Catalyst - Winter 2013 - Weighing All the Options


John PennettIPO Financing Alternatives

Remember what your mother always told you about doing things the way everyone else does them? Just because everyone else's company is going public doesn't mean yours needs to do the same - and you certainly don't have to do it the same way.

John Pennett, partner in charge of EisnerAmper's Life Sciences and Technology Group, said that while the public markets are white hot these days for life science and biotech companies, not all companies are ready to take their "show" on the road. It's not that you have no public options, he added, it's just that an IPO may not be the best choice for companies that are too early in development or have too much risk to have an attractive valuation and/or to be attractive to the institutional buyers of IPO Stock.

When companies looking for financing meet with you, what's the most important piece of advice you give them? 

JP: Unless a company is a clear candidate for an IPO, I generally tell them to get a sampling of different financing option out there. Definitely take advantage of the confidential filing pathway contained in the JOBS Act; it will give you time to perfect your pitch. Find out where your story is stronger and where it's weaker so when you are ready to lift the veil, you have already built relationships with potential investors. You know who will amenable to hearing a revised, stronger pitch and perspective.

Most importantly, get out there and start talking. See who responds. You may get great interest or you may find out what they don't like about your company. Either way, the feedback will be invaluable.

What's the biggest mistake a company can make in the public markets?  

JP: Without a doubt, the worst position for a small company to be in is to become a publicly reporting entity and fail to raise enough money to reach a critical value inflection point. If you go out there and raise money, but it's not enough to get you to the next milestone, the company stock value may not ever be able to recover. Make sure when you are ready to take the important step you know exactly how much money you need and that you can raise it without a problem. Reputation is everything and many companies can't recover from a failed public offering.

If IPO is not an option, what other routes can a company take?  

JP: There are several alternative financing avenues. I usually talk about two - "registered direct" and "reverse merger." Registered direct is when a company sells shares initially to a limited number of accredited investors. A registered direct offering is a hybrid between a public follow-on offering and an equity private placement. Reverse merger is when a private company acquires a public company. This transaction holds the benefit of allowing the company that needs capital to bypass the underwriting portion of the IPO process.

Regardless, when companies come to see us, they are usually considering different options and want to be introduced to the right people.

When is "going public" a bad choice? 

JP: The best answer to that question is to say that, for some companies, remaining a private company is a better choice. It generally costs less to raise private financing and offers much more flexibility for the company, and until this recent market, the valuations in the private capital markets were often higher. However, it seems that the public markets are commanding higher valuations in the current marketplace. Further, the timeframe to prepare for a private transaction and the distraction to management is often significantly less in the private marketplace.

Staying private can be less time-consuming and frustrating for executives, as well. That's because going public means, well, being in the public eye. That means both smart analysts and unsophisticated investors are looking at what you are doing and asking deep probing questions (or just complaining about the stock price). That being said, it is always advisable to have smart money challenge you with good questions - whether public or private investors.

The bottom line is that each company has to make choices in its best interests. I'd advise any company considering going public to figure out their desired exit strategy. If you know you are only planning to take the company to a certain stage before out licensing or sale of the product, you may be able to do that with less cash and, therefore, really may not need a public vehicle to raise the necessary capital.

EisnerAmper's Catalyst: Winter 2013

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