. Since modern business is influenced by numerous factors, we need a stable partner in order to fulfil our operational goals. Therefore, Listing Partners service is designed to provide the necessary resources, know-how and guidance to support achievement of the company’s financial goals to fuel the company’s strategic objectives.
Listing Partners with partners provide the necessary services and helps the company to become listed. Listing as a Service so to speak. The finance industry purpose is after all to finance companies, to let companies fulfill its full potential, not to squish out a high IRR as fast as possible.
Read more about on www.listingpartners.lu
Associate Professor Mitja Jeraj, PhD