The tides of today’s corporate finance are shifting quickly. Traditional methods for business funding are being morphed and replaced by new and sexy alternatives. But, as often is the case, it’s sometimes best to make new friends and keep the old. Older tried and tested options for raising capital are often still overlooked in the haste to chase the latest small business funding fad. And while the sexiness of financing methods like crowdfunding and crowdlending are receiving a great deal of press at the moment, other alternative financing methods still weigh-in heavily as an option for raising capital for both existing and startup businesses including reverse mergers and direct public offerings (DPOs).
Crowdfunding & Crowdlending
Sourcing a large crowd to find access to capital is not a new concept. Internet and social media have helped to spawn a newer, more efficient means of delivery of such solutions. The rise of sites like Kickstarter and Indiegogo are only the beginning. Most are in agreement that the opportunity for successful capital raising via crowdfunding has still yet to reach its full potential as an alternative source.
Rewards-based crowdfunding is still the process of choice for most startups, whose businesses is often financed through providing incentives, rewards and/or presale of the company’s product. Successful crowdfund campaigns are now consistently topping the $1 million mark on many of the most popular crowdfunding sites.
Unfortunately, however, the legislation that would make selling equity through crowdfunding legal has all but stalled in the Senate and the SEC isn’t being super helpful either. Both are likely concerned the equity crowdfunding would create a new type of boiler room. Once agreement is made on truly how the JOBS Act should be implemented, then equity crowdfunding for all, including both accredited and non-accredited investors, will represent a huge boon for small business finance and likely the economy at large.
Reverse Mergers & Public Shells
A reverse merger has often been referred to as the backdoor method for taking a company public. While the process has somewhat of a checkered past, it still remains a viable alternative to venture capital funding. As an alternative method, it has its own benefits and downsides, but the opportunity, process and costs of a reverse merger have not remained fairly unchanged over the last couple of decades.
In typical reverse merger fashion, a private company will either source or manufacture a public shell corporation for use as the reverse merger vehicle from which the company will go public. The process and costs of going public and raising money through the reverse merger route can vary widely, depending on the speed and general time needed for capital access. Unlike crowdfunding, reverse mergers are a bit more expansive in their use. For instance, they may be used for doing more than just raising money. Providing public stock as consideration for M&A, stock incentives for bringing-on key talent and treasury stock swaps for use as a tax-savings tool. And while reverse mergers have their benefits, there are still risks involved with playing the public shell game.
Direct Public Offerings
Similar to its sister offering, the reverse merger, a direct public offering or DPO often involves the registration of securities with the SEC and the simple sale of such securities to those directly within the network of the founding members and the company itself. In this case, stock is often sold in exchange for cash to employees, customers, suppliers, buyers and existing shareholders. DPOs typically include stock sales to people within the same community or network.
Surprisingly Direct Public Offerings still aren’t used as frequently as they could or should be, but that doesn’t relinquish some of the benefits of selling shares and raising capital through this alternative route. In fact, a traditionally-executed DPO could be considered a precursor to today’s crowdfunding platforms. An entrepreneur starts by sourcing capital from within his/her closest network, directly seeking financing from friends, family, neighbors, partners and customers. Expanding outside of that network has its limitations, but the modus operandi is similar: sourcing capital directly from those who know you best and who would be most willing to invest.
In general, raising capital from a venture capital firm is a double-edged sword. On the one hand, it can provide both the money and the partnership expertise needed to help grow the business to the next level. On the other, venture capital is expensive, often taking more than is necessary in equity holdings in the business. Avoiding raising such expensive capital, where possible, can be a helpful boost to an entrepreneur’s ultimate control of the business and sustainable success of the company over the long-term.