Tip of the Week: Raising Money Great Reason to Go Public – If it's Available

Probably the single most common reason that companies consider going public, whether through IPO, reverse merger, self-filing or other method, is the greater access to capital, typically at more favorable valuations, than might be the case if the company remained private. In real estate the most important values are location, location, location. In going public it’s capital, capital, capital. Of course many go public for other reasons as well: making growth by acquisition easier, bringing a path to liquidity for the entrepreneur and his or her investors, rewarding executives with valuable stock options and so on. But by far in most cases it’s all about more capital for growth.

It is true that being public means you will have an easier time raising money, and yes you will likely do so at a higher per share price than if you didn’t go public. But you also take on the costs of being public that were not there before. Therefore, if you are going public to improve your access to capital, make sure that capital indeed can be raised. For example, a start-up software company with a plan to develop new technology but with many years of R&D ahead before revenues will come, may not find that investors in public companies such as PIPE funds will feel the company is ready to be public. That said, there are a number of pre-revenue companies, for example in the biotech area, where going public and raising money has not been a problem. It is not the stage of development that is the point, it is the perception of the financial community that matters.

If a company can fund itself if it is unable to raise money after going public, it still might be worthwhile if there are other benefits to being public, if the hope is to raise money down the road. But make sure, if you are not raising money at the same time as going public, that your cash flow or other capital resources are sufficient to ensure that the costs of being public are covered.

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